Solvay SA
XBRU:SOLB
Earnings Call Analysis
Q4-2023 Analysis
Solvay SA
In 2023, our company demonstrated noteworthy financial resilience with an underlying EBITDA of EUR 1.2 billion. Despite a 13% decline in sales year-on-year, attributed to softer demand, our EBITDA margin improved by 1 percentage point, reaching a remarkable 25.5%. We are proud to report a robust free cash flow to shareholders from continuing operations, amounting to EUR 561 million. In recognition of this strong performance, the Board of Directors will propose a total gross dividend of EUR 2.43 per share, underscoring our commitment to delivering shareholder value.
Our disciplined financial policy is built on two fundamental principles: maintaining an investment-grade rating and ensuring a stable to growing dividend. This policy reflects our dedication to financial stability and shareholder remuneration.
Looking ahead to 2024, we adopt a cautiously optimistic stance, expecting organic EBITDA to decrease by 10% to 20% compared to 2023, translating into an absolute range of EUR 925 million to EUR 1.04 billion. In the face of double-digit declines in soda ash prices, we anticipate resilient pricing trends across our other businesses to counterbalance some pressure on the top line.
Our capital expenditure strategy for 2024 remains judicious, focusing on essential investments while targeting a minimum free cash flow of EUR 260 million to shareholders. This approach prioritizes not only dividend payments but also our commitment to maintaining a robust balance sheet and progressing on our sustainability targets, including the energy transition.
Our immediate focus is on the first half of 2024. We anticipate volumes to be in line with the second half of 2023, while expecting second-half volumes to potentially surpass first-half levels. The management has conveyed that current market conditions are early in terms of recovery, and while some positive signals are visible, it's too soon to ascertain sustainable trends.
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Good afternoon, everyone, and welcome to Solvay's Fourth Quarter and Full Year 2023 Earnings Call. My name is Geoffroy d'Oultremont, Head of Investor Relations, and I'm joined today on our call with -- by Philippe Kehren, the CEO; and Alexandre Blum, the CFO of the company. This call is being recorded and will be accessible for replay on the Investor Relations section of Solvay's website later today. I would like to remind you that the presentation includes forward-looking statements that are subject to risks and uncertainties. The slides related to today's broadcast are also available on our website. And with that, I'll turn the call over to Philippe.
Thank you, Geoffroy, and good afternoon, everyone. It's my pleasure to be with you today for my first earnings call as the CEO of Solvay. It is already more than 3 months now since the spin-off of Syensqo, and I would like to begin the call by sharing with you a few personal observations. As leader of this great business, these first 100 days confirmed a lot of things I already knew such as the reputation of Solvay with our customers. And they also reinforced my conviction that we are even better positioned as a simplified and focused organization to reach greater heights for our customers, employees and investors. But first, a word on safety. At Solvay, ensuring Solvay's employees well-being is a daily priority for me and the executive leadership team. It's at the heart of everything we do. So while our performance in this area over 2023 was satisfactory, we must remain vigilant and continuously strive for improvement in our safety standards. Although we see less and less near misses with high severity potential, the global number of reported injuries and illnesses have not improved in 2023. So you can count on me as CEO to keep focusing on safety every day. Since January, I have traveled to many sites, along with my colleagues of the executive leadership team. Most of our people work in one of our 45 industrial sites around the world, and we've made it a priority to meet as many of them as possible. Solvay's employees are our main assets. They are essential to our future success. And now more than ever, we realize how much they are committed and how much they are engaged in their roles. As CEO, it's really wonderful to feel the energy within our company. I'm not alone in this journey. I have a very strong leadership team around me, completely focused on Solvay's transformation. Our leaders are all seasoned professionals, and we have a great balance between people who grew up in Solvay and people bringing new and fresh views from other global organizations. Next, let's discuss our clients and suppliers. During my first 100 days, I had the opportunity to meet with a lot of customers and suppliers, and I'm happy to see that they are all really supportive of our roadmap. They want security of supply, including regional supply. They also want low carbon products, and we cannot do that without their support. Also, I could realize how the name of Solvay is on top of their mind when they think about reliability or process innovation that's very encouraging and very energizing. We will capitalize on this employee engagement, customer loyalty and service reputation to continue deploying our strategy and deliver our goals for the benefit of all our stakeholders. Finally, let me make some observations on our financial markets perception. We met many investors during the post Capital Markets Day road shows in November. And these interactions were extremely valuable to