© 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.
Ladies and gentlemen, welcome to the Solvay Full Year 2017 Earnings Conference Call for analysts and investors. I am pleased to present Mr. Jean-Pierre Clamadieu, CEO; and Mr. Karim Hajjar, CFO. [Operator Instructions] I now hand you -- hand over to Mr. Jean-Pierre Clamadieu. Sir, please go ahead.
Thank you very much. Thanks, everyone, to participate in our call today. I'm here in Brazil with our CFO, Karim; and Kimberly, Head of IR. And the objective is obviously to provide you with an overview of the full year 2017 result, but also share with you the outlook for 2018.Q4, as you've seen, was strong, and it concluded a year 2017, which was, indeed, at least in my view, a very good year for Solvay. We delivered fully on our strategic priorities, and I think we are very much on track with our mid-term objectives that we've shared with you in 2016.Regarding portfolio, we've reached what I think was a very important milestone with the divestiture of Polyamide to BASF. This was really the last but very important part of our -- of the current chapter of portfolio upgrade that have started back in 2012. We expect the Polyamide transaction to close in the second part of 2018, and things now are going exactly as planned.Regarding the operational performance, we have achieved in 2017 a 7.5% increase in EBITDA, with all our operating segments contributing to the growth. If we are however thinking in -- on an organic basis, which means excluding foreign exchange and scope impact, we grew at almost 10% our EBITDA, which I think is a good achievement and once again, very much in line with our strategic objectives. We have a strong EBITDA margin, 22%, despite rising raw material and energy prices. We had a specific impact in soda ash, but overall, a very good ability to sustain margins, which are best-in-class in the European industry playing field.Cash generation continued to be a priority for us. We have generated EUR 871 million of free cash flows. And you've seen also our earnings per share moving up very significantly. If I look at the full year guidance that we've shared back in 2016, you see that we are very much in line to achieve or exceed, and in most cases, exceeds our objectives. If I look at cash flow, we expect to deliver on our target of EUR 2.4 billion despite the divestment that we've -- that took place during the period. And I don't want to forget the sustainability aspect of our objectives. Indeed, I am very pleased to see that today, what we call sustainable solution represents half of Solvay sales, 49% to be specific. This is good for the planet, but we are also convinced that this is good for our growth and our bottom line.With that, I will turn to Karim and ask him to provide additional insights on our past performance. And I will get back to you with some comments on what we expect for our 2018.
Jean-Pierre, thank you. Good afternoon, and good morning. As usual, I'm going to refer to slides that you can access on our website, and everything I will talk about will be on an underlying basis. And clearly, restated for the divestments of the Polyamide business, which is now in discontinued activities. I will start with the sales. And if you turn to Slide 11, you will note that net sales have increased by 6% in 2017 versus 2016. It is worth noting that volumes really drove this. They were up 8%, driven by growth across all our operating segments. Advanced Materials, up 5%. We see that in automotive, where we continued to benefit from the secular trends, the growth in the replacements of metal and high-performance polymers and also growth in smart devices. Composite sales to aerospace ended the year slightly up, as the production ramp-up of the F-35 program, the Leap engine compensated for the continuing and expected declines in the wide-bodied platforms. Industrial composite sales did decrease sharply in the year, as we experienced demand softness across all industrial markets, be it wind, high-performance auto and rail, to name but a few. And this unfortunately weighed on the overall composites growth.Advanced Formulations volume's up 13%, as 2017 marked a recovery year for the oil and gas market. Technology Solutions ended the year slightly up as well, with higher sales of phosphate products sold to the electronics industries. We also noticed an improvement in mining towards the year-end, with increased copper, alumina prices driving higher demand for mining reagents with customers.Performance Chemicals volume's up 8% on good growth in soda ash seaborne markets and specialty bicarbonate applications. And of course, we continued to benefit from the new HPPO peroxide plant in soda -- in Saudi Arabia that started up earlier in 2017.So good. From the top line to the EBITDA, you can see the outcome and the bridge on Slide 12. The fact is we delivered 7.5% growth in EBITDA. Although as Jean-Pierre just mentioned, this is after overcoming headwinds in ForEx and accounting for the scope effects. Without which, EBITDA would have grown nearly 10%. As I've already indicated, the growth was driven by volume increases across our 3 business segments. Clearly, there's more. If you look at the fixed costs line, excellence programs and synergies have continued to play their part fully to essentially offset the inflationary effects. However, it is important