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Ladies and gentlemen, welcome to Solvay's first 9 month 2020 results conference call for analysts and investors.Jodi, the floor is yours.
Good afternoon, and welcome to our third quarter 2020 earnings call. My name 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, and hello, everyone. I hope you and your families are staying healthy during these continuing challenging times.At Solvay, health, safety and security of employees remain our #1 priority. As you know, the number of COVID cases, particularly in Europe, has been increasing in recent weeks. At Solvay, today, we have 9 colleagues who are infected with COVID-19 and 118 employees in quarantine, and we continue to take a disciplined approach to protect our employees.We also maintained our disciplined approach across the business, prioritizing cash management and cost control again in the third quarter, as we have done all over the year, and I'm very pleased with the results of these efforts.We delivered, again, a strong free cash flow of EUR 801 million across 9 months in 2020, a new record and the sixth consecutive quarter of robust free cash flow. We have more than mitigated the effect of reduced profit in large part due to effective working capital practices and also due to deleveraging pension liabilities. Many of the improvements are structural in nature and will bear fruit in the years to come.In addition, we continued our focus on our self-help measures and have made significant progress executing on our cost-saving programs. As you know, we accelerated these efforts this year in light of the crisis. This enabled us to deliver EUR 260 million in savings in 9 months of this year. Half of this amount, or EUR 130 million, is permanent structural savings.Moving to the top line. Sales in the third quarter were down 14% on an organic basis versus the third quarter 2019. Demand remained low throughout July and August, and we saw improvement in September in a few select areas, which I will highlight when I comment on some key markets. Regionally, we continue to see modest growth in China, up about 2% year-to-date. Other regions are still declining.Moving to the markets. I will comment on a few key areas, specific to third quarter trends. I'll begin with aero. You are all aware of the significant reduction in build rates for civil aircraft, which represents 7% of the group sales. We experienced a step-down in our sales in the third quarter, aligned with the lower build rates. Sales to composites were down by 44%, reflecting the drop in civil production as the Defense sector remains stable. And we are pleased with our contract extensions with Lockheed Martin and with Boeing that we recently announced. The business is doing a good job managing the situation, and by the way, still making profits.Moving to auto. As you know, multiple businesses supply products in the auto markets and our technologies are used in many different applications. Overall, sales to auto across the group were down by 20% in quarter 3 year-on-year, but improved by 28% versus the second quarter. However, the dynamics across product lines differed from one end use to another.For example, our specialty polymers, that replaced various metal parts in under-the-hood applications remained low demand in July and August. And in September, however, orders increased from the summer lows. Q3 sales to these applications were 15% lower year-on-year, so slightly better than the global market in that end use, we believe, is around minus 17. Yes, our solutions use, especially for EV batteries, showed significant improvement, with sales up 35% sequentially versus the second quarter.In Special Chem, sales to auto also increased in September, following very low July and August, but still 20% below last year. And sequentially, sales improved by 17% versus quarter 2, whereas demand for silica used in tires has consistently increased throughout the third quarter, with sales up 48% versus quarter 2. So the pace of recovery in auto is quite different depending on the product line and application, though the pickup in momentum in September is encouraging.Moving to our more resilient markets. Starting with health care, we have seen mid single-digit growth through the first 9 months of the year, slightly better than the overall market. We sell, as you know, many different polymers into various medical applications. It's showing stable demand.One product that I would like to highlight here is PEEK, or polyetheretherketone, which, of course, is used in health care among other markets. And it's down only modestly year-to-date versus 2019 single-digit numbers. And this is in large part due to extending our leadership positions in the various markets we serve.In fact, when you look at our sales of PEEK, since January 2019 to quarter 3 2020, our sales are up 40% in the 18 months period just in this product line, thanks to the great value proposition and commercial efforts.Moving to Home & Personal Care. Here sales have been growing at a modest pace since last year, consistent with the overall market. I want to point out that September has been a record sales month. Our team has been focused on introducing more biofriendly solutions to our customers in this space.And I mentioned to you last quarter that we had just launched a new blockbuster innovation, which we call Actizone, a disinfectant technology that can protect surfaces from viruses and can kill up to 99.9% germs for up to 24 hours, much longer than any products on the market today.Our customers are thrilled and are taking a great interest in the solutions, the products, with multiple qualification underway. Another resilience market I want to highlight today is electronics. This market is supported through various businesses, including Specialty Polymers and Special Chem. We continue to show modest growth into electronics in both businesses, driven by semiconductor.Growth in China, in particular, is strong, thanks to our recent capacity increases in electronic grade H2O2 for semiconductors. We also see good demand in other electronic components, including smart devices and displays.To wrap up, we delivered an EBITDA of EUR 473 million in the quarter, which is up 7.7% versus quarter 2. And on lower sales. And although we cannot defy the gravity of the lower demand, we have improved the quality of our earnings, demonstrating that our cost mitigation efforts are having a real impact. This, together with sustained pricing, has enabled us to preserve our industry-leading EBITDA margin of 22.5% in the quarter.I'll now turn it over to Karim to review the business results and financials. Karim?
