© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Welcome to Solvay's Q3 2021 Results Conference Call for analysts and investors. Solvay team, the floor is yours.
Good afternoon, everyone, and welcome to our third quarter 2021 earnings call. My name is Jodi Allen, 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 very much, Jodi, and hello, everyone. As always, I'll begin my remarks with the health and safety overview shown on Slide 3. Today, we have 49 colleagues who are infected with COVID-19, unfortunately, up from 32 at the end of July when we last talked together. We have to remain obviously vigilant, and we are gradually and carefully reopening our administrative sites with all the measures in place to protect our employees and ensure high levels of safety. And it is a return to work in hybrid mode. This is our new normal at Solvay. On the top of that, when necessary, as you know, we'll continue to use the Solvay Solidarity Fund to support people in need. Before we move to the results, I would like to highlight another announcement we made this morning. As we execute on our Solvay One Planet sustainability road map, we continue to look for areas to strengthen our commitments. One of these is within our climate pillar, and I'm really thrilled to share that Solvay is targeting today carbon neutrality before 2050.With the -- obviously, global warming set to reach or exceed 1.5 degree by 2040 and extreme weather events becoming increasingly common, it's an imperative that we take decisive actions. And since I joined Solvay, we acted decisively to raise the bar, setting realistic yet ambitious targets that we know we will reach. Our climate neutrality target represents a vital step forward in our journey towards net 0 emission after, obviously, we launched our Solvay One Planet, and we joined the Paris Agreement, SBTi last year. Our road map and sales and investments up to EUR 1 billion by 2040 for all businesses other than soda ash. And for soda ash, we have identified investments of approximately EUR 1 billion by 2040. This will be partially funded by nonrecourse finance. And importantly, we fully expect this investment to also generate compelling economic returns. And we look forward to sharing more with you on this journey during the future ESG webcast being planned for December 1.We are also proud that our site in Brazil recently received the highest biodiversity rating from the Wildlife Habitat Council, a respected international organization focused on biodiversity conservation practices in the private sector. Solvay is the first chemical company in Brazil to achieve such a rating. Finally, we are honored to have received an award from Cefic just this week for the restoration and ecological plan of our Torrelavega soda ash site in Spain. It's a great example of the typical remediation effort applied at our plants.Let me now move to our results. I am very proud of the strong performance we delivered in the third quarter despite the challenging environment facing the whole industry. In fact, our employees are doing an excellent job managing this environment of inflationary pressures. And I'd like to say to them, thank you. Thank you to our teams globally for their continued hard work. Your efforts are paying off and without you, we would never be in such a good position after such a crisis.As you know, sales in the quarter were up 25% on an organic basis and up by 6% versus 2019. I'd like to highlight that most of our end markets are back at the level of 2019, and the demand continues to be very strong. I will suggest the example of Specialty Polymers, hitting a new sales record in the quarter. As we told you previously, this was driven by continued strong demand for our high-performance polymers used to lightweight various parts of the vehicle and automobile and also used in electric vehicle batteries. Both areas grew by similar amounts in the quarter, around 50% year-on-year.Other markets continued to the group's double-digit growth versus quarter 3 last year. In fact, markets growing between 25% to 30% included auto, electronics and building. Markets growing between 15% and 20% included mining, consumer goods, agro and health care. And in fact, volumes were higher than 2019 levels in every business outside of composites. Now geographically, all regions delivered double-digit organic sales growth versus quarter 3 last year. Europe was up 20%, Asia Pacific by 22%, north America was up 24% and finally, Latin America was up 45%. Let's now discuss about the inflation, obviously, and inflation, given its significant impact. You may recall that we have been projecting these significant increases for several quarters, and the impact has sharply increased in the second half as anticipated. We are progressing well in securing price increases, and we will be unrelenting in protecting our margins in the face of these significant and ongoing industry-wide inflationary headwinds.Now navigating within such an inflationary market is, in fact, an everyday fight. But again, our customer intimacy, our highly valued technologies, together with our good energy hedging and management, efficient procurement processes and the structural cost saving program initiated 2 years ago have allowed us to post another strong EBITDA performance. And we delivered on cash. And I'm happy with that. This is the tenth consecutive quarter of positive free cash flow generation. All in all, we are above last year levels on a like-to-like or for-like basis. And year-to-date, we have achieved double the cash flow versus 2019.Before I pass the floor to Karim, we would like to celebrate a couple of recent achievements and reinvestments for growth in line with our strategy. We are adding a new thermoplastic composite capacity in the United States of America with the completion of an investment in Greenville in South Carolina. The new product line will have the ability to manufacture unidirectional composite tape from a range of high-performance polymers, including PVDF, EPS and PEEK and help customers in energy, aero and auto markets by reducing weight and emission while being recyclable and circular.Second, we have also announced the creation of a new joint venture for the production of highly purified hydrogen peroxide for semiconductors. The JV is scheduled to begin operations in the first quarter of 2023, enabling penetration of these critical ingredients into a new market and will have an initial production capacity of 30,000 tons per year. You may remember, in July, we explained to you our strong leadership position in batteries and the potential it represents for Solvay. A couple of days ago, we announced that Solvay is advancing its innovation power in the electric and hybrid vehicle market to develop the next generation of solid-state electrolyte for batteries. On the ground, investments started with the opening earlier in the year of a dry room laboratory and research and development pilot lines