us. I believe that our story today is simple and straightforward, but we also understand that we are a new company and that we need to continue explaining who we are, what we stand for and continue delivering quarter after quarter to be fully understood and trusted. I'm more convinced than ever that we are all set to deliver on our transformation, which will benefit shareholders, employees and customers. Now let me remind you, sorry, who we are. We are Solvay. We are mastering the elements that are essential to our world. Our products are made with molecules that already existed decades ago and that will still be needed decades from now. We possess an unmatched and focused portfolio of world-leading assets. We have 5 global leading technologies; Soda Ash, Peroxide, Silica, Fluorine, and Rare Earth. And we have one very strong regional business with Coatis in Latin America. We like this portfolio because of the quality of the assets and the quality of the people operating them. And we also like this business because there is some very interesting potential in it, such as the electronic grade hydrogen peroxide for semiconductors or the rare earth hub in France for permanent magnets. With these technologies, we serve a wide range of end markets. None of our markets make up more than 22%. So this enables us to be more resilient to market challenges than many of our peers. As a result of our leadership positions and end market exposure, our businesses are very resilient, probably more resilient and less cyclical than many of you might think. Over the last 10 years, we've been able to deliver strong EBITDA performance, while keeping our cash conversion ratio between 60% and 70%, thanks to the way we actively manage our investments. Our strategy [ for separation ] is both much simplified and clear, and it is based on 4 pillars. The first one is about our portfolio and consolidating our leadership positions in every market in which we operate. This is what I explained just before. Secondly, to drive excellence and competitiveness through process leadership and cost savings. This will be an important driver of our EBITDA growth over the next 5 years. Savings have already been identified, and we started to deploy initiatives to deliver them. We are confident we will be able to reach our EUR 300 million per year savings by 2028. And you can count on us to push the teams to accelerate and to deliver as much as possible already in 2024. Our third pillar is our commitment to realize our energy transition and deliver carbon neutrality by 2050. We know what we need to do to achieve. And let's be clear, this is critical, not only for the planet, but also for the competitiveness of our sites, especially in Europe. We want to be a lead actor in the transformation of our industry. This is what drives me and this is what drives all of us at Solvay. Last but not least, we are focused on cash generation. We have a very clear cash usage prioritization. Out of the EUR 4 billion of free cash flow before CapEx, we expect to generate over the next 5 years, we will spend on average 1/3 in what we call essential CapEx, 1/3 for dividends, and the remaining third when available will go in growth investments and other value creation initiatives. This strategy is not just words. Let me be more concrete and give you 5 recent examples of how we put this strategy into action. You may have seen our announcement from just last week on our future investment in the rare earth value chain in La Rochelle, France. This agreement further confirms our strategy to establish a significant manufacturing footprint for the rare earth permanent magnets value chain in Europe. This will be a clear driver for accelerating growth in our rare earths business. Then you heard us speaking of Star Factory at our Investor Day. This is our ambitious program to transform all our plants and build the plants of the future. Our plans will become the benchmark in the industry. This is key to maintaining our competitiveness and leadership. I have seen how digitalization is already used extensively in our rare earth business in La Rochelle, France as an advanced control tool and there is clearly a lot more to do. Recently, and I'm particularly proud of this, we announced the complete coal phaseout in the U.S. at our U.S. soda ash plant in Green River, Wyoming. By 2025, overall emissions from Green River will have decreased by 20% compared to 2021, despite a 25% increase in production. And let me also remind you that by the end of 2024, Solvay's Rheinberg site in Germany will become the first soda ash plant in the world to be powered primarily with renewable energy. Then another example that covers many of our strategic priorities is our projected soda ash plant in Neom, Saudi Arabia. First, it confirms that when demanding people think about these kinds of ambitious products, they think about Solvay first. Second, that plant will be the first one based on the new e.Solvay process, more cost effective, and this is case even carbon-neutral. Finally, about our cash usage, I would say that 2024 gives us immediately the opportunity to demonstrate our agility. We will start the year with prudent investments as we are committed to protect the dividend payment in a low demand environment. With that, it's a great pleasure to turn the call over to Alexandre, who will first comment on some of our ESG progress before moving to financials. As part of his financial review, Alex will also give you some more context on the way we present the numbers and then review the highlights of our '23 performance. Alex, to you.