to note that the overall increase in fixed costs also reflects 2 or 3 other factors. Clearly, the significant impact of the capacity additions, the ones from Saudi, China, U.S. and Italy, that have contributed to the top line, clearly, we need more resources to support the volume growth. But additionally, we saw the effect of offering cost from the divestments as well as an increase in the variable remuneration, as we share the successes and the progress with Solvay improving have contributed to this outcome.Overall, as Jean-Pierre mentioned, we are really pleased that we've got -- that we have sustained our industry-leading EBITDA margins of 22% for the year, despite what you saw towards the end of the year, which is the headwinds into the raw material and energy costs that have eroded some of the progress. It's very, very strong as we see it. But it really not important -- it's really important to us to look at the cash and the cash conversion. And if you turn to Slide 15, the cash flow, we believe, is still very positive. EUR 871 million compared to last year. It doesn't tell you the full story because last year, we had the beneficial impact of businesses, such as Acetow and Vinythai, that were within our perimeter, but we've sold. On the comparable basis and like-for-like basis, just focusing on our continuing businesses, free cash flow was 19% up, as it grew from EUR 658 million last year to EUR 782 million this year. That stems from 3 factors: higher EBITDA, that I've explained; a reduction, which was fully anticipated, in capital expenditures; as well as ongoing and relentless focus on discipline and working capital.Now that strong cash flow, combined with the effects of the proceeds of divestments, funded the debt service cost, the growing dividend and helped to reduce the underlying net debt by EUR 1.2 billion, which is now down to EUR 5.3 billion. Now that represents a leverage of 2.2x. And indeed, it will reduce further on a pro forma basis once we complete the Polyamide deal to approximately 1.9x.You'd also remember that during the year, our credit rating was upgraded by both Moody's and S&P, and again, another independent appreciation of the improvement in our credit strength.Now clearly, there is quite a bit more I could say beyond cash and debt, but I'd rather have a conversation and respond to your questions. But I will highlight 2 aspects. One is we have continued to focus on improving our profitability beyond just EBITDA. If we look at the reduction in our financing charges, note the significant reduction in our underlying tax rate. That's why we say, we've increased our underlying continuing business EPS, earnings per share, by 26%. Secondly, and really importantly, when we look at value creation to the profits and cash, return is one indicator that we have always recognized. We are keen and really did some stream improvements. And our CFROI, which you will recognize as one of the most demanding cash metrics, has improved by 10%. We are now back at the levels that we had before the Cytec acquisition 2 years ago. And indeed, if you recall, we'd indicated we'll get to this level within 3 to 5 years of the acquisition. So we are essentially 1 year ahead of expectations on this particular measure.I'm sure you have tons of questions we will take later. But before we do that, I'll hand you back to Jean-Pierre to take us into the forward-looking aspects.
Thank you very much. And if you can look backward just for a second, clearly, the big achievement in 2017 was volume growth. It's thanks to this very significant volume growth that we've been able to generate the improvement in EBITDA and cash that Karim has commented. And indeed, this was our priority when we entered into 2017, and I think, as you are now aware, we've delivered. For 2018, we remain focused on driving growth. On an organic basis -- and it's important to be specific on the wording, which means that constant perimeter and exchange rate, we expect full year underlying EBITDA to go between 5% and 7%. If you look at the Page 14 of the financial report, you will see a very detailed presentation on -- relating to this outlook.In Advance Material, we expect double-digit growth, driven by volume improvement, both in the specialty Polymer and composite part of the equation. We see a strong growth coming from automotive. I would say, classical automotive, commission engine, but also in electric vehicles. We see opportunities in smart devices. We see opportunities in aerospace, where, indeed, the LEAP engine and F-35 program are now firmly on a growth trajectory and in a situation where we expect also a significant increase in bidding rate from the single-line jet project. On the -- to finish on composite, on the non-aero part of the business, we are also expecting to see significant progress at some high-end automotive programs are starting again.High single-digit growth in Advanced Formulation. Same driver as last year. They are both on the mining and oil and gas side of the equation. And then in Performance Chemical, I know that a lot of you had questions on what would be the situation of soda ash. We've been very clear that we are [ refuting ] that the situation was under control, and that we should not expect a catastrophe as Turkish volume are finding their ways into Europe. Indeed, we can come to you today telling you with a