Thank you, Ilham. Good morning, good afternoon, everybody. I will start with an overview of the 3 business segments. And as usual, I will refer to figures on an organic basis, meaning at constant scope and currency.Starting with materials, which you can see on Slide #6. Net sales in the 9 months were down 15%, driven by volume declines in civil aero and auto markets. In the third quarter, specifically, sales were down 23%.In composites, sales were down 44% in the third quarter, reflecting the significant reduction in aircraft build rates in the civil sector. As you know, we were very quick to adapt to market developments, and we acted on reducing our manufacturing footprint. These actions are mitigating a good portion of the volume decline. In fact, and as you know, we don't report EBITDA for individual businesses, I'm pleased to confirm that the timely, the decisive cost reduction measures we took ensure that the business remains profitable. We remain on track to complete the shutdown of the second site by the first -- or in the first quarter of 2021.In Specialty Polymers, Ilham gave you an overview of market performance. Now over July and August, demand levels were low. They did improve in September, most notably related to electric vehicle batteries. Our broad product offering and the diverse markets that we serve in this business underpinned our resilience during the quarter. Despite the reduced top line of 13.6% fixed cost reduction, pricing helped to preserve EBITDA at a level slightly below that of Q3 2019.Overall, materials delivered EUR 131 million of EBITDA in the third quarter, 29% lower than the prior year due to the volume decline. The fixed cost takeout, however, helped to preserve EBITDA margins in the third quarter at 26.6% compared to 28.4% last year.Moving to the chemicals segment, shown on Slide #7. Sales in 9 months declined 10% year-on-year, but in the third quarter, increased 10% sequentially against Q2 2020. This was driven by the rebound in silica and coatis following the low points in Q2.Starting with soda ash. Demand in the quarter remained stable, in line with Q2, with a slight recovery in volumes in September. But this really differed by region and by application. The seaborne market was the most impacted by volumes as competitive pressures intensified. So we chose to preserve pricing at the expense of some volumes, a strategy that has proven itself time and -- time and again to generate value over time.Looking at end markets, flat glass used in construction showed some improvements in the quarter, but the growth was offset by declining container glass used in restaurants and in hospitality as many countries again faced new lockdown measures. The business continues to deliver on its cost and on its cash targets.Peroxide sales were down 8% in the quarter as the demand for HPPO increased following a weak Q2, whereas demand in the pulp and paper industry remains pretty soft. Pricing discipline, supported by cost control, led to solid profit in the quarter.Our silica business showed clear signs of recovery since the end of the second quarter, and demand for tires remained steady throughout Q3, with silica sales increasing by 48% in the quarter. A similar trend occurred in coatis, with 29% sales increase in the third quarter compared to second quarter as demand for solvents using coatis and in other industrial applications rebounded.EBITDA for the chemicals segment was down 10.4% in Q3 versus last year, but up almost 10% sequentially against the second quarter due to the demand improvements I referenced in silica and coatis as well as the accelerated cost measures across our businesses in that segment. This supported solid EBITDA margins of 27.7%, despite the lower volumes.The solutions segment results are shown on Slide #8. 9-month sales in the segment were down 10.7%, with third quarter sales down 11%, again due to volumes. Net gas sales in the Home & Personal Care markets, agro, coating markets continued to show their resilience with solid growth across the third quarter.Oil and gas remains under significant pressure, but has stabilized, and the business continues to deliver strongly on its cost actions. Special Chem sales began to see improvements in September across several markets, yet sales are down 16.5% versus last year in the quarter. Also showed some signs of recovery late in the quarter, but were still down 20%, whereas electronics remained resilient with growth driven mainly by semiconductors.In Technology Solutions, some of our key customers have been impacted by COVID, and this has impacted demand in mining. Sales in the business was down 16.5% versus last year across copper and alumina customers. Aroma remained resilient, with slight decline in sales in the third quarter, otherwise, very much robust demand with natural vermillion absolutely continued.Overall, the solutions segment EBITDA was down 15.3% in the third quarter, but up 7% sequentially. EBITDA margin for the segment was maintained at 18.4% despite the strong fall in sales that I referred to. And that reflects quite simply continued cost control across our businesses.I will now turn to cash on Slide 9. As Ilham remarked, our strong free cash flow performance continued into the third quarter, resulting in 9-month delivery of EUR 801 million, it's a record, more than double that over the 9 months of 2019.The improvement in performance can be summarized as follows: first and foremost, we took decisive steps to mitigate declining sales by adapting our investments, accelerating our cost reductions, strengthening our working capital discipline, whilst also, and you've seen that now, improving, really working how to improve the phasing of our cash generation.Indeed, as we take a step back, you can see that our working capital to sales ratio has continued to improve, and now stands at 15.4% compared to 16.7% a year ago. The structural improvement in working capital generated around EUR 140 million of onetime cash benefit this year, principally in relation to receivables and to payables.You remember also that we had onetime benefit of around EUR 90 million, mainly from tax effects related to pension contributions, which we referred to in the first quarter of the year. More importantly, we now have substantially reduced our financial and pension cash costs, which already contributed an EUR 85 million improvement this year.In all, we have now made exceptional contributions of EUR 0.6 billion to our pension scheme since December last year. And we have plans to do more. We've got plans to invest a further EUR 350 million in the next 18 months. The combination of our actions and of our plans reduce our pension cash costs by EUR 100 million per year. These are highly value accretive, structural and sustainable into the midterm.Also, financial charges continue to fall as we continue to delever and reduce the average cost of our debts. The combination of record cash generation, proceeds from the divestment of our polyamide business early in the year and despite our pension contributions, we managed to reduce our net debt by EUR 1.1 billion in the first 9 months of this year.The last topic that I will cover today is the progress on our cost savings, which now total EUR 260 million year-to-date, which more than offset inflation of EUR 54 million in the first 9 months. Of this amount, about half, or EUR 130 million, are structural savings, which fall into the following 3 categories: one, restructuring EUR 62 of savings. By far, the very significant contributor to our cost reduction. And as you can expect, this essentially comprises labor costs.We also saved EUR 51 million in relation to indirect spend as we drive relentlessly our improvement programs. These savings result from many actions and often have standardization at their core. For example, we are standardizing our bulk packaging. We are recycling and reusing intermediate bulk containers, or IBCs, for short. We're standardizing the management of spare parts, and the list continues.We also, as the third driver, continued to drive productivity efficiencies across our industrial sites, and this includes things like yield improvements. And here, we've saved 17 -- EUR 17 million in the 9 months.In parallel, we've continued to drive our temporary cost measures, and we've delivered EUR 40 million in the quarter, EUR 130 million year-to-date. These savings comprise actions such as furloughs and discretionary spending as we continue to work in a virtual capacity. And of course, business travel costs have been dramatically cut, as you'd expect. It is important to note that the structural cost savings in the quarter at EUR 50 million were higher than the EUR 40 million of temporary measures.And with that, I hand you back to Ilham for closing remarks.