Thank you, Philippe. Good morning, good afternoon, everyone, on the call. I will start with an update of our ESG road map and targets, and highlight the progress we made in 2023. As you know, we are committing to reduce our carbon footprint as fast as we can. We've already achieved a 19% reduction in our Scope 1 and Scope 2 emission versus 2021. We recognize this was mainly driven by lower volumes. However, all our sustainability project that will structurally contribute in 2021 and 2025 will be able to offset an increase of the GHG emission due to the recovery in demand to come. Indeed, we have taken significant steps towards switching to renewable energy, be it through biomass, wind power, solar, to make that happen. And beyond our own emission, we also target to reduce emission along the value chain by minus 20% by 2030. To date, we've already achieved an impressive minus 16% reduction. We also acknowledge the positive trend on safety, but we will never be satisfied, and we'll continue to raise the bar to reach the 0 accident target. As you can see, bringing gender parity at mid and senior level management is a challenging goal. With the spin-off, the starting point has been reset, but this does not change our parity ambition. While we still have a long way to go, our teams are taking initiatives to progressively close the gap. Lastly, we initiated our first pilot program to evaluate our adherence to living wages, standards in the U.S., U.K. and China. This is in line with our pledge to provide a living wage to all employees by 2026 as part of the UN Faster -- sorry, Forward Faster initiative. Our finding demonstrate continued alignment, which reflects our position as a responsible and ethical employer. We are well advanced in our plant and this further reinforce our commercial competitiveness and our [ attractivity ] as an employer. Moving to financial. Let me start by stating the obvious. The state of -- the set of financial statement we published this morning is complex, especially our balance sheet and cash flow statement. Obviously, an accounting consequence of the recent demerger of Syensqo. As you know, the partial demerger was approved by Solvay's shareholders at the EGM on December 8, 2023, and became effective on December 9. As a consequence, the group present the specialty businesses as discontinued operation for the period prior to the partial demerger in the consolidated 2023 statement and the comparable figure for 2022 have been adjusted accordingly. I won't go in too much details around this, but let me mention 2 points. Our profitability and free cash flow is set out in our press release and presentation material on a like-for-like basis, and this allows for easy comparison. Second, our capital structure at the end of 2023 is consistent with what we have announced at the Capital Markets Day. In the appendix of the presentation, you will find more details about the structure of the account. And if you have more questions on this, the Investor Relations team is available to discuss with you in the coming days. We have also announced this morning our new operating segments to better align with the new group strategy and operating model. We know have 3 reporting segments. Our Basic Chemicals segment hosts chemical intermediate businesses focused on major and resilient markets. Solvay is a world leader in soda ash, bicarbonate, and peroxide. These global businesses serve major markets that include building and construction, depollution, consumer goods and food. Together, they represent 61% of our net sales. Performance Chemicals host a wider range of product in our Silica, Coatis, and Special Chem business units. For the sake of clarity, the Special Chem business unit comprise of our Rare Earth and Fluorine technologies mentioned earlier by Philippe. This performance chemicals are subject to customization based on the unique formulation and application expertise while remaining essential product by nature. These businesses share similar economic characteristic and are also a high-quality asset with a strong position on their market. Together, they represent 39% of our sales. Finally, the Corporate segment, comprising corporate and other business services, such as our global business service centers as well as procurement and energy expertise centers. With that out of the way, let me now focus on the key highlight from our earnings release. To add comparison, I will comment on the organic evolution, meaning at constant scope and currency. Sales, were down 13% year-on-year in 2023. This is primarily due to lower volume as a result of softer demand, while prices were slightly up in a lower variable cost environment. The softer demand became visible across all businesses in the second half of the year and sales were down 19% in Q4. Underlying EBITDA was EUR 1.2 billion in 2023, essentially flat organically with lower volumes being offset by increased net pricing and fixed cost discipline. Overall, the EBITDA margin increased by 1 percentage point to a record 25.5%. In our Basic Chemicals segment, demand was still holding up well in the first half of the year, but it started to deteriorate during the summer, in parallel with energy prices going down as well. In our Performance Chemicals