strong level of confidence that we expect the impact in our Performance Chemical segment at the EBITDA line to be less than EUR 50 million, which -- it's a meaningful impact, but again, far from being a catastrophic impact. And we expect the soda ash business to average for bottom of its performance within the current environment.So this 5% to 7% organic growth will lead us to a cash generation where we expect to maintain the momentum. We are also seeing opportunities in the lower part of the P&L, where our significant improvement which are still to come. On our financing costs, we expect to gain around EUR 100 million in this part of the gain.So this leaves us with a couple of comments. The first one about priority. The key priority for Solvay top management in 2018 besides delivering on our financial objectives is creating a more efficient operating structure. We've been working on this for the last 12 months. We are now about to launch a pretty comprehensive program. We want simple objective, making sure that everyone at Solvay is focused on customer and making sure that we simplify the processes, which needs to be simplified, to have an organization which allow us to deliver with customers which are more and more demanding. When we sell in aerospace, when we sell in automotive, when we sell in smart devices, we have customers who are expecting Solvay to deliver the best solution, the best level of service. And it's why it's so important for us to make sure that the organization is indeed completely focused on customer. This is what we will achieve, and this will deliver both some efficiencies, some short-term operational improvement, but also -- and this is the whole objective, this is -- allow us to generate more solid long-term growth.Maybe one last comment regarding Solvay, it's the dividend where the discussion yesterday at the board, and the Board of Directors recommend a dividend increase of 4.3% to EUR 3.6 per share. This reflects both the strong delivery in 2017 but also the confidence in our ability to continue to create sustainable value for our shareholder.Maybe a personal word before we move into the Q&A. I just want to make sure that you will understand where I stand. In fact, I was -- in past months, I was preparing for a next stage in my career. I did not know when it would happen, where I would take nonexecutive positions, because I think it's another and very interesting way to contribute to the development of various companies. You might have seen, by the way, that this morning, I was proposed to become a member of the board of Airbus, which is, indeed, a very interesting opportunity. But earlier this month came an unexpected offer from the Engie Board of Director, which offered me to become their Chairman. I have accepted this with a clear condition that I wanted to be available at Solvay to do 2 things: one, deliver on the 2018 priorities; and second, make sure that the board can run without any time pressure the high-quality process to identify my successor and make sure that there would be indeed time for a smooth transition. So the board has decided -- the board of Solvay has decided to accelerate the identification of my successor. And our common objective, the board and myself, is to conclude this transition by the end of 2018. And I think that this should be seen as a very smooth transition by all of our stakeholders internally and externally. And in the meantime, although it was started imminently, but I think it's a good coincidence. I have just made the decision to strengthen our Comex. We have 3 new people going into the Comex, while Roger Kearns is leaving us to go back to a position in the U.S. I think that Augusto, who used to run our Specialty Polymer business; Hua Du, who used to run our special chem business; and Cécile Tandeau de Marsac, who is our Head of HR, we have indeed a very strong Comex, able to deliver on 2018 priorities but also to prepare the next steps of transformation for Solvay.With that, I'm ready to take your question with obviously the support of Karim. Okay. First question? Hello?
[Operator Instructions] The first question is from Tom Wrigglesworth from Citi.
Tom Wrigglesworth here from Citi. And Jean-Pierre, congratulations on your new appointments. I was wondering if you could -- maybe just following on from your comments there, if you could just highlight what you think the core competency should be of the new incoming CEO of Solvay and share your thoughts in terms of what they need to achieve going forward in the years to come. I'd be interested to hear on that. With regards to the results, could you -- you obviously talked about this focus on getting close to the customer. Obviously, following the divestments, your business is now less cyclical. What do you think is that -- how much do you think your underselling the technology that you've currently got, i.e, what do you think the EBITDA margin of the businesses -- of the business should be if you were operating at a very maximum? And lastly, pricing in the fourth quarter was -- wasn't a big contributor in your bridge. And yet, I would have thought that cost inflation was probably quite prevalent, given what we're seeing in some of the input costs. Is there costs -- are the price increases yet to come through? Where are we on the price versus costs dynamic starting 2018 and looking beyond?