Thank you, Karim. And I wrap up with a few remarks about ESG, a brief portfolio update and our outlook for the remainder of the year.First, on ESG, some of you may have participated in our webinar back in October 2, where we shared a bit more information on our Solvay One Planet sustainability objectives launched earlier in the year. I'll share just 2 takeaways.We are taking our climate's ambition one step further by committing to align our greenhouse gas emissions objectives with the science-based target initiative. We shared some recent innovations that not only align with sustainability, but also with our growth objectives.Since I discussed Actizone earlier, I will briefly mention 2 others. In response to a market need for the replacement of PFAS surfactants, we have developed a non-fuel surfactant technology, which we introduced to our customers in January this year, and they are in the process of qualifying the technology.As you may know, we placed priority on the resources needed for this type of solution, and it's an excellent example of how the right combination of innovation, industrial expertise and collaboration with our customers can unlock solutions.We have also been working for many years on solutions for green hydrogen production and usage. We now see a significant market opportunity as part of the larger trend towards sustainable mobility and energy solutions with a very ambitious hydrogen road map being adopted in many regions.Production of green hydrogen via water electrolysis is expected to reach more than 100 gigawatts of global capacity by 2030, while the global fleet of fuel cell electric vehicles, ranging from large passenger cars to heavy-duty commercial vehicles, trucks and buses, is forecasted to reach several million vehicles by 2030.Our Aquivion conducting polymers are at the heart of key hydrogen technologies, such as proton exchange membrane electrolyzer and fuel cells, serving both as functional materials in the brain itself and in the electrodes.Our technology has demonstrated its value proposition. With potential customers, we have municipal qualifications underway with sizable sales potential in the next few years. In fact, Solvay has a range of technologies within our materials segment to address the needs of these markets. Our objective is to be a leading material solutions provider for the emerging needs of the hydrogen economy, contributing together with our battery solutions to achieve the Paris Agreement's climate targets. Therefore, we will create a hydrogen platform at the group level in order to share resources and expertise to better serve customers in these markets.As you can see, we are very excited about our innovations. And hopefully, you can see that our sustainability initiatives are already a key part of our business strategy. In fact, future ESG updates will be integrated into our annual reporting and our strategic reviews.Moving to the portfolio. As you know, improving businesses takes time, and we spend the past year optimizing many assets before we considered any divestments. We also indicated in July that we began the process of exploring options to sell certain business lines. Since then we have signed agreement to sell our interest in a few business lines, including certain fluorine chemicals and our site in Korea, part of Special Chem; the process materials product line, part of Composite; and the sodium chlorate business line and related assets in Portugal, part of peroxide.You will understand that the completion of transactions would be subject to prior consultation with employee representatives and/or approval by the relevant regulatory authorities in each jurisdiction. The enterprise value of these divestments would be about EUR 100 million, equivalent to an average high single-digit EBITDA multiple.We have also entered into a sales process for our barium and strontium commodity business line within specialty -- Special Chem, and our European sodium percarbonate business within peroxides. Altogether, these 5 business lines represent total sales of around EUR 250 million.Looking ahead, we are exploring strategic options in relation to other businesses, including the commodity amphoteric surfactants and the oil and gas business line, both part of the solutions segment, which represents a combined total sales of around EUR 400 million. These developments are in line with the growth strategy to simplify the portfolio and to maximize value creation.Further, we are also exploring the merits of organizing certain activities into separate and fully controlled legal structures in order to increase strategic portfolio flexibility. And this is the beginning of the journey, and we will share more with you along the way.Moving to our outlook for the year 2020. On EBITDA, please be aware it's still an uncertain environment, especially with the rise in COVID cases in many parts of the world, and we have not taken into account a second wave.Let me share our assumptions. First, October sales are similar to September, indicating the improving trend in certain markets. We estimate a slower December as customers are likely to lower their own inventory levels at year-end, not to unlike normal year-end periods, by the way.Second, our Composite business will remain challenged in the fourth quarter before we see the full benefit of their cost actions in 2021. And we still expect earnings in quarter 4 in positive territory.Third, as a reminder, we expect to fully deliver on our previous cost guidance of EUR 300 million for the year, with a particular focus on the structural actions.These assumptions lead us to an estimated full year underlying EBITDA in the range between EUR 1,890 million and EUR 1,970 million or down between 16% and 13% on an organic basis for the full year.Finally, on cash, we expect full year free cash flow to be around EUR 900 million, which represents a 50% improvement versus 2019.To conclude, we have managed very well through this crisis, delivering consistently strong free cash flow and improving our operating leverage through our [indiscernible] and accelerated cost actions. This demonstrates our ability to mobilize our organization.And I'd like to thank all of our employees for this delivery and for their continuous engagements throughout this crisis of lifetime. It is truly a global collaboration across all teams that has enabled this achievement.I also want to take a moment to thank our shareholders that have generously contributed to the Solvay Solidarity Fund, which has reached EUR 12 million. We sincerely appreciate your contributions on behalf of our employees. And consider this to be a concrete example of a truly responsible capitalism.Thank you very much, and we'll now take your questions.