businesses, demand has been softer throughout the year in our Special Chem and Coatis business, while Silica started to see some improvement around year-end. Moving to cash. The free cash flow to shareholders from continuing operations amounted to EUR 561 million in 2023. This strong performance is driven by 2 major elements: a solid EBITDA and an exceptional high contribution from working capital variation. The later -- the latter is due to the softer demand around year-end and the effect of the simplification of our portfolio. Indeed, the spin-off of the Specialty activities and the phasing out of our energy and thermal insulation businesses allowed us to improve the working capital and consequently [ our EBITDA ]. The balance sheet now. We ended the year with an underlying net financial debt of EUR 1.5 billion. This is slightly lower than the previously announced EUR 1.7 billion, mainly due to the cash phasing around year-end from separation costs. As I stated earlier, the capital structure of Solvay after the completion of the partial demerger is in line with the targeted capital structure announced in November 2023. This will clearly provide a very strong platform for us to deploy our strategy while reiterating our commitment to pay stable to increasing dividends. Provisions were EUR 1.6 billion at year-end and that included close to EUR 0.8 billion of provision relating to employee benefits, primarily pensions and approximately EUR 0.5 billion of environmental provision. Based on these strong financials, the Board of Directors will propose a total gross dividend of EUR 2.43 per share at the General Meeting in May. If this is approved and taking into account the interim gross dividend of EUR 1.62 per share paid in January, the final gross dividend of EUR 0.81 per share will be paid in June. So as I mentioned during our Capital Market Day, our financial policy has 2 red lines: first, maintaining an investment grade; and second paying a stable to growing dividend. The capital structure and the recommended dividend are well aligned with this. Before I hand the call back to Philippe, you remember that we provided you in Q3 last year with the 2023 base for the 2024 outlook. The details can be found in appendix, but let me quickly reexplain. With simply organic 2024 EBITDA growth implied by our guidance is based on 2023 restated figure of EUR 1.154 billion versus the reported figure of EUR 1.246 billion. There are 5 reconciling elements that were set out in details in the press release this morning, so I don't want to repeat the details. But briefly, these elements relate to 2 things: the phaseout of our 2 businesses with approximately EUR 100 million EBITDA impact; and second, over adjustment netting themselves relating to [ dis-synergies ] in joint venture. Let me also remind you that the transfer of the electronic grade of peroxide moving from Special Chem to Peroxide at the -- sorry, as of the 1st of January. The electronic grade of peroxide is no well-established business, which benefited from the know-how of Special Chem to develop in electronic markets and will be now more naturally hosted in our Peroxide business unit. Finally, please note that the 2023 quarterly underlying EBITDA, sales and EBITDA, restated figure will be published in April, ahead of our Q1 2024 publication. Now I'll transition back to Philippe for the full year 2024 outlook and his closing remarks.
Thank you, Alex. Well, it's no secret that 2024 is likely to present the share of challenges for our industry. First, on volumes. Generally speaking, the challenging demand environment we observed in Q4 2023 has continued into the first months of 2024. So as a result, we take a prudent but realistic view of H1 2024. Across our product portfolio, we expect current demand levels to continue over the next few months. And as such, we expect H1 '24 volumes to be broadly in line with H2 '23. Although visibility on H2 '24 is low, based on selected customer feedback, our current expectation is for H2 '24 volumes to be at least at H1 '24 levels and potentially a bit higher. Now on prices, starting with soda ash, and I remind you that soda ash alone represents only slightly more than 30% of our sales in '23. You all noticed the publications from industry experts, mentioning strong price decreases year-on-year in 2024. While we don't communicate on specific numbers, it is indeed correct to state that soda ash prices are down by double digits in 2024, but that includes both the part relating to the demand and the part relating to the decrease of the energy prices. This will weigh on business margin this year. However, pricing trends across Solvay's other businesses are forecasted to be extremely resilient year-on-year. The lower energy and raw materials prices should positively offset some of the negative pressure on the top line. We also started, and you know how important it is for us to implement cost savings initiatives that will start to deliver results already in 2024. So what does this mean for Solvay financial in '24? First, we expect for 2024, an organic decrease of the underlying EBITDA by minus 10% to minus 20% versus a high comparison base in 2023, especially in H1. Based on the new perimeter set out by Alex in his