Okay. Well, on the first point, I will be prudent because this is for the board to have -- to set the profile of which would be my successor. On my -- out of a discussion we had, including yesterday, with the board, there is a clear willingness to continue the strategy that we have started and on which we have delivered. So clearly, we need something where the strategic vision and is able to imagine what will be the next steps in Solvay transformation. On an operational point of view, the exercise that we will start this year to create a much lighter customer-focused organization is also something which needs to be developed. Bringing Hua into the Comex means that we think that Asia indeed is a strong potential growth platform for the group. We are probably one of the most diversified European-based chemical company in terms of geographical spread. I think we should be in a position to use even more of this Asian platform. And at the end of the day, I think the objective of the board is just to find the best person possible to take the responsibility for Solvay executive teams. It could be an internal, it could be external. But clearly, the objective is to find the best person. And I think we have ample time to do this. Regarding our current situation, and where do I see -- how do I see our performance in the various clusters. Advanced Material cluster, we are almost at 30% EBITDA margin. The cluster is earning significantly more than the cost of capital. So the challenge there is growth, not much more than a server improvement in profitability. And growth will come from a pretty full pipe of opportunities. Short-term in specialty Polymer where we are indeed a number of business opportunities that we've seen in very different end market. When it come to composite, the short-term opportunities are linked to the fact that some of the key programs where we have taken a position are indeed taking off. This is the case of F-35 LEAP engine. We've seen it already in '17, but it will be even more of use in '18. Increase in building rate for our single line, the arrival of the 777X. And longer term, we see very significant opportunities there. Advanced Formulation, I think there's a bit of a space for improvement in margins. What we've seen in oil and gas, what we are currently seeing in mining gives us the feeling that, indeed, the profitability could be improved to put this business also firmly in the value creation zone, which is a -- which leads to a lower EBITDA margins than performance, because we have then Advanced Materials, because we have less capital to remunerate in Advanced Formulation. And then growth again is the priority. On pricing, I think we had a specific situation in soda ash. In fact, the impact of what's coming from Turkey is not so much of volume impact. It was not -- it was more a pressure on prices, which makes it difficult for us to fully compensate for the increase in energy cost, mostly coal. Overall, in other businesses, I see a pretty sound situation. As you've rightly mentioned, in the [indiscernible] activities where we are, we don't come back to the customer to ask them to increase prices because energy costs are being increased. Because energy cost is a very small part of our cost. And yes, I see some opportunities looking forward in terms of pricing. But I remind you that with 22% margin, we are probably best-in-class in the European space as far as margin is concerned. So we probably have a bit less [ movement ] than some of our competitors when it comes to demonstrating our pricing power.
We have another question from Alex Stewart, Barclays.
Congratulations also on your appointment. I've got 3 quite simple, slightly boring questions, maybe more for Karim. Firstly, the EUR 30 million of scope impact that, I believe, in between polymers and technology solutions. Could you give us some idea what the split was between the 2 of those? And secondly, you talked about an additional EUR 20 million post-retirement boost to earnings in the second quarter of 2018, is that on top of the EUR 38 million you recorded this year? So is it EUR 58 million in aggregate? Or do we have to net one-off before adding on the other? And then finally, the discontinued line, excluding Vinythai and Acetow, I think I remember reading was only about EUR 2 million. Why is that so low given that presumably Polyamide is still in there and still recorded as a discontinued item? Any light on those will be great.
Okay. So 3 questions. I'll take the first one, and that is to do with the EUR 30 million related to -- can you just remind me, please, Alex? It's been quite a few numbers, I mean.
It's the scope effect on the acquisitions.
Yes, yes. It's predominantly in Advanced Formulations and the Technology Solutions business. That's approximately 2/3 of the EUR 30 million. The rest is Advanced Materials and a very small divestment that we did in Specialty Polymers. So for the second question, on the Cytec-related synergy, what we're indicating is there's supplementary new opportunity that will crystallize during 2018. First half, second half, let's see, we haven't really finalized yet. So that is in addition. If you look at it on a comparable basis, what it does mean, it's a lower contribution than we had last year. Nevertheless, we see it as an additional source of value creation. So far as your question on the discontinued businesses, your real question is around the profitability of Polyamide. Is that what you're looking to understand?
No. Sorry. Do correct me if I've got this wrong. But I seem to remember reading in the release that the discontinued line, if you exclude Acetow and Vinythai, which has now been deconsolidated. What was the -- I mean, perhaps I'll put it another way. What was the contribution from Polyamide in the discontinued line in the P&L for the full year?
I'll quickly get access to the figure just to tell you exactly what it is. It's the full amount, which is essentially Polyamide. So what you see is essentially the 6 -- so it's the EUR 2 million underlying for the year, which is from the scope, where the Q -- yes, that's one for it. It is the EUR 2 million, that's essentially Polyamide.
So -- but that was my question. Why is that so low? I would have thought that it would have been a considerably bigger contribution.
Sorry, I'm talking about the quarter. Were you to look at it, it's EUR 159 million for the full year, excuse me, and that is essentially the figure that -- the [ description ] of that business. So EUR 159 million predominantly Polyamide. We only had a couple of months worth of trading for Acetow. Vinythai was not significant. Last year, the figures were much higher at EUR 240 million because you had the full year for all of the 3 businesses. Net-net, that is the impact.
The next question is Martin Roediger from Kepler Cheuvreux.