[Operator Instructions] We have our first question from Mubasher Chaudhry from Citi.
Just two, please. Can you provide some time lines around the execution of these disposals that you're talking about today? And then linked to the proceeds, and given the strong cash generation of the business, are you looking to invest this back into the business through CapEx, given the low level of CapEx in 2020? Or do you expect to put it towards further deleveraging of the business? Just some thoughts around capital allocation would be helpful.And then secondly, you made a good headwind on the cost cutting plan. I think only EUR 40 million is left over for the fourth quarter. And similarly, on free cash flow guidance, it's only EUR 100 million to be achieved in the fourth quarter. Can you just provide some comments around the conservatism around these guidance levels? And if there are more chances to the upside in both of these metrics?
I may start with the portfolio, and Karim, you pick up the financial.
Sure.
Well, listen Mubasher, I think since I joined the company, I told you, and we expressly say this during the growth strategy publication, that we plan to simplify our portfolio. And not only we look at our industrial footprints, we focus on low return assets with the desire to improve our cash and returns. We obviously, now align also with our Solvay One Planet environmental goal.And you now, much progress has been made operationally in relation to free cash flow generation. I mean it was a bit [ a nail in the shot ] Solvay, when I joined the company. And I listened to many of you that all wanted a better free cash flow generation and better phasing and quality phasing of it. We are getting there.And while it's getting stronger and it's more consistent across our business, this enable us to be less reliant on some laggers, lower return businesses, or even cash cow.So what we announced, Mubasher, is that we are now reaching an agreement today on 3 areas, and the municipals are really good. They are high single digits. They are small businesses, and we are completing it. It's a matter of weeks, with respect to consultations, obviously. And we are entering into a sales process for 2 other businesses, namely the barium and strontium commodity business in Special Chem; and the sodium percarbonate business, part of peroxide. And all of those 5 businesses represents more or less EUR 250 million of sales.And further, we are also announcing that we are exploring strategic options in relation to commodity amphoteric surfactants. That's a product line, which is part of Novecare. And obviously, the oil and gas, which, as you know, has been a really depressed market since I joined the company, [indiscernible] of last year, we have been restructuring this business.In Q1, actually, we completed the turnaround. The market is the market, and we are now exploring strategic options. And we'll share with you the progress in the coming quarters. And the amount of those 2 last businesses represents more or less EUR 450 million.So listen, we take our time. I mean we want to create value. There is no rush. We improve the assets when we can, while being more or less a bit patient. And when we believe we are not the right owners, we enter into strategic conversations. And the good news is that during this crisis, there are also opportunities in the M&A sector as well.Karim, you would like to take up the other topics?
Let me take up maybe, Mubasher, some of your other questions. And they're very important, obviously. Let me start with maybe -- you talked about costs. We gave an indication that we expected to deliver EUR 300 million this year. Clearly, you've seen we delivered EUR 260 million. So yes, mechanically, it doesn't take much to be confident we will deliver more than EUR 300 million, and we factored that into our outlook. That's one.So far as proceeds are concerned, a couple of questions. What will we do with the cash? Are we going to all of a sudden start to invest more? What I can say is this, we'll give you more clarity for next year. But at this point in time, we will maintain our discipline in terms of CapEx and working capital -- CapEx management, but we do expect to continue to invest to enable us to support the needs of our customers as it rebound. In fact, we already started it, started to do that.Strategically, we gave an indication that to maintain our growth trajectory requires a reinvestment of the order of one-to-one versus depreciation. I'm not going to say we'll get there next year, but you can expect us to continue to evolve in that direction over time.Specifically, the proceeds we'll get -- we talked about EUR 100 million of enterprise value, the operational cash flow is very strong. You will have noticed, I've mentioned that we're going to put EUR 350 million more cash towards our pension schemes, which will generate a lot of value. So it's fair to assume that we won't be shy to invest for growth, well, we're very clear the values there, but deleveraging is part of the agenda. That's really the key point there.Now you also said something around the fourth quarter only being EUR 100 million. So I'll give you a bit of color on that. First and foremost, I'll remind you what I said, which is within the EUR 800 million we've delivered so far this year, there's a couple of hundred million just over EUR 200 million were one-off in nature related to the tax deductions or to the structural improvements in working capital, which you can't repeat year in, year out, nevertheless if they're high quality.We've improved the phasing. We generate more cash now consistently every quarter. And you've seen that throughout the last 6 quarters now. One of the impacts of the COVID pandemic is that the normal seasonal variations we're going to accustomed to are becoming less pronounced. And we also expect to build some inventories in the fourth quarter to support the resumption of activity of certain customers in very targeted markets, for example, mainly Specialty Polymers.And finally, I want to highlight restructuring cash costs. Our restructuring cash cost so far this year is about EUR 67 million. Historically -- that's in the first 9 months. Historically, in the last 2 years, we were EUR 62 million or EUR 63 million. So we've already spent more in the first 9 months than we have done annually, and I expect that run rate to continue to grow. I expect this to be around about EUR 100 million for the full year. So Q4, we'll see more cash.But this is really the main dynamic. So I'm not going to say it's cautious. It's a strong performance if we delivered EUR 100 million, which is very much what we're targeting and indicating to you.
Next question from Chetan Udeshi from JPMorgan.