in France. As you know, Solvay is leading the development of advanced inorganic material for solid electrolytes. This is a key component for solid-state batteries and well accelerating the scale-up of these materials. Full operation is anticipated for the second quarter of 2022.Also related to polymers, recycling is an important element. And Solvay together with scientists has conducted a proof-of-concept showing that PVDC has the potential to be recycled. As you may know, PVDC is used in food, beverage and health care multilayer barrier packaging across the world. Now that this initial breakthrough has been achieved, we're inviting fellow companies operating within the plastic industry to play their part and to set a global PVDC recycling stream across the globe.I also wish to highlight our recent innovation called Actizone, I'm really proud of as it started actually last year. We created a unique and long-lasting disinfection technology and it's now commercialized by Reckitt a global market leader in their iconic brand, Lysol. The technology was just launched in France this month and it will launch in Germany in the coming weeks, followed by other European countries in 2022 and in the United States of America in 2023.Also our SOLVAir bicarbonate technology has been successfully tested on one vessel of La Méridionale passenger ferry operator, you can see in the south of France, and we will extend our solution to all the engines of the ferry. The partnerships will enable compliance with International Maritime Organization, IMO, regulations for the reduction of, what we call in our jargon, SOx, it's sulphur oxide emissions and will facilitate the removal of 99.9% of particle matters. Finally, our soda ash is an essential material for the production of lithium carbonate by the Chilean chemical company, Sociedad Química y Minera de Chile. And believe it or not, this is the biggest lithium producer in the world whose production is based on the natural brine resources from the Atacama Desert. We managed to close the multiyear agreements and expect to supply about 170,000 tons of soda ash next year and we will reach about 200,000 per annum from 2023 onwards. And this is a great example. And remember, I told you that Solvay is circling the battery. This is yet another one. We are going beyond the material businesses or special chem businesses and leveraging our full portfolio.And now Karim will review in more detail the group segment and financial performance. Karim?
Thank you, Ilham. Good morning, good afternoon, everybody. I will start with an overview of the 3 business segments, and I'll refer as usual to figures on an organic basis, which means at constant portfolio scope and currency. And before going any further, let me remind you that the 6 businesses we divested early this year, together with the currency fluctuations are expected to impact full year EBITDA by around EUR 120 million. At this stage, the impact is EUR 16 million for the third quarter, EUR 87 million for the 9 months thus far.Turning to the Materials segment on Slide #7. You'll see that sales in the third quarter were up 26% against Q3 last year. Sequentially, up 6% versus second quarter of this year, driven by another record quarter, as Ilham mentioned, in the Specialty Polymers business. Sales in this business unit alone were up 33% in Q3, reaching EUR 570 million, and this reflects continued high demand across all its key markets.As Ilham referenced, growth was across all markets by the business, and we continue our penetration of materials into auto and in particular, electric vehicle batteries where our technologies can be found in binders and separators and enclosures as well as sealing and cooling applications. Altogether, these grew by almost 50%, 5-0 percent over last year. And that's not the only market growing double digits. Our polymer sales into electronics also grew around 50% in the quarter. This was boosted by semiconductors, electrical components as well as smart devices. Sales also grew 20% in health care, and that includes polymers that are used in medical devices and pharmaceutical packaging. Turning to Composites. Sales are up 6% year-on-year as we start to see some signs of recovery. This quarter was the first with year-on-year volume increase since the beginning of the pandemic. It's also the third consecutive sequential improvement. Now it's important to note that our top line was again affected by supply chain, labor and manufacturing issues. The recovery that we're seeing is mainly visible in single-aisle craft, but do keep in mind the high level of inventories that are still there for the 737 MAX. And we need to see that reduced before we see a more pronounced acceleration of production rates expected by customers starting in 2022. Sales of the space and defense markets also grew in the quarter and have remained resilient.Turning to profitability. The EBITDA of Materials in Q3 increased 52% year-on-year, and EBITDA margins improved almost 600 basis points to 32.7%, primarily driven by the record sales in specialty polymers by sustained pricing and significant cost reductions especially in the Composites business.Turning to Chemicals on Slide 8. Third quarter sales in the segment, up 20%. All businesses experiencing organic growth year-on-year. Soda ash sales were up 8% in the quarter, and that's driven by higher volumes, slightly offset by lower prices. Demand trends in the third quarter were similar to what we saw in Q2 with sustained demand in the building market where flat glass is used, while the container glass market that's used in hospitality, restaurant, catering, HORECA industry, slightly improved sequentially, although it still lags 2019 levels.Sales in the bicarbonate product line continue to be very strong. That's about 1/4 of our business there, the bicarbonate product line and it's very strong mainly in the U.S., driven by our SOLVAir technology that's used in flue gas treatments, which as -- I highlighted just a few moments ago, it represents alone about 10% of the business sales.Peroxide sales were up 11%, driven by volumes and prices. Market conditions remained strong in HPPO, which is used in automotive and building industries predominantly. Volume growth was further supported by customer wins in the electronic markets. Our silica business had another strong quarter. Sales growth of 17% with strong continued growth in the replacement tire market.The business also continues to benefit from market share gains, thanks to the penetration of its sustainable solutions, including our highly dispersible silica for tires that enable better rolling resistance and far better wear. The Coatis business in Latin America is going from strength to strength. It's continuing its record run. Sales up 70% against Q3 last year, reflecting continued strong demand, customer wins as well as pricing actions.Wrapping up, the EBITDA of Chemicals segment increased 19% year-on-year, thanks to