I have also 3 questions, if I may. First, on Composite Materials. There is a lot of consolidation taking place in the aerospace market: the Safran-Zodiac, Boeing-Embraer, Airbus-Bombardier. Do you see the consolidation in your end market as a challenge for you because customers might have more purchasing power or as an opportunity as you may leverage your business? The second question is on Advanced Formulations. The volume and mixed effects in Q4 were plus 10%, and that sounds quite high to me. And of course, this is triggered by Novecare, which established growth in Q4. Was there any pre-buying in advance of any price hikes you have -- you may have announced for the beginning of 2018? And the third question is on your end markets. With the disposal of the nylon business, your exposure to the end market automotive and aerospace obviously shrinks from roundabout 28% to roundabout 22%. I would like to know the split of both end markets, i.e. is automotive now half of this roughly 22% sales exposure.
I'm trying to figure out whether I can answer your 2 last question, but let's start with the first one. The consolidation that you are referring to are opportunities for us, always specific situations. But Bombardier, we have a significant position on this commercial jet. When I say significant position, we are the supplier of composite. And it's a plane which contains a lot of composite. So my reading is that the Airbus-Bombardier deal will increase quite significantly the probability that this project will be a commercial success. So for us, that's very good. On the Safran -- on the Safran-Zodiac, frankly speaking, we have a very good relationship with Safran for the LEAP engine. The relationship with Zodiac was pretty complex. They are not a large user, but they are using some of our materials. Zodiac was a pretty unconsolidated organizations with a lot of teams working quite independently. My understanding is that Safran will align this in a more systematic way, and I think we are well positioned to benefit from this. So I -- overall, I think that this consolidation should play in our favor. On top of that, it's clear that the key issue that the large commercial aircraft producer as we are seeing is the organization of their supply chain. That's something which, in my view, will be improved with the consolidation. And as production rate will increase, we'll see opportunities arising for us. So all of this is good news. Advance Formulation, frankly speaking, we don't see any meaningful pre-buying situation. Yes, volume growth was significant. We see again good development in oil and gas. You've seen some news coming from there. We show also good development in mining. Metal prices are back at the level, which allows for some projects to move on, so quite a sound situation that we expect to achieve. On your last question, I think it's probably pretty close today. I would need to make the exact calculation, but I think the automotive and aerospace probably represent around EUR 1 billion each. But again, take that as something directional, and we can clarify it. But it's what I have in mind. After the divestiture of Polyamide, which will leave the EP business out of our scope. So a reasonable assessment after the Polyamide divestiture is probably 50-50.
The next question from Peter Clark, Societe Generale.
There was 2. You mentioned soda ash and potentially, some opportunity on price. I'm just wondering, obviously, the Turkish mine is ramping up still. You made it quite clear you felt the market effects of that was pretty much in. But just the risks on 2019 in that business when we're at full ramp on the pricing situation. Do you think there's a risk in the pricing as we go towards 2019 and the pricing for that year? And then the second question. On the Industrial Composites, you say it's still shrinking in Q4. You're expecting stability. Just a feel for how much it's shrunk since 2015. I would guess somewhere over 30%. But how much lower could it go before it turns? And when do you expect returns, second half or perhaps second quarter?
You want me to use my crystal ball. On Industrial Composite, we think that we hit the bottom. Industrial Composite, once again, it's a type of -- rather small project. And when you think automotive, again, it's the Ferraris, Lamborghinis. So these guys produce a few hundred on a given model, and they move to the next one. Sometime, with a bit of a lag time in between. So our view today is that we reached the bottom and that we should see some increase as we move into 2018. And this is what we start to see. It has dropped about 25% since 2015, so a little bit less than what you were implying. I remind you that when we took over the business, it was still in the middle of an SAP or ERP crisis. That's something which has weighed obviously in customer loyalty. We have solved the situation, and we have recovered a much better relationship with our customers. On soda ash, to be absolutely clear, what I said is that due to your -- in a very strong volume situation, what we've enjoyed during the last part of '17 and in the beginning of '18, we've been able to weather reasonably well the arrival of the Turkish volumes, physical arrival of the fact that this volume will be made available during the course of 2018. The only impact, not meaningful, but the only impact is that there were some implicit pressure on prices, which makes it difficult to fully compensate for the increase of the energy costs. And this is the reason why we are pointing to this negative impact on performance chemical, although we feel very confident to say that this impact will be less than EUR 50 million. 2019, a bit only, but most of the impact of the new Turkish volumes are in '18. So I am reasonably confident that we've seen the worst, and that we should see a situation which develops reasonably favorably in the next few years.