First, I just wanted to clarify, because there were a lot of numbers thrown out on asset phase, and I'm not sure I got all of them. So can you maybe help us clarify what is the EUR 100 million EV associated with? Is it for the entire EUR 250 million sales that have been planned or agreed already? So that would be the first question.The second question was just looking on the sequential progression on gross margin, I mean, it seems like that the sales are slightly down quarter-on-quarter, but the gross margin has gone up significantly from like 23% last quarter to 26%. So can you maybe help us understand what is driving that significant increase in gross margins sequentially?And last question would be, given the strong free cash flow performance this year, some of that may be temporary, do you feel you can do more than 30% cash conversion now already from next year onwards rather than from 2024, which was the original target?
I may take question 1 and 2, and Karim, I didn't get the question on which portfolio or product line.
First question is on the EUR 100 million.
No, No, I know. The second one on the product line?
The sequential progression in our gross margin is the question.
So I'll leave it to you. So here, Chetan, on the portfolio, the EUR 100 million EV is on the 3 agreements we are just closing, right? So that's on the 3 business, namely: the sodium chlorate in Portugal; the Korean business with fluorine chemicals and the processed materials in France, part of Composite, right? And this is about high single digits. I hope it's clear now.And what I was saying is that there are 2 other businesses coming in into -- we are entering into a sales process, right, and that's our commodity business, the barium/strontium business and the percarbonate business. I hope it's clear.
Yes, that's clear enough.
Karim?
Fundamentally, what we're saying on the sequential progression gross margin, you're right. Essentially, what we're seeing is continuing strong pricing power. That's one of the main factors, and there's less destocking. These are the main drivers for that sequential improvement. You're correct in highlighting.On the cash flow, we'll tell you a bit more early next year what we expect. But absolutely, what I can confirm is that the 30%. We have a very clear line of sight towards getting there. Much depends on the pace of the rebound we might anticipate for next year. Because as you know, in the same way on the way down to supporting sales, our working capital shrinks. As it grows, we'll keep the discipline. Absolutely there. But we'll invest to support the growth.So I'm not going to pronounce myself at this stage that 30% is achievable next year. What I can say is that we're going to get to that 30% sooner than the 5-year road map we'd indicated a year ago. Because of all the actions we're taking. Does that make sense?
Yes.
Next question from Alex Stewart from Barclays.
Hopefully, 3 quick questions. You talked about Composites still being in positive earnings territory. I think that's what your comment was. Can you just confirm that you're talking about EBITDA there?And then secondly, the EUR 450 million revenue chunk of disposals in the last 2 businesses. Can you give some sense of what the margin might be for those assets? Whether it's making money or losing money would be really useful.And then finally, can I just check, Karim, that you said that there was EUR 140 million structural net working capital inflow this year that won't recur next year? Did I get that right?
Thank you for that.
Yes.
Maybe start with the first question on Composite?
Yes, on Composite, yes, indeed we were talking about EBITDA, right, positive EBITDA and obviously, positive cash. And I commend the work done by our teams. I mean we have taken, as you know, decisive action since the beginning of the year, and actually, last year, we have been preparing with 737 MAX crisis and all of this, right, so really engaging to this year. And more than just restructuring, we have been actually restructuring on people on headcount, but also restructuring our industrial footprint.As you know, we have already closed 1 site, Manchester in the U.K. in June. And the second site Tulsa will be closed in quarter 1 in the U.S. without losing any volumes. The qualification of product is underway. And yes, with that, we are removing the lowest return on capital employed assets we have in the Composite industrial footprint.So I really commend the work done and the renewal of our contract with Lockheed Martin and Boeing is testimonial that we are considered as a strong player in that segment, not to talk about, again, the Defense business, which has been extremely resilient, if not growing. Karim?
Your second question on the EUR 450 million, it wasn't too clear what you're looking to understand? Alex, can you just maybe reframe it?
Yes, sorry. The last 2 businesses, the EUR 450 million of revenue. Can you give us some indication of what profitability of that revenue is? Whether it's making earnings contribution would be useful.
The portfolio, right?
It is. Maybe I'll start with finance question. Oil and gas clearly is not profitable because of the situation going through, and that's the biggest part of it. What I can say in both those businesses, in fact, even the other 3 we've already signed agreements for, deliver results in terms of profits, cash and returns that are significantly below the group average. And that's a thing to note maybe.
And again, Alex, obviously, there are times where it's good to sell, and there are times where it's good to wait, right? And we know that Solvay is known in the market as who have the high-quality assets.And when I say strategic options doesn't mean automatically divestiture. It can take different -- there are different options, right? So we are ready and we'll see if we can get the type of valuation and multiple with the serve. We'll listen and we'll engage, if not, we'll be patient because we are improving those businesses as we speak.
Sorry. Just a second. You said -- would you said it clearly not profitable or would you said it was clearly profitable, the oil and gas?
We haven't commented specifically. What we're saying is they are less profitable than the group.
Yes. Yes. Definitely.
The final question is around the EUR 140 million of working capital onetime. Let me give you some color as to what exactly what I mean by that? There are 3 components. One, are receivables. We're serving over 11,000 customers. We manage on day sales outstanding, our credit risk profile very, very attentively. But most importantly, what teams are being focused is really making sure we hold on and hold people to the terms we agreed. So really manage and reduce overdues, and we've set a new internal record.Our overdues are 2% to 3% better than we've had historically. That a lot is worth EUR 60 million, out of that EUR 140 million, EUR 65 million to be more precise. We've been negotiating for the past program -- to negotiate for the past 15 months with our suppliers. Our DPO, days payable outstanding, on average is 4 days better today than it was before. That's worth another EUR 45 million. On days of sales outstanding in stock, our inventory metric, let's say, has improved by 2 days. Compared to last year, that's another EUR 30 million.These type of improvements, you can't continue to repeat, there is a limit. And these already at very, very high-performance levels. Doesn't mean we're not going to continue to look, but the real goal now is to ensure that as we rebound, we hold on to that. But that's where the EUR 140 million comes from. I wish I could say we can repeat it every quarter every year, but that's obviously not realistic.