higher volumes in all businesses, high prices and also very strong contribution from our RusVinyl joint venture, which is in Russia in PVC. Taking all this together, it translated to an EBITDA margin of 27.3% in the quarter.I'm now going to turn to the Solutions segment, which you can see outlined on page -- on Slide #9. This segment delivered sales growth of 28% this quarter. Beginning with Novecare, sales were up 25%, driven by double-digit growth across key markets, including coatings, industrial products used in auto and building and construction markets. We also saw more robust demand, more somewhat sustainable technologies, which supported the double-digit growth -- sales growth in agro as well as HPC, home and personal care markets.You may have noticed that we also have now provided separate sales figures for the oil and gas business, which today represents about EUR 100 million in sales in Q3, a sharp improvement over last year. We really hope that you welcome this additional disclosure, not least because it helps to also highlight the significant progress being achieved by Novecare in all its non-oil and gas markets. To be clear, most of oil and gas business resulted in the Novecare business units in the past. And we've added 1 product line from our Technology Solutions business because that also supports the oil and gas market. And now what we have is a distinctive business where all of our fracking activities reside.The Special Chem business delivered sales growth of 26% in Q3, again reflecting the continued strength in the electronics sector, particularly in semiconductors. Now although products used in the automotive sector showed modest growth against last year, the business is now feeling the impact of the slowdown in production related to the chip shortage that I'm sure you're all aware of. In Technology Solutions, sales were up 27% in the quarter, driven by higher volumes and strong pricing across the mining sector. As we mentioned last quarter, we are gaining market share with existing customers, and we're winning new customers as well. Other product lines, including phosphorus specialties and additives are also progressing and are supporting the growth. In our Aroma business, sales were up 16% in the quarter, driven by strong demand in food and beverage as well as flavors and fragrance markets. Wrapping up Solutions. The segment delivered 28% EBITDA growth versus Q3 last year, reflecting the strong and continued recovery across most markets, whereas the EBITDA margin was stable at 18.3%.Now I'll move to the group financials. And first and foremost, I would like to share some elements that are related to the inflationary cost increases that we experienced in the third quarter because they reached EUR 145 million versus Q3 last year and a sharp increase versus the second quarter. And please note that the impacts I'm highlighting are after our well-established hedging practices.To give you a bit more color, about 80%, 8-0, of this increase relates directly to raw materials and energy and the balanced logistics. Keep in mind that a significant part of the energy increase is related to the spike in natural gas in Europe, which manifested itself in the latter part -- in the latter half of the third quarter. As a result of these developments, we now estimate that the full year cost inflation will be of the order of EUR 400 million, that's 400, rather than the EUR 250 million we'd indicated in July. Now that's the backdrop that has really motivated us to really drive and accelerate the increase in prices as the main lever that helps us to maintain our leading margins.Turning to cost savings on Slide 10. Once again, we've been able to generate new additional cost savings, this time EUR 41 million in the third quarter. There are 3 main areas for that delivery. First and foremost, restructuring, which came in at EUR 18 million, and that reflects the reductions in labor-related costs. And you know that we've launched different simplification and restructuring plans such as in composites, but really across the group as we will continue to delayer. These plans have thus far resulted in EUR 171 million of savings since the beginning of 2020.Indirect cost reductions came in at EUR 15 million, and that also reflects the benefit of programs such as the zero-based budgeting that we put in place last year. And then finally, productivity efficiencies at our sites came in with EUR 6 million in this quarter. This brings our year-to-date total structural cost savings to EUR 172 million. Therefore, I can confirm that we are on track to achieve our full year guidance of EUR 200 million.Now you may also remember that our objective is to achieve EUR 500 million structural cost reductions by 2024. We remain well on track. And indeed, at the end of 2021, the cumulative cost reductions over the 2-year period should amount to EUR 375 million. That's EUR 200 million more than fixed cost inflation. These cost reductions, together with the strong top line performance that you've seen have allowed us to post another strong EBITDA performance, coming in at EUR 599 million which represents a 31% organic increase against last year, and nearly 7% against 2019 as well on a like-for-like basis. That's really encouraging.Now what I also want to do is to highlight that this EBITDA performance has been achieved in a very specific context. This beginning of the year, the impact from increasing raw materials, energy and logistics, particularly taking Q2 and Q3, now that totaled EUR 210 million so far this year. Now that is unprecedented. Therefore, these new market conditions, these headwinds, they require new actions. They require a new way of facing off to these headwinds, and we'll be actively pursuing those price increases across our businesses to mitigate the significant headwind. I can tell you that, for example, we've been engaged very deeply with customers as we seek to both meet their needs but also preserve our margins because everybody understands the necessity to maintain that balance, that important balance in our commercial relationships as we navigate together through these challenging times.And again, you can see, actually, that are strong margins show that we're making progress. That said, there is more to be done. We can never relent. And of course, I can tell you that the focus of the entire leadership in Solvay and for the entire commercial organization is very much around maintaining our leading position in the market and driving pricing up. That is key. I would suggest to you that has been our priority #1 for quite a few months this year.But there's more. Cash is where it matters as well. It's where the rubber hits the road, as we say. So if you can turn to Slide 11, you know it's important to us. We worked really hard for more than 2 years to drive sustainable and consistent improvement in cash generation. And I'm really pleased that we're continuing to deliver. For the tenth