presentation, this translates into an absolute range of between EUR 925 million to [ EUR 1.04 billion ] for our 2024 EBITDA. Secondly, free cash flow to Solvay's shareholders from continuing operations is expected to be at least [ EUR 260 million ]. And this is in line with our cash usage prioritization, and it will be supported by our ability to manage CapEx and working capital according to the market environment. As an absolute priority, we will ensure the essential CapEx and the payment of the dividends while keeping the strength of our balance sheet intact. Finally, a word on our midterm targets that we presented last November during the Capital Markets Day. We obviously anticipated a softer 2024 when we gave them to you and the outlook we announced this morning does not change our view and our convictions on our 2028 targets, which we reiterate today. As we move forward in 2024, our 2 priorities as management are clear. I'm hugely excited to look forward to continuing to develop and reestablish the Solvay brand in its new format. We are Solvay. We are 160 years old, but we are entering a new chapter a reenergized and more agile Solvay. We need to reexplain our activities, our strategy and our vision to our employees, our clients and suppliers and also to you, the financial community, to all of our stakeholders that are on this journey with us. Then as I set out earlier, even in the short term since [ the demerger ], decisive actions have already been made to continue to transform the company and deliver on all our objectives. It's about operating model, energy transition and cost-saving initiatives. You can count on me and on the management team of Solvay to work tirelessly to deliver on our targets, again, for all our stakeholders. So, thank you for listening. And now Alex and I would be delighted to take your questions.
Thank you, Philippe and Alexandre. For the Q&A session, we have 2 recommendations if we may. The first one is to ask one question so that it leaves some time for others. And the second one, we obviously understand that you might have some very technical questions about the structure of these unique sets of financials. Please keep them for us, the Investor Relations team will help you understanding all of this and focus today on strategy and important questions for the management. So Caroline, now you may open the line for questions.
[Operator Instructions] We will take the first question from line Frank Claassen from Degroof Petercam.
Frank Claassen, Degroof Petercam. My question is on CapEx. I noticed that in '23, you had quite a high CapEx number, [ EUR 450 million ]. So what were the main drivers for this high CapEx number? And what can we expect for '24? And what are the main projects here?
Yes. Indeed, we voluntarily inflated, I would say, our CapEx decisions in 2023, and I will let maybe Alex explain a little bit what was the rationale behind and what we plan to do in '24, where obviously, we are starting the year in a very -- much more prudent mindset.
Sure, Philippe. Yes, in 2024, as you remember, we started the year with a quite higher demand -- and we had a result which was quite high though, almost at the level of our record 2022. So we decided to sustain not only the investment, which are [ necessary ] for sustaining our plant, for maintaining our plant and the energy transition, what we call the essential CapEx. But as demand was there, we've continued to invest for growth. Again, each time we invest, we invest on 2 criteria; affordability and merit. So 2023, we had projects which met both criteria. So we've invested. To give you example, we've continued to invest in our additional capacity in the U.S. for soda ash, which will come online in 2025 and several other type of investment. Obviously, since the middle of 2023, we've seen the demand decreasing. So that's why we've started to really reduce our discretionary investment to the bare minimum with only no targeted investment. So that's the logic. Again, I mean, we've told you many times, we have the ability to manage our investment. It means when we can afford, when the cash flow is sufficient to pay for discretionary CapEx, we will invest when the times are harder, we will reduce.
And by the way [indiscernible] in '23 -- in '23, yes.
'24, yeah.
'24, okay. Yes. We will go to '24. But I think in '23, it was also coming from the expansion that we're making in the U.S. just on our soda ash plant. So, now '24, yes.
Yes, now, '24, we said it in the Capital Markets Day. We found -- the first bucket of investment is essential CapEx, which are around EUR 260 million. The rest, we will invest if we can. So this investment that for the moment, we plan to do are really sustenance CapEx and the energy transition. This is how we start the year. Let's see in the second part of the year. I mean if the demand -- if demand is picking up, there will be a need for capacity increase to follow the growth. This is when we will restart. So we don't want to give you an exact number of CapEx because this is what we are going to decide and manage during the year.
This is exactly the flexibility we have, and that, that's what we explained. And this allows us to guarantee, in fact, the dividend payment. Does that make sense, Frank?