Next question from Andreas Heine from MainFirst.
The first is on Specialty Polymers, which was sequentially down in sales. Maybe you can elucidate a little bit more to this? It might be that you are lagging in the automotive industry and that you see the rebound in the automotive industry in Q4. But I would like to understand more this finding, which is a little bit different to what we see from other players.Second question, you mentioned half of the cost savings are temporary, but may be not all of them are really coming back. Maybe you can elucidate what you expect of these savings to stay in 2021, even if you have classified them as temporary?Third, I appreciate that you would like to substitute coal in the energy. As far as I know, that's mainly used in the energy you need for soda ash. Yes, you, obviously, use coal because it's the cheapest way. Have you done any analysis how costly will be to change this? And whether you have enough reserves at the different locations than you produce this? And lastly, on Novecare, if oil and gas is taken out, we look on the business, and it is around EUR 1 billion to EUR 1.1 billion, if my calculation is right? Is that still enough as critical mass for the surfactant business?
Okay. So let me take -- remind me with the questions. I will take the Specialty Polymer one.You've seen Specialty Polymer sales were down 13.6% in the third quarter, with growth in health care and electronics, partly offset the demand in automotive and other industrial markets. And actually, the automotive sales were down 20% versus quarter 3, the flat if you compare it to quarter 2, thanks to the growth of -- in EV batteries, as I mentioned.So there, we see actually an improvement. Specialty Polymer is overperforming its market year-to-date. We consider minus 15% in its markets. So we overperformed. We consider its market to be declining by minus 20% year-to-date.And why it is important to look at it year-to-date than just the quarter is because there is stock in the value chain, and there may be things struggling between 1 quarter or another. And we have seen a phased recovery for region as well, China and APAC leading, right?So this was for Specialty Polymer. I remind you this is a business with a strong value proposition on replacing metal on light-weighing and electrification. So more we penetrate into a vehicle in automobile, cleaner is mobility because it consumes less fuel and therefore, emits less CO2.Also, the growth of EV is real, right? And this is going to just go higher and higher, and we are preparing for further capacity extension in discussions with our customers between Asia Pacific or in Europe who is claiming to localize the value chain in EV battery. Karim?
So your second question was around your temporary costs. I think it's a very good question that you asked. Now some measures like furloughs, et cetera. Of course, a normal sustainable part of doing business, and those customers come back.However, if you're trying to get a handle of what can you expect from us going forward? Maybe a couple of points I'll make. One is we will not stop looking at cost reductions. Secondly, all the structural cost reductions we've been delivering this year, we're going to get the full year impact next year as well. So expect us to continue to drive the cost agenda very hard next year.As you recall, maybe last year, we talked early in Q2. I think we're putting in place your base budgeting. So yes, we're taking a number of steps to further reinforce, maybe say, definitely raise the bar. Because we're really off here.But maybe Ilham can say more?
Yes. No. I mean you've seen that our cost saving and focus -- rigorous focus on cost and cash is really in this company. And we delivered EUR 260 million year-to-date half structural and half nonstructural.By the way, this is the first quarter where the structural savings are overtaken the nonstructural. And with our teams, we knew that the temporary cost savings are going to decline at one point of time. And that we need to make the temporary to become structural, and that's why we have initiatives. We call it the growth-based budget. We are unveiling waste. We are looking at how to run leaner, do more with less, be it in our activities, be it in delayering, reorganizing the company, be it in smart spending and smart purchasing. And all of this, like we told you during the growth strategy, is an important component in our long-term cost savings where we are already delivering now a big part of our EUR 400 million of commitments of 10 years -- of 5 years, sorry.
Maybe I'll take your question on Novecare. I mean if you -- just by separating out the oil and gas business, we're not really impacting new critical mass because we've adapted our business in any case to enable us to do this. So there's no real question for us in terms of sustainability, good commerce. We just have a very, very good surfactant business for Home & Personal Care.
Yes. And Home & Personal Care, I mean, that was my personal wow during this crisis. You know that during crisis, you unveil inefficiencies in any organization. And second, you really stress test the industries you serve and the businesses.And here, what we've seen is that the Home & Personal Care and the formulation business, as part of Novecare outside oil and gas, are really resilient, right? The formulation for Home & Personal Care for agro feed and somewhat coating. And Home & Personal Care, we are so excited that we have accelerated our innovation with Actizone, and that's a blockbuster we are launching. Kills 99.9% germ, lasts 24 hours. It's something the FMCG companies and big brands you know are, as we speak, accelerating qualification and the launch. So we're very excited with our position and the quality of this business.I think you talked about coal as well right? And I was not sure about the question, sorry, the line was not good that...
I was starting and I can -- let me repeat it.
Yes, please, if you can?
I think the coal is predominantly used in the energy content you need for the soda ash production. And you obviously have used it in that side because it's the cheap source. So what is -- how is the transition time wise? And what does it mean on the cost base for the soda ash operations?