The next question is Stephanie Bothwell from Bank of America Merrill Lynch.
It's actually her colleague, Georgia, here. The first question is just on the cash flow statement. So you've guided to your restructuring payments of EUR 80 million in 2018. But the commentary suggests that these restructuring opportunities may impact on your spend levels but not impact the cash generation. So I'm just wondering if you could help us to understand a bit more what these payments are related to. And then if it's part of your operational excellence plan set out with the 2016 CMD? Or are there additional savings on top of that? So just a bit more clarity on that would be good. And then secondly, on the LEAP engine and the F-35, can you give us a better sense of the level of composites contained in these projects compared to your current base level?
So I'll start with the first question, Georgia. The EUR 80 million is an indication. We've traditionally been of the order of EUR 60 million or so in the past few years. This is really reflecting the fact that we are really determined to maintain the cost discipline. When you've been through portfolio transformation, you get overhead costs. We go, we tackle them. So that has an element of restructuring costs. What we're saying here, as we're looking to prepare the future and really align the organization, we are breaking out cost for a modest increase in restructuring costs. But whatever we do, we do 2 things. We absolutely look for a very rapid payback. We typically talk of less than 2 years cash payback on sub-costs. And secondly, no matter what we do, we will continue to focus on the overall free cash flow of the group. It's about making choices and delivering the cash. And that is what we intend there. Does that help?
Yes.
On the second question, can you just repeat?
On the LEAP engine and the F-35, just want to get some idea of the composite content? And how that relates to your existing base level of composites sales?
On the F-35, we have published a number saying that it represent around EUR 1 million per plane, so quite significant. I have to say I don't recall if we have published something on LEAP. But no, I'm getting the answer that we have not published a number for the LEAP engine, so I won't comment this. But F-35, very significant. Again, in terms of sales per ship-set, we are probably at the highest content of composite or among the highest content of composites.
The next question is Laurent Favre from Evercore ISI.
Jean-Pierre, congrats on the way ahead. And 2 questions, if I can, one for you, one for Karim. The first question, for you, I guess, is on formulations and net pricing. I think you've had about a EUR 150 million squeeze on net pricing over the past 2 years. I was wondering if you could talk about the drivers of that in terms of mix versus like-for-like pricing and whether, when you talk about better net pricing in '18, you're referring to expectations of better mix or, I guess, something that you control around your pricing initiatives. And the second question is around, I guess, the corporate costs and the simplification program. If we benchmark Solvay again on the diversified, I think that for the size of this business, we end up with around EUR 150 million of corporate costs of what would be the benchmark. Is this what you're trying to achieve with this simplification and the overall change in the corporate center or would you say that you're more it's rather than a cost exercise?
You take the second one, Karim?
I'll take the second one, sure. I agree with your overall benchmark comment you made, the EUR 150 million. The way I'd look at it is this. If you look at -- traditionally, what we've done is see costs of between EUR 200 million and EUR 250 million in the last few years. When we have divested, we have overhead costs and we tackle them. And that's always going to continue to be part of our model. What I would say, the benchmark can be simplified as approximately 2% to sales, on top of which, one would typically invest in that we would -- we as an investment for the future of resuming corporate R&I investments. This is a EUR 40 million to EUR 50 million a year. If I take your EUR 150 million and add the EUR 40 million to EUR 50 million of R&I, which is having a good cost, we're very much in the top quartile of those benchmarks, and we intend to continue. The focus, let's say, in preparing this future and realigning our functions to help serve our customers, it's got nothing to do with the cost motivator, at least around the sales growth. But it will have an efficiency impact that will show itself through in the next couple of years.
Well, on your first question, and we are a little bit prudent before giving net pricing information per segment for reasons that you probably understand. We have 2 impact. One is indeed mix. Overall mix in our analysis is within the volume. The mix was from in oil and gas from the expensive guar base formulation to the less-expensive friction reducer. There, we've seen a movement in the direction I just mentioned, which impacted us negatively in '16, '17. We are starting to see guar coming back in the formulation, so that's good news. And it's part of the volume growth that we expect. In terms of pricing, there has been a pressure here and there. We are today seeing a situation, both in mining with Technology Solution and in oil and gas with Novecare, where we have space for price adjustment. That's good. We have also a situation regarding our purchasing conditions. And this impact especially the home and personal care cluster, which have improved significantly. In the last part of 2017, we have negotiated and started new contracts for oleochemical in -- with significantly better conditions after the summer period in 2017, and this will have a full year impact next year. So these are the reasons why we expect some positive impact on margin for Advanced Formulation in 2018.