quarter in a row, we're delivering positive free cash flow, this time EUR 276 million in the quarter. Since the beginning of the year, the total is EUR 692 million, slightly higher than the first 9 months of last year when we exclude scope, currency and the onetime elements that you recall we highlighted last year.Now I would like to highlight a few additional elements to give you some color on that free cash flow. And I'll start with working capital. The current top line growth is driving a natural increase in our inventories, in our receivables, but we are managing it very, very carefully. And up to now, everything is completely under control. Just look at working capital to sales, you will see that and it speaks for itself. As of end of Q3, we're about 2% better than we were at the beginning of 2020, for example, stronger than in 2019 as well. That discipline is here to stay.Two, CapEx. You see that we spent EUR 412 million in the first 9 months, which is broadly the same amount as last year. Now despite our best efforts to resume to ramp up our investment plan, we were impacted by raw material shortages and supply chain issues that again are very well-known for the whole industries, many industries. Now as a result of this, we now expect to finish the year with a total CapEx slightly below the EUR 700 million -- slightly below EUR 700 million. And you know that we compare with EUR 700 million to EUR 750 million we indicated to you at the very beginning of this year.Third point I'd like to add on free cash flow is, as you know, we're deepening, we're accelerating our restructuring programs. We spent EUR 39 million in cash to make that happen, which brings the 9-month total to EUR 92 million. That's the highest I've seen for many, many years. It's actually EUR 26 million more than last year. The payback is very compelling.Finally, not in -- but certainly not the least impact, but it's very important, is the continued deleveraging of our balance sheet. The benefit of all the work done on pensions and on our debt are paying off and are visible in the bottom line with pension financial charges together being EUR 32 million below the first 9 months of last year. As a result of all these actions, our free cash flow conversion ratio is close to 40%, 4-0 percent, for the last 12 months.Finally, before I turn back to Ilham, a word on our net debt. The level at the end of September 2021 is slightly below the end of 2020. The strong free cash flow and the inflows related to the 6 divestments more than offset both the dividend payments of EUR 388 million and EUR 102 million voluntary contribution to our pensions that we made in Belgium, in fact, in the first quarter this year.And I remind you that we still have plans to make another EUR 300 million in additional contributions in the next 6 months, which will bring the cumulative additional pension contributions to about EUR 1.1 billion. Indeed, on the question of debt and pensions, it's useful to take a step back sometimes and to really take note of the cumulative progress on our global indebtedness since 2019.And Ilham, I'm not sure if you realize this, but since you became CEO, the fact is -- and this is a real fact, that our balance sheet has strengthened by EUR 2.5 billion in just 10 quarters with a fall in net debt from EUR 5.5 billion to EUR 4 billion now, a fall in pensions from EUR 2.7 billion to EUR 1 billion. I just wanted to make note of that because when you look at each quarter individually, we may sometimes miss the big picture.And with that, I'll hand you back to Ilham, who will provide our outlook for the remainder of the year.
Yes. Thank you, Karim. Thanks. It's a teamwork. I'll now comment on our outlook for the full year shown on Slide 12. We are very pleased to confirm today our full year EBITDA guidance for 2021 despite the key headwinds facing the whole industry today. The fourth quarter won't be easy to navigate, considering not only the strong demand in a lot of markets; the usual softness during the holiday season; the chip shortages impacting some auto businesses; the raw material, logistics and supply chain disruptions; or the potential power restriction in China as you all know.So some of our brands that are sold out 1 day and have to slow down or stop the day after because of these issues, and discussions with clients on price increases or difficulty to deliver products, in fact, managing these uncertainties has become an integral part of the daily job of our teams. It's also somewhat difficult to anticipate the full impact of cost increases and disruptions given the very high volatility we see with some raw materials and with the energy prices in Europe. As Karim mentioned, our best estimate for the full year inflationary cost impact is now about EUR 400 million. So things are changing rapidly, and we are fully mobilized to respond effectively and we are ready.Notwithstanding these challenges, our focus on the top line gives the confidence to confirm our EUR 2.2 billion to EUR 2.3 billion EBITDA guidance for the full year. I remind you, this represents 20% to 25% growth on an organic basis against 2020 and around 4% against 2019. Even plus 13% excluding composites and oil and gas, which had a slower recovery. On cash, we are increasing, as Karim said, our free cash flow guidance and now estimate generating around EUR 800 million for the full year. This will represent a free cash flow conversion ratio between 35% and 40%, higher than our strategic commitments and 3 years ahead of time.In short, we have not forgotten the lessons learned during the COVID crisis, and we are making good use of them today to make Solvay even stronger. This means we will continue to be innovative, to think differently, to stay close to our customers, drive value and to go the extra mile. And we will continue to implement our growth strategy and look forward to the future, a future that will be more sustainable for sure.So by now, Karim and I will be happy to take your questions. Back to you, Jodi.
Yes. Thank you, Ilham. We will now move to the Q&A portion of the session. [Operator Instructions] Thank you, and I'll transition now back to the moderator.
[Operator Instructions] We have the first question from Matthew Yates from Bank of America.
I've got 1 cash flow question and 1 operational question, if that's all right. So on the cash flow, you're talking about EUR 2 billion cumulative CapEx for decarbonization, but that's over the next 20 years. Is the simple way to think about this EUR 100 million a year spending? Or is it much more concentrated and front-end loaded than that?The operational question relates to soda ash. Obviously, energy prices are up a lot. I think IHS are talking about $40 to $80 a ton depending on feedstocks. I'm not sure if you agree with those numbers, but is there a way to think about the percentage price increase you need next year to pass this through? Is it around 20%? Or is that -- am I way off there?