Yes. It's a great question. Actually, it's the first primary energy we used 158 years ago when we started this company. So moving away from coal, as you can imagine, is a big deal. And we are doing it because Solvay is transforming and raising the bar in terms of sustainability. And Solvay One Planet caused us, as we are aiming to join the Paris Agreements and follow the science-based target to actually abandon coal. So obviously, we can do it whenever there is [indiscernible] renewable energy in the country we produce. That's number one.For your question number two, I'm not starting from scratch. So last year, just last year, when I joined the company, we had 2 plants actually migrating from coal to biomass, Bernburg and Rheinberg in Germany actually, where the economics are favorable, actually.So we are -- we merged to renewable recyclable actually is waste, is wood waste, et cetera. And we built an ecosystem around these plans, which makes it actually more profitable than with coal. As we speak, obviously, we are also negotiating, for example, Don Bell in France and other areas around the world. And we give ourselves 10 years right to complete our road map, by the way, which is already laid out as part of our Solvay One planet strategy by 2030 and even beyond.
Next question from Mutlu Gundogan from ABN AMRO.
I have 3 and 1 small question, if I may. The first question is on cost savings. Clearly, you're ahead of schedule. You did -- in terms of structural savings, you did EUR 130 million in the first 9 months. You're targeting EUR 150 million. I think you did EUR 50 million in Q3. So that means you only got less EUR 20 million. I mean is that realistic? Are you going to do EUR 20 million? Or should we expect a higher number? That's the first question.Then the second question is on the outlook. Your guidance has a wide range. If you solely look at Q4, it's somewhere between EUR 410 million and EUR 419 million. it's 490. Can you tell us in which scenario you meet the low or the high end of the range? Is that solely stopping in December? Third question is on divestments.Thank you for giving some numbers on the potential divestments that will come. I mean how should we think about your M&A or divestment strategy off these 5 businesses? Would you continue to shed businesses or perhaps look at larger businesses that don't fit into your portfolio?And then final question on green hydrogen. Can you put some numbers on that? So what kind of sales or EBITDA could we think about in, let's say, 5 years' time or so?
That's 4 questions. So let's Karim start with one and, then I do 2, 3 4.
So cost savings, no, it's not going to be EUR 20 million in the fourth quarter. We did EUR 50 million in the third quarter. That's a better indication. And that's what I said earlier to an earlier question that I expect our cost savings to exceed the EUR 300 million we indicated. Well, we haven't given you a specific update, but we certainly have integrated that in our outlook guidance that we've given.Ilham, do you want to talk about the outlook? The range?
The second question was about the guidance, right? And I agree with you. This range is wider than usual, but we wanted to share with you our views, and it reflects the increased volatility in order books level.So you know us by now. I mean we want to deliver against any promise, and we've seen volatility in order book, all right, including in quarter 3. So we've seen improving trends in late quarter 3 actually, September was minus 10%.And to give you an idea, September was the best month since the beginning of the crisis. And to give you perspective, without composite materials, which has been hard -- hit hard with more than 40% decline in top line in quarter 3, without composite material in Novecare, oil and gas, the decline in September was 3%.So we really saw an improvement in September. And October sales are down around 10%, right? October is almost closed. For November, it's too early to tell. And let's keep aside the second wave impact. We have factors in the same here in our range the trend in December, consistent with the usual year and seasonal pattern in this company, right? Nonetheless, we may face higher variation in stocking and destocking patent in different end markets. Silica, for example, for tires, as soon as people start driving, they will change their tire because of seasonal requests, right, and demand versus auto OEM, which may actually have a challenge from sickness absentees and present and locked down in different nations. And a bigger question between you and me is how deep and long the second COVID wave will influence demand in markets such as auto building and construction we have not yet made any allowance on this eventuality yet. But this is why we have forecasted the range for the full year as uncertainties remain.Having said that, you've seen us deliver in 6 quarters in a row. So free cash flow is going to happen, as guided. And second, our cost savings, definitely, we are trending into the upper level, and we'll continue converting our temporary cost saving into structural.There was a question about divestiture.
And the strategy, what's next, I think, more than the specifics?
Well, listen, I see this since I joined the company, and I hope you see now that we are serious about that. There is no sacred cow in the company. We evaluate any assets we have. We have, again, high-quality assets. And much progress has been done operationally.First of all, I hope that you all notice that the growth strategy, the G&O were very simple ways into managing businesses according to their potential and their performances and resume so far. And obviously, the solution pillar has to increase and improve its return, which we've been doing, including pruning the portfolio where needed. The AR is about increasing cash and delivering more cash, that's our cash cow. And although it's suffering these days because of the COVID-19 and the distress in transportation, we know that sooner or later, all the value proposition and the secular trend around lightweighting, electrification, digitalization, health care are real, are big and we can win.And as I said, as we are making operationally improvement in free cash flow generation, right, which is getting stronger and stronger and more consistent across all businesses. This will enable us less reliant on some cash cows as well. So we will create more flexibility to prune our portfolio going forward.There was a question, I believe, on hydrogen, right? So to give you an idea, I think we believe at Solvay that the EV battery and green hydrogen technologies will coexist to make vehicles truly sustainable in the future towards cleaner mobility.I'm very excited with this development. I mean, since I joined the company, we already launched the EV battery, the CPC, both of them represent EUR 0.5 billion opportunity for our company, and we are best-in-class and the best position to deliver the best solution to the market on both EV and semi-plastic composites.But as all you know, lithium-ion batteries have emerged the preferred solution to make the automotive sector more sustainable. We are embarking we even have now exciting EV battery consortium with Veolia in recycling, but it's not enough. And to get into decarbonization to make transportation truly sustainable. And that's why hydrogen has its own chance and play. And this will be one of the most competitive low-carbon solution for transportation. It goes from forklift for long distances to buses, to cars, to truck, to regional trains and even airplanes, you may have seen the note or the news from Airbus on hydrogen train by 2034.The market opportunity, we believe, is big. We know that the global hydrogen generation market size is around 117 billion. And today, still from the gray origin. So without giving you the soup of colors now from gray to green, not to talk about the blue in the middle. We know that there is an opportunity, the CAGR between 19 and 27 is high single digits. And hydrogen in mobility will be even higher. And the EU is investing, green deal. A lot of money is going to go -- gigawatts are going to go to hydrogen.And we believe that 2030, our potential -- addressable potential, I'm not saying it's accessible, will be about EUR 3 billion between green hydrogen and fuel sales.And it's exciting for us. We are launching today an ion_conducting polymer technology solution to support this green hydrogen economy, it's key to win in Fortel exchange electrolyzers and fuel sales market. And we have been relocating resources in the past 12 months to be ready for large commercial program with our customers.And as we speak, we are qualifying some of these innovations. And sooner you will hear more from us about our investments.