Yeah, it does. Absolutely.
We will take the next question from line Matthew Yates from Bank of America.
I would like to follow up broadly around the cash flow guidance. You're saying at least EUR 260 million. You've given us an EBITDA number. Maybe you can help us with a few of the other big moving parts. I guess you're not going to give us an explicit CapEx number, but how about some of the moving items like restructuring charges that may be associated with your efficiency goals or the working capital unwind you mentioned associated with discontinuing some of those operations. If you can just help us flesh out really that free cash flow guidance, so we can make sure we understand the big moving parts, that would be helpful.
Yes, absolutely. I will give Alex, the opportunity to give some more color on these different variations, just to be pretty clear. I mean, this EUR 260 million number is the minimum guarantees in terms of free cash flow to shareholders. So obviously -- and this means that whatever happens on the market, whatever happens in the range of EBITDA that we are giving our guidance, we will guarantee this free cash flow to shareholders. Now to come back to your question, maybe some color on the different variations.
Yes. So Matthew, so what I can give you because, I mean, it's -- what happened in 2023 and will not repeat in 2024 is that, 2023, we had 3 buckets, which will lead to 2024. The first one, the first bucket is around the phaseout of businesses. We had indicated that about EUR 100 million of EBITDA was linked to the phaseout of energy, third-party business, and thermal insulation and Special Chem. So that obviously will not repeat in 2024. In 2023, we had also some one-off of working capital, things we could optimize as we were starting to simplify the role we were phasing out those businesses. That's also a significant amount, which is -- it's good that we could deliver it in 2023. That has helped us to reinvest, but that will not repeat in 2024. Then we have the decrease in activity, which is impacting EBITDA, which we will compensate partially by CapEx.
Does that answer your question, Matthew?
Yes, I guess in part, we can follow up offline.
We will take the next question from line Chetan Udeshi from JPMorgan.
I was just wanting to -- there is no Q1 guidance. So if you can help us understand how you see Q1 different moving parts, volume, net pricing, et cetera, et cetera. But what I'm trying to get to is, if I look at your Q4 EBITDA, it's EUR 238 million underlying that you reported. We should be -- I guess, we should be taking out EUR 25 million from that for the run rate given that you are exiting the businesses that you talked about. So that sort of gives us EUR 215 as a starting point. And then we know the soda ash prices have come down in Q1 versus Q4. So I guess the question is, are you expecting Q1 actually to be below EUR 200 million EBITDA? And if that's the case, isn't there an implied sort of a strong recovery through the year when in reality, you were actually talking about flat volumes or slightly better volumes only in second half versus first half. So maybe you can just help us understand how are you phasing the numbers throughout the year from Q1 to the remainder of the year? And the second question was, we understand your point on soda ash. It's also somewhat seem to be a late business. But can you talk about what you see in the other markets, some of these markets like silica or hydrogen peroxide or Coatis, -- they tend to have a bit of an early cycle feel to them. And we've seen some of the other early [ cycle chemical ] companies talk about a rebound in demand. Is that something you don't see at all in those businesses?
Very good questions. In terms of phasing, I mean, first, clearly, it's difficult to -- I think we're still in a very uncertain environment. And so obviously, it's difficult to make predictions, provisions, I would say in that period of time of the year. But still, I mean, what we can say is that indeed, if you look at Q1, I think Q4 is a good reference. You have, on one side, a negative impact coming from the soda ash pricing, that's true. But on the other side, this will be -- this might be offset by slightly stronger volumes coming in particular from restocking effect. We know that the last months of the year, in particular December, are traditionally quite low. And we've seen some additional volumes at the beginning of this year, most probably due to the re-stocking in the supply chain, difficult to say more at this point. So the numbers that you have in mind are probably a bit, I would say, pessimistic. Then on your question...
But if you allow me to address Chetan, because [indiscernible] Yes. On your comment, you mentioned the EUR 100 million. The EUR 100 million is mostly linked to Q1 to Q3, okay? So it seems you've done the calculation to where you were removing EUR 25 million from Q4. We phaseout the thermal insulation and the energy third-party business during Q3. So I mean this EUR 100 million are mostly concentrated on Q1 to Q3.
So you don't have to take that into account between Q4 [ and Q1 ].