And just going back to the point on the cost center, just so I understand, you're talking essentially off a EUR 50 million potential. I assume this is not for 2018. This is more something we should be thinking about for 2019, given that those plans take time, and you haven't actually announced the plan.
I think, overall, as a general guidance, yes. I'd say the midterm 2% to sales is absolutely what we'd consider to be a very appropriate level of corporate costs. Because essentially, we're trying to lighten it up and make sure we build the strength in our global business units rather than the corporate center. I'm not going to say that's 2019, that is the direction we'll travel.
Next question is Geoff Haire, UBS.
Just 2 very quick questions. Of the guidance that you've given for both chemicals of this, a maximum of a EUR 50 million hit to the EBITDA level, could you just split out what your thoughts are between price declines and rise -- and the rising costs for 2018 to get to that number? And then secondly, on the free cash flow for 2018, with the guidance you have given, do you believe that you will cover the dividend payment when you include interest payments, so a more normalized cash flow number in 2018?
Karim, you want to take both questions?
Sure. I think on the soda ash, there is a very modest price erosion in '18 relative to '17. But again, the team that we have in soda ash is really doing a lot to mitigate with really raising the bar on excellence. So there's a lot of mitigation to compensate. So I'd say, operationally, we're maintaining the volume, the leadership positions. Yes, there's modest price erosion, something we're not going to quantify. But net-net, what we can do in the current market conditions and the new capacity is also to overcome the increase in energy costs that we're already seeing. Essentially, had energy costs been more favorable and going back this way, I think you will see different expectation despite the significant capacity addition. And that's not by accident because we've been planning and anticipating, getting ready for this 2 years now. As far as free cash flow is concerned, I can give you a very simple answer, which is yes. Our free cash flow will exceed financing costs and dividend. One thing to highlight though is we have been working hard, not just in reducing the tax rate, but also the financing charges, and we also indicated that the cash financing charges in '18 will be lower than 2017 as well. What does that mean? It means that our cash available to equities, so free cash flow after all financing costs, will be quite a lot higher than we had in 2017. Does that help?
Yes.
Next question, Chetan Udeshi, JP Morgan.
Again, a question on free cash flows. I know in the outlook, you've mentioned that the net cash out for provisions is going to be EUR 390 million. Is this to be compared to the EUR 190 million that you had for 2017? So net EUR 200 million increase, is that the right way to think about this increase?
The answer is no, it is not. And just to give you this some more specific. The equivalent last year was EUR 367 million, just a modest increase. That's EUR 373 million, to be more precise.
Okay, fine. So that's clear. And then the second question was, again, on raw material headwinds. If you look at some of the raw material prices like alkoxylate nitrite, et cetera, have gone up quite a bit starting September of last year. But you don't seem to have seen any impact from that on your margins. So is it because you have some sort of indexing in your contracts? Or are you trying -- I mean, are you successful in offsetting that to some other cost reduction measures?
Well, for that, I think we've been able to compensate for these, yes.
So are you saying through pricing or just normal, you call, excellence programs?
Well, first, it's a very small part of our cost, which was not such a -- but no, I mean, we've been able for a number of measures, both on the pricing side, but also on the operational efficiency, to compensate for this. So for all of these raw materials, they have not represent a significant part of our input cost. So it was not a huge challenge.
Okay. And maybe if I can follow up 1 question on pension, where you are saying it will be higher. How to tie this up with the sort of the synergies that you talked about, with EUR 38 million last year associated with Cytec pension provisions and again EUR 20 million additional one-off benefits? So those benefits doesn't seem to be resulting in reduction in cash. If anything, we are seeing an increase in pension payments. So how to tie those 2 things together?
A couple of things. There are -- the cash service costs of our pension obligations essentially is pretty stable. We saw modest increase in the U.S., and it's very much in line with, let's say, the actuary mortality tables, U.K. and U.S. in particular, nothing untoward here. What you do see is at the end of the year, our pension obligations are lower quite materially, and that's been the trend in the last year or so. And I think I expect that to continue to go in that direction, which actually is very positive from a credit standpoint on our balance sheet. We're at EUR 2.6 billion, I believe, at year-end.
We have time for 2 more questions. The next question is Nathalie Debruyne, Degroof Petercam.