Yes. I may start and Karim, you follow. I may start with the second question and then follow up on the carbon neutrality. Yes, indeed, you've seen the IHS publication is EUR 40 ton, 20% more or less for Europe in 2022. There are also prices up in APAC, about USD 300 almost per ton as we speak, et cetera, and [ USD 350, USD 350 ] LatAM and EMEA. You can take them as a proxy. You always know that we at Solvay we are in the higher range and above this. The way to look at it is that, obviously, this is a high energy intense business. Obviously, we have a policy of also energy hedging. We don't disclose the amount of it, but it's supporting us and helping us. And you've seen our numbers in terms of pricing in the sales bridge against the quarterly cost savings, although we don't disclose it on a business unit level.Believe it or not, this is the first time in our history where we have started renegotiating the prices on soda ash business, right, in a given year for contracted business because it's abnormal times. Our customers, they understand that. So we are discussing it with them. And obviously, as we are in quarter 4, we are also starting the discussion as traditionally we do for next year pricing. So more to come as usual, and you've seen it through my tenure with the team, we will ensure that we protect our margin and continue ensuring that in each business, it deserves the prices it should deserve.On the neutrality, and maybe, Karim, you can give a bit of color how we are going to send this. Obviously, you've seen us announcing carbon neutrality and it's a big day for Solvay because we are part of the chemical industry, which is harder to [ abate ] industry. We've been working on this since my arrival in the company in March 2019. Obviously, Solvay One Planet was the first step to declare a bigger ambition on sustainability. We joined the Paris Agreement. We joined the SBTi last year. We did 2 ex-Paris in 2019, 2020, so 4% structural decrease in emissions in 2019, 2020. And Paris requested 2%. This shows -- and we did it on high-value projects with good returns.On the soda ash, you know that soda ash represents last year, I think 2020 was 64% of our emissions. So there is a soda ash case and non-soda ash and that's why we are making the split. On the soda ash side, it's about exiting coal, and we have 7 assets in Europe, which are still using coal as primary energy. Since I joined the company, we are now announcing the second plant, Dombasle in France after Rheinberg in Germany we announced earlier in the year, exiting coal, which has approved -- has been approved by the Board of Directors yesterday. And we are doing it through recourse financing, obviously. So we deconsolidate, but the CapEx is turning to OpEx. And we asked the team to do it. It's very simple, it's to show me and to show us and obviously, it's a competitive landscape that we can do it at lower landed costs, including vis-a-vis our natural imported competition. And that's what we are doing with those 2 investments.And moving away from coal or gas, you've seen it now with the spike in gas pricing, it actually supports our less cyclicality and dependency of highly cyclical energy, right? And that's what we are going to do with biomass based on wood chips in Rheinberg. And here, we are using what we call RDF, refuse-derived fuel, which is, by the way, just [ nonbio-derived ] waste, right? We burn the waste. And this is going to be good for the planet, but also profitable. Karim, anything to add on financing?
No, sure. I mean Matthew, I think -- I don't have a better indication than your average of EUR 100 million a year. I think it is a good proxy. But the reality is it's not going to be as linear as that. However, the important point, and I'll go back to what Ilham has said, is there will be a fair proportion of that, that will be nonrecourse financing. So yes, we use the strength of our balance sheet, but the cash will stay with us as well. More importantly, this will not get in the way of our growth plans and it also won't undermine the capital discipline and the real focus we have on generating returns. And I say that because what really like about this from a pure financial standpoint is the returns are really compelling. This underpins the resilience and improves the competitiveness of all our businesses without in any way disrupting our growth potential, and that's what I find particularly attractive. And clearly, maybe to give you an example, we announced you recall Rheinberg, same thing we moved away from coal earlier in the year. Soda ash, we've announced Dombasle. Both of them benefit also from project financing. Again, this is an example, let's say, being smart, using other people's money wisely, let's say, putting in the equity we need and that helps us to move the agenda. As I said, the returns are very, very strong. I hope that helps.
Next question from Mubasher Chaudhry from Citi.
One note, can you elaborate your -- on your conversation with your customers with regards to the price increases that you see in the current quarter? Is there an understanding that the pricing will need to come down when the raw materials come off or potentially in 2022 and therefore, we see the margin remaining flat as opposed to a margin expansion story?The second question is a bit longer term. On capital allocation, with the strategic review of the soda ash division and the strong performance of materials business that you're seeing now, are you open to large ticket M&A? Or do you think the focus is still very much on cost containment and efficiency execution before you turn to thinking about big-ticket M&A? That would be helpful.
Yes. Thank you very much for the question. Well, listen, on pricing, frankly, although it's painful specifically the level of inflation we see now, and it's probably very unusual and first time in my career I see such spike in such short period of time. Actually, a side of me like it because it stress tests our value proposition, and it's the best timing to go and get pricing, not only for commodities, obviously, but also for specialties. So yes, I mean, we are discussing constructively with all our customers, right? Our sales team is working hard. You may remember actually, I told you after getting fit and working on our cost, and I think Karim has given you a color on how the infrastructure now is getting leaner, better, more efficient and productive at Solvay, now it's the time we are switching gears to the growth potential of Solvay. And I think, frankly, even before joining the company that's what attracted me. We have -- we are the only one who has all these specialty polymers and the carbon fiber, the composite know-how in one home. And we are unique there. And you see it now when I told you back in 2019 at the growth strategy launch that the battery platform and the thermoplastic platform are going to be the emerging growth platform. I mean, frankly, even me, I couldn't believe that it's going to be so quickly increasing and growing after 1.5 years or 2 years.So we have a unique value proposition. You've seen that our sales, you can -- in our sales bridge, we've achieved EUR 139 million in price increases in the quarter versus EUR 145 million cost impact. Those are the data and there is more to do given the headwinds, which remains and are clearly increasing in quarter 4. We expected it at the beginning of the year, but I told you EUR 200 million, EUR 250 million, now it's more EUR 400 million. And we are still continuing to increase prices. In the open volumes, we have energy surcharges. We are putting it. I told you that's the first time in our history where even contracted business like in soda ash, we are putting it on the table and customers, they understand. I mean they look at the numbers and the data like you do and I do. So that's extremely important.So -- and we are anticipating the '22 price negotiations they are underway, just too early now to talk about it. And as you know, for contracts, there is a lag between cost increase and price increase. In average that's always 4 months, right? That's the example in silica, for example, and in commodities like Coatis, we are capturing the increase right away. And indeed, for the sustainability of it, I think what I like is it stress tests specifically the specialty portfolio. So now we are looking at our value proposition, our value pricing. And obviously, if we believe that we were not pricing enough and well our product and solution, we will fix it through this period of renegotiations, including, by the way, the terms and conditions. Karim, you want to address the other question?