This is roughly a good base or a good starting point.
Yes. Q4 is a good basis to calculate Q1. Is it clear, Chetan, on this point, before I move to the markets?
I'm a bit confused, but maybe just good to clarify. So are you saying that Q4 [ EUR 238 million ] is a good starting point without any adjustment for energy and the exit of the business? And then what about the impact from soda ash? Are you saying soda ash impact, more or less will be offset by that seasonal volume rebound that you see across the businesses. So it's probably not much different from Q4, maybe plus/minus something, but it's not going to be massively different from Q4 in Q1. Is that the message?
Again, we are not going to give --
We are not giving numbers, but directionally, that's the message.
Yes.
Okay. Understood.
We will publish the respective, it will be...
Directionally, that's exactly the message, in terms of numbers, we will give you more detailed information -- but that's it. Then in terms of market, I would say, again, it's a bit earlier. We are seeing -- you're right, some positive signals. I mentioned, higher volumes in the beginning of the year. But we know that part of it is probably due to a restocking effect. So we need to wait a little bit to see how the situation evolves in the coming weeks and months, in terms of volumes, that is. In terms of prices, the other businesses don't see the same price evolution as we see in soda ash. They are extremely resilient -- and this is in line with what we said also during the investor -- Capital Markets Day. It's also due partly to the fact that we have also longer-term contracts in some of these businesses.
We will take the next question from line Laurent Favre from BNP Paribas.
I got, I guess, questions on soda ash. There's 3, sorry. The first one is, I guess, can you educate us around the structure commercially of your business now that you're expecting for this year between, I guess, quarterly contracts and annual contracts? And should we care about those quarterly sort of announcements, for instance, in Europe? Or is your business still mostly on an annual basis? And can you perhaps also tell us to what extent you are matching energy hedging with the structure of those contracts. In other words, I mean should we care about those quarterly contracts and what's happening on the energy side? That's the first question. The second one on your comments on stopping growth CapEx for this year. Can you tell us what kind of phasing we should be assuming for Green River between 2025 and 2026, given that [ you're stopping ] growth CapEx, should we assume that most of the incremental capacity is for '26? And the third question on the Neom project. I've read up to 1.5 million tons of capacity for this project, which I guess would run into the [ billions ] for CapEx. Can you maybe tell us if you do go ahead with the FID, I guess, what kind of CapEx we should have in mind for the next few years?
So well, on soda ash, I would say the structure of our contracts remain more or less the same. And so I would say we have around 30% of our contracts that are long term. 50% that are annual contracts. And you are right, this is mainly for Europe and for our bigger accounts. And so the remaining is shorter term and mainly on a quarterly basis, and that's mainly seaborne and Asia Pacific, which traditionally is always a little bit more dynamic. And that could potentially when the market rebounds, bring [ some upside ] as well. In terms of our Green River investment, this is ongoing, and we will be ready to produce those tons next year. So whenever the market -- the demand will recover, we will be ready to supply those tons. And you might know that those tons are for the seaborne of the export market, right? So those tons will land on what we call the export market and in particular, Asia Pacific and Latin America. Now on Neom, it's true that we have just announced our intention to develop the first carbon-neutral soda ash plant based on the new e.Solvay process in Saudi Arabia in the framework of this very ambitious Neom project. The 1.5 million tons is a long-term target. The first step will be a 0.5 million ton tranche. And clearly, we are doing this in partnership with the local project developer. And our intent is to have a low CapEx contribution from [ Saudi ]. So please don't keep in mind those huge numbers relative to those type of investment. We will have a contribution that will be by construction in terms of project finance extremely limited.
Okay. And if I can just follow up on the point on contract for soda ash, so, when you negotiated those annual contracts, [ TTF ] was in the high 30s, and it's obviously not a lot lower. Should we assume that there is upside on that energy deflation piece? Or have you hedged? And have you matched your energy requirements to the duration of those contracts?
Well, you know that we are trying to put energy adjustment clauses as much as we can in our contracts. So the upside is indeed relatively limited. And the downside, if our energy prices are going up again, is also relatively limited. We don't want to make [ win-for-profit ], and we don't want to be squeezed neither when we have huge variations on the energy market. Now that being said, of course, we have a very dynamic way to manage our energy exposure, and we can