2 questions from my side, if I may add. The first one would be on the PVDF plans, especially for battery materials. I'm just wondering, I saw that actually the plant is going through the qualification process. When can we expect it to actually start to contribute to the volumes growth this year? And then, secondly, I know it is still a very small business, but what do you think the potential of it could be? So in terms of percentages of Specialty Polymers particularly. So that is the first one. And then the second one, I would like to have some clarity on your guidance, especially on the currency impact of EUR 125 million at $1.25 exchange-rate EUR/USD. Is that full translation impact? Or is it again like the rule of thumb, you gave 2/3 of it as transaction -- as translational and 1/3 transactional being hedged?
Okay. On the first one, PVDF, in fact, we are selling to different markets. We have different qualification times. So we have -- we were able to receive the first qualifications during the last part of 2017, so we are starting to sell. But the most important qualification in terms of potential volume will come during the course of '18. And yes, I mean, we think that this is an investment, which is coming at a very good point of time, because we see the battery market increasing tremendously. And when I say tremendously, I mean we could see sales doubling from one year to the next that -- increasing by 50%, sorry, which is not doubling, increasing by 50%. And at Solvay, from one year to the next, this being said, and I don't want to quantify it more specifically, it's still a small business within Solvay, more meaningful in Specialty Polymer. And yes, we have high expectation. But it's probably too early to give you the ability to measure this our [indiscernible]. But we are today supplying all the battery makers, both the local Chinese player with our new Chinese plan, but also the international players, which are mostly Japanese and Korean guys. Good news, too, is that we see opportunities to get more out of our current unit in Peru, thanks to manufacturing excellence and the use of some digital tools. So overall, very good opportunities in front of us in batteries, but a bit early to qualify what this could represent.
So for the foreign exchange part of your question, Nathalie. A bit -- I'll try to be very clear. This is only around translation effect, so conversion, as we say. If we give you a sensitivity of 0.10, it gives you 120 million. What we've done is basically said if we look at the key basket of currencies, so mainly U.S. dollars that we've got at the beginning of the year, but also with the -- some of the other currencies like Japanese yen, Chinese yuan, the Brazilian reais. And based on that package of currencies, we've given you that indication. So if you wish to make a hypothesis that what we see in beginning of the year continuing, this is an indication of what to integrate into your expectations. But predominantly, U.S. dollars. And only conversion or translation to use your word. Transactional effects allows [indiscernible] but it's up to our teams to fight to be competitive in the marketplace. So to my mind, this is absolutely a core part of doing business, that we have to deliver the margins, and -- no matter what, and that's the kind of the culture. Does that help?
Yes, that's very helpful.
The last question is [ Daniel Hulgood ], [indiscernible].
You've successfully tendered for some of your senior bonds in 2017. And we've recently had a clarification from S&P regarding tendering and reissuing hybrid bonds. Given that, I'm just wondering how you're currently thinking about those bonds within your capital structure.
That is a very interesting and a very important question. I think we recognize there's an opportunity to continue to optimize our balance sheet. There is some relaxation. The rules in the guidance are quite -- is quite encouraging. I think when we're ready, we will make an announcement. So we are looking at options to further optimize and essentially reduce a reasonable proportion of our hybrids, whilst maintaining -- which is really important to us, maintaining strong investment grade rating. Well, we see opportunities, and I'd say we're on the case. And in a matter of months, certainly toward -- early next year, you will see some progress there. It's my expectation.
Good. Thank you very much. This was the last question that we took. So maybe just a few comments to -- before we conclude. The first one is that we think that in 2017, we've delivered, thanks to a strong volume growth, and we've delivered on all fronts. When I look back at the various objectives that we've set, both in terms of EBITDA growth, but also cash generation, CFROI improvement and even -- although it was not in our objective, but EPS growth is also quite significant, which gives us confidence to raise the dividend as we decided yesterday and the board. For 2018, growth will continue to be on the agenda. Growth will accelerate in our core clusters. Unfortunately, we have 2 elements that we need to take into account. One is the foreign exchange that we have discussed. The other one is the situation in soda ash. But there, too, I think we are coming with reassuring news. The fact that we can come with confidence, telling you that the impact will be less than EUR 50 million. It should show that, indeed, as we've been saying for the last quarters, we think that the situation is manageable and under a reasonable level of control. On top of that, a key priority for 2018 is to deliver this more focused, more efficient organization. You will see some news coming in the next few weeks on this front. And overall, reinforced Comex, fully aligned and motivated to make 2018 a very good year for Solvay and for reasons that you understood. It's very important for me, too, to make sure that 2018 indeed is a very good year for the group. With that, I thank you. And we'll talk to each other once again on May 3. Probably we'll see some of you on the road in the meantime. But May 3 is our first quarter results presentation. Thank you very much.
Ladies and gentlemen, this concludes today's conference call. Thank you all for your participation. You may now disconnect.