The other question is really around capital allocation and M&A, et cetera. I mean -- and you mentioned soda ash, [ old normal ] soda ash has announced the carve-out, that gives us at some point, portfolio flexibility, of course. But at the moment, the focus is on driving that improvement. Not just financials, you can see the results, they speak for themselves, but also in terms of sustainability on the 2 projects.So what's our view on M&A? We are clearly open. We're looking to upgrade our portfolio with discipline, absolutely with discipline. We won't overpay ever. We will make sure we focus on returns. So we look -- and clearly, we have some dry powder, look at the cash on our balance sheet. So to my mind, of course, we're looking very selectively and where that's very strategically coherent, where we find opportunities, we don't hesitate. And you've seen us acquire. Okay, it was small, a small business on agro, Novecare. Because we saw that we're clearly a very good owner that can drive a lot of value.My only regret on that particular one, I wish it was 10x bigger. That would've been nice. So what I'd say is we are looking. Cash funding is not a constraint to our ambitions. It really is around driving the agenda organically in the first instance, priority #1, but also the portfolio lever is there and we'll take our time to find the right opportunity there.
Next question from Jaideep Pandya from On Field Research.
Okay. I'll stick to 1 question only. The soda ash business that you have discussed to carve out, interestingly, quite a few other assets at least have been rumored to be on the market, especially more in the U.S. with rumors on Ciner and Tata. And if we add all this capacity, then it looks like almost 75% of U.S. capacity is up for sale. So I just want to understand how do you guys see this in the context, what is really driving so many businesses to -- also many players to actually put their assets up for sale? And how do you see, let's say, future of soda ash in this backdrop? Is this something where all options are open, i.e., even an IPO? Or is it something where you're going to carve it out and definitely sell it to either a strategic or a financial?
Yes. Jaideep, thank you for the question. Well, listen, I remind you that we announced the carve-out, right, of soda ash a while ago. Actually, the COVID-19 has delayed our plans, right, because we were already ready into early 2020. We started it a bit later, and the objective of our carve-out is to reinforce the internal financial and operation transparency and accountability and increase the strategic flexibility and this remains our focus at the moment. I have done such carve-outs in my career. I know they can be complicated specifically for a founding business like soda ash at Solvay. And we indicated that in February 2021. It's going to last approximately 12 to 15 months. So you can expect better news by the end of quarter 2 next year. And when -- and if we make additional M&A decision, we will inform the markets. At this stage, there are no decisions. We are just busy with the carve-out and doing the right thing here. To give you an example, a significant number of legal entities out of total of 400 entities needs to be reviewed, and we consider carefully. So it takes time. And transformation is a process, not a destination. I mean we are not for sellers, and we are guided by improving Solvay's profile in order to create shareholder value. So that's key for us. And we've done it with 6 recent small product line divestitures. When we believe we are not the right owners, when we believe there are commodities, we make a deal, provided people are paying the right multiple. The rest, frankly, I'm not going to speculate on what's going on in the market. I'm watching like you. And anything which can build equity for beautiful business line soda ash, take it. Back to you.
Next question from Chetan Udeshi from JPMorgan.
Two quick questions. First, it seems in Q1, at least the company was successful in keeping the net pricing close to 0 almost. In other words, the price increases offset more or less the incremental energy costs. Can you give us some sense of how do you see that in Q4? I think that would be useful.And second question, straightforward. I think you mentioned something about the project for solid state. I don't know if you can give us some color on what is the chemical backbone that you're using? Is it based on PVDF? Or is this some other material that you are using to develop your solutions for the solid state.
Yes. Thank you, Chetan. On pricing, obviously, it's a battle of every day. I think I'm satisfied. Not totally satisfied, right, with where we are. So I think the team has done a good job. Obviously, it's always difficult in a given year to go and renegotiate established contracts. I think -- but as I told you, Chetan and the team, I think I was -- frankly, during my career, inflation times are really good times to really challenge your pricing strategy, right? As we speak, we hired people to help us, externally even, to review thousands of contracts, terms and condition, the formula pricing, inbound, outbound.Do we have the right formula in terms of energy, in terms of logistics, in terms of raw material and vulnerability here and there? Whenever we have a full supplier, we are validating and qualifying more than one. We are having a discussion, as I told you, I give you the extreme example of soda ash because it's historically in our history. And frankly, when I put it on the table with the team, obviously, it's never happened. But when you go, the customers understand that it's fair. It's very credible. They need winning suppliers.So we are doing this. So we are on pricing every day. Costs are increasing. We don't see them decreasing. I don't have a crystal ball on energy and gas for next year. I'm hearing different energy companies, and we have our intel where it's going to go, but I am now counting with the team that H1 costs are not going to ease up. If it does, good news. It's going to be an upside. So therefore, we are keeping our pricing momentum and we're reviewing it every week with our team here, with the corporate team. So we are doing just that, and this is important.Then the question -- there was a question about batteries. Yes, I mean, again, very happy that we -- since 2019, we really played the batteries game as a platform. I know it's -- as a platform, I'm not sure it really struck you guys, in 2019 was my first 9 months in the job. I was struck by the power-leading technology, power position of Solvay. And when I say we circle the battery, I'm weighing my word. I mean batteries, the cathode and the anode. We are in separators, we're in electrolytes, we're in the casing and now we have even soda ash and lithium mining. And we are technology agnostic, and that's what you are alluding to, probably, Chetan. We are not making anode, cathode or separators material but developing binders, coating and electrolyte.So battery technology, it means using those different cathode chemistries and the answer is we are present in all. So different generation of batteries with commercialized Generation 2. We are already qualifying Generation 3 and Generation 5, which is the solid, we are working on this. Now on the technologies, it's beyond PVDF, that's what you asked for. We're not going to disclose which one is our preferred one because we have still competing technologies, but we are working on several ones. And the launch of this dry room lab and another line to assemble and already mimic what a solid battery of tomorrow can be is the testimony that we are progressing very fast with our customers. I think I -- that was the question around solid batteries, yes? Back to you.
Next question from Geoff Haire from UBS.
I just got two, one quick question and probably a slightly longer question. First of all, just on Q4 pricing. I think you said the EUR 400 million of cost increase due to raw materials and energy. I think by implication, that would mean you'd need to get prices up about 9% to 10% in Q4. Is that roughly where you think you can get to given the negotiations you've had so far with customers? And then second question, just sticking on the solid-state batteries. When you launch this product commercially, is it going to be for EVs? Or is it going to be for consumer electronics first? And when do you think the first revenue will come from?
Geoff, on your first question, I mean, your maths are -- I'm not sure they're right or wrong, but fundamentally, here's the math. We said -- I said EUR 400 million is our estimate for the full year. We had just over EUR 60 million from memory in Q2, EUR 145 million now. So we're EUR 200 million to EUR 210 million of the way there. So that implies for the headwinds of the order of EUR 190 million to EUR 200 million in Q4, within our guidance. What we said is we will give you -- we expect to deliver an EBITDA for the full year between EUR 2.2 million, EUR 2.3 million. I'm not going to give you a precise answer. What I can tell you is we have factored in an expectation that we will mitigate now. Part of that will absolutely come from pricing. You saw what we did in Q3. The run rate of what we saw in Q3, that hasn't fully crystallized but also come through to the bottom line.So in terms of euros, I can tell you, but I don't want to give you a percentage of because I think it could be unhelpful in many, many respects. It's the euros were looking at. But I do expect us more than ever to, let's say, to really maintain our leading margins. If I said it differently, we really like the fact that our EBITDA margin now 9 months into the year is 24.1%. If I can ignore 2020, look at 2019, that's 1.1% better than 2019. And I'm not going to say that's going to reduce, go up a bit. Yes, of course, there are always little seasonal impacts, et cetera. But do expect us to keep those leading margins. That's really what we're saying. But it may not be linear from 1 quarter exactly to the other. But the focus on pricing will absolutely be maintained and will drive us up.
On battery, again, solid state, and thanks for the question. Obviously, as you know, the accelerations which we based on current PVDF, we have a road map, we more than doubled the capacity since I joined the company. And be patient with us. We are going to tell you a bit more about our plans, either in the coming quarters or during a future Capital Markets Day. So we are busy with that. And that we master, we know and frankly, we can do a better job in making it more efficient and productive. The holy grail will be the solid state, obviously. And the Generation 5 it's further out, probably post 2025 to the end of the decade. We have friends right as well from governments and we put together demo plants, and we have small scale capacity, and we are upgrading it with some very good competitiveness there.So there is the biggest price there, if we can move to solid polymer electrolyte. It will give you a lot of performance, right? And safety, security, number one, highly valued by our customers. Nobody wants to recall cars because of problem of flammable batteries. But also the weight and the density and the affordability, right, and the cost of ownership. So we'll get to that. And I think we are protecting our IP wherever we can, and we can tell you more in the coming quarters. Back to you.
Next question from Sebastian Bray from Berenberg Bank.
It's on the special chem business. There is quite a lot of news flow coming out of China about some rather outrageous price increases for rare earths at the moment. And then when I add up the capacity that Solvay has at La Rochelle and elsewhere, as a rough guess, I think it's about 20% to 25% of processing in this market. I remember back in 2010, 2011, there was a big spike and this had a quite positive impact on EBITDA. If this were to repeat, would we be looking for, let's say, EUR 50 million, EUR 100 million of EBITDA uplift from this segment? And linked to that, how do you think about the demand for rare earths on a 10- or 15-year view in terms of the erosion from auto catalyst business versus the use in EV electric motors?
Sebastian, I think it's an interesting question you're asking. I think the situation today is different from the part that you allude to. I don't believe that we're in a bubble which is what we saw in the past. I wish I could say to you I see EUR 50 million to EUR 100 million. And you know what, I wouldn't hesitate to tell you that if I really believed it. What I can tell you is that we are in niche markets. I think some of the markets we're serving -- customers we're serving, especially we're in fading business, diesel, et cetera, over time, they're fading, they're stagnant, they're fading. But fundamentally, what we've described is very much so within our expectations, let's say. We factored in -- within the EUR 400 million, for example, we factored in these expectations, but I really don't think we're in a bubble with a significant upside at this point.
Thank you. Next question is from Laurent Favre from Exane BNP Paribas.
It's a 2-part question on materials. The first question is around pricing and raw materials. You only had 1% pricing in Q3 for the division. So I'm assuming that there wasn't a lot of pricing, and there wasn't a lot of raw material inflation. I was wondering if you could talk about maybe the delay in inflation in composites because of the fiber contractual arrangements, but also what you're expecting in terms of the further innovation in specialty polymers.And the second question on Specialty Polymers. On silica, you talked about the decline in car production and the issue with chip shortages. I'm surprised that polymers have managed to have the highest sales on record in the history of Solvay when car production is about 20% below all-time highs. So I'm just wondering, is it that the non-auto parts of Specialty Polymers is doing phenomenally well? Or is there some results in the chain?
Yes. I may start, Karim, and I'll start probably with Specialty Polymers, right? Well, you've seen the numbers, obviously, a very good quarter on Specialty Polymers, and we expected it to be this way. Let me start with the market situation because you hear a lot about auto and probably you are trying to compare us with other peers. From OEM perspective, there was no major slowdown yet in quarter 3, right? So from a Specialty Polymers' perspective, absolutely our demand has been extremely high since January, by the way, yet we did have some customers' orders cancel here and there even in quarter 3. So we do expect to see some slowdown in quarter 4 and this is factored in our forecast.The story on our results, it's a bit in my mind, I try to make it in a simple way. Even with some softness in demand, we still have full plants, right? That's what we see. I mean there's a lot of red in the capacity utilization here. There may be some inventory, but we don't think there is much yet on inventory buildup based on our intelligence directly with our customers. And here, I feel better than last year because last year, when the COVID-19 hit us, we didn't have a central order book, and we didn't waste a good crisis. So we built a central order book now where we have a pulse a bit on what's going on, and we are in direct contact with our customers. So some parts of the value chain had no inventory, so they try to rebuild, but it's getting consumed immediately, so no backlog.Therefore, our -- many of our customers believe it's I'm not still screaming for inventory in quarter 3, and that's what we know from our intelligence again. Intrinsic demand from consumers. Still there are people who are still buying cars. Now OEMs are giving priority because of the chip shortages. You've seen it, and that's what we hear to the high-end, high-margin vehicles. And both are either EV or luxury brands, high-performance vehicle is the sweet spot of Specialty Polymers. It allows, frankly, the OEM to sustain their margin. Also, Specialty Polymers are used in this type of vehicle, therefore, we still saw a high demand in quarter 3, specifically on those areas. And we see a continued penetration of EV and hybrids, as you know, where we have more weight in this vehicle.You remember my [ 6, 9, 12, ], 6 in ICE, mining, electric and 12 in hybrid. So the OEMs favoring those models, it's better for us. So all in all, the forecast, market is probably getting softer. This will somewhat affect us in quarter 4. It's again in the forecast, and it's in there already. And please note, I mean we talk about auto and batteries and like that, but all other markets in Specialty Polymers outside auto are also performing very well and growing at high rates. So all of this together translated into superior performance in quarter 3 and a new record. You want to talk about actually carbon fiber as well? You don't want to that? Yes?
[indiscernible].
So carbon fiber, as a reminder, our asset base is a bit more flexible here versus our competitors, meaning we are not 100% vertically integrated into carbon fiber. We procured a large option of our needs, as you know. And this means we have less of an issue with fixed costs, right? Although, as you know, last year with the slowdown and halting of civil aviation, we did what it takes. We structured our infrastructure. Two plants have been closing. The third one is underway. We didn't lose volumes. And frankly, composite material, when the aviation, civil, because defense is doing well, will get back to 2019 level, which we expect by 2013 is going to be a far better business that's very healthy and higher margin than what you've seen from [indiscernible] or even the composite material within Solvay in the earlier days of this decade.And indeed, we are -- we procure our needs. Our contract structure provides some protection. We have formula pricing, as you know, but we are also able to get pricing, obviously, because we had those formula pricing. We have multiyear formula pricing. And as we speak, we are also reviewing those formula. But yes, definitely, we can pass on some pricing.
Last question from Alex Stewart from Barclays.
Just to go back on this auto question and on [indiscernible]. Because if you look at the numbers your auto sales and materials -- or your [ automotive ] sales were down 20% this time last year and now up 45%. So that's up 15% over 2 years. Global car production was down 10% relative to 2019 in the third quarter this year...
Sorry, Alex, you're cutting off. Alex, I'm sorry to interrupt, but you're cutting off. You're going to have to repeat your question. We cannot hear you.
Okay. It's fine. I'll give the IR team a call afterwards. Maybe that's better.
Okay. We can try again one more time. And then if that fails, feel free to reach out directly. Have one more go, please.
Okay. So the -- I hear what you're saying about the auto industry and demand is still good and they're prioritizing premium cars. But this time last year, your sales to the auto industry were down 10% or 20% and now they're up 45%. So that's 15% higher in the third quarter this year relative to the third quarter in 2019. Over that 2-year period, car production is down 10%.
Alex, I'm sorry, your voice is intermittent. We're going to have to take it offline. I do apologize. I wish the connection was better. I'd love to answer your question openly today, but we'll take it offline with the team. Thank you. Next question, please, operator.
We have no more question. Back to Jodi for the conclusion.
Yes. Thank you, everyone, for your participation today. Indeed, Alex, feel free to follow up with us. But anyone who has additional questions, the whole IR team is here to speak with you. Thank you so much, and have a great day.
Thank you, ladies and gentlemen, this concludes the conference call. Thank you all for your participation. You may now disconnect.