[indiscernible]. We probably have time for one last question. And clearly, the Investor Relations team remain at your disposal.
Last question from Wim Hoste from KBC Securities.
Yes. I actually have three. I hope you excuse me for asking them all. First question is on composites. Revenue was down 44%, and I was trying to get a feel to what extent that might have impacted by destocking? And how you see the underlying trends kind of developing now that there seems to be also some progress with regards to the 737 MAX? So that's kind of the first question.The second one is on the outlook for soda ash. There have been some volatility in the Chinese market. I know you're pretty shielded from that. But with -- yes, demand is relatively weak at the moment. So how confident are you entering into discussions for the 2021 pricing? Could you maybe comment on that?And then third question, a bit more housekeeping, is on the corporate line, you posted [indiscernible] EBITDA level minus EUR 31 million in the quarter. And I was just trying to get a feel to what extent are your savings initiatives structurally lowering this line or improving this mine, if you will? And can you kind of offer some guidance on that line going forward, either quarterly or on a full year basis?
Okay. I'll start with the Composite, Karim, and maybe just for the ash, and you can finish with the housekeeping.Listen, on composite, yes, as you know, we don't defy gravity, yes, only 7% of our total sales of the group is aviation. Obviously, this is depressed and more than 44% actually of composite materials sales were down in the third quarter.Having said that, you can probably benchmark our performance against peers. The team has done a fabulous job to quickly and decisively act. And this is a result of the past 12 months' actions. Not only we had a value creation plan in this business, we knew which plans are the least efficient, that map was already part of the growth strategy. And when the crisis hit us, we were ready to really now where we need to restructure the footprint, the industrial one, and that's what we've done.On stocking, I think you mentioned that indeed, 737 is in the minds. It has been test flying. And the EU regulator mentioned that it will grant back authorization as soon as the U.S. exercise theirs, keep in mind that there is a backlog, right, of airplanes in inventory, more than 400, and even more lies in the value chain. And it will take time to deplete. That's the thing.Boeing has [indiscernible], for example, that they plan to scale up to 31 per month by 2022. So again, it will take some time for us to see that benefit.Having said that, we are a leader there in resin infusion, the variabilization of our cost and the variabilization of raw material, like carbon fibers, as we speak, is really a strength of ours. And were, as we speak, and you've seen it Lockheed Martin and Boeing renewal is a testimonial that these large clients, they see us as an important player in the future. Having said that, aeronautics will have an L-shaped recovery as you know.On soda ash, you say this, I think we've experienced resilient pricing in EU and the U.S. this year. We have defended our pricing, I should say, right? And that's what you can expect from leaders. There was a price pressure in Asia beginning of the year, even if the Chinese pricing were rising since summertime, and those prices, by the way, were unsustainable, right, economically and put in danger some exporters from the U.S., right? But China remains small exporters, right? They do it very opportunistically. And this will only slightly benefit the seaborne market short term because even if Chinese produces export, it's less than 1 million tons, and usually do not significantly impact the rest of the world.So -- however, I mean, having said that, we are, as we speak, negotiating, right, next year volumes and pricing. It all depends on -- I mean supply/demand, and we will see demand recovered in 2021, right, in building construction in glazing, in bottling, right, glass containers.So as we are now facing a second confinement, specifically in Europe and both the elections in the U.S., we are observing how those mature economies are going to really develop in terms of supply demand. But we've seen in Chinese glass production, for example, and consumption is doing well. So far, good sign of economic trends. So the ash inventories are moving up again since 3 weeks due to more production in China. So let's see if there is some stabilization in the seaborne while Europe and North America, we continue to close our contract negotiation, yearly negotiation with our customers. And we will tell you more when we close the year in February.And there was another question, housekeeping?
Yes, corporate costs. So, Wim, I think it's a very good spot. We've got -- we spent EUR 140 million in our corporate line in the first 9 months.Your question really, I think, we're looking forward. Now this year, we clearly have the benefit of some of the temporary cost measures as well as the structural, things when you have closed offices, you're not traveling as much, et cetera. We also had the benefit this year of no insurance claims on our self-insurance policy.So that has had to flatter. And as I look forward, you recall, probably a couple of years ago, I would have indicated that the corporate line is of the order of EUR 200 million to EUR 225 million. You can expect us to be a good 10% to 15% below that level on a sustainable basis going forward, because of the structural programs we're driving, which is hitting everywhere across Solvay, including the corporate.
Thank you, all. I think we've run out of time. But I want to thank you for your participation today. And certainly, if you have additional questions, the whole investor relations team is available to speak with you after this call. So thank you very much.
Thank you, ladies and gentlemen. This concludes today's conference call. Thank you all for your participation. You may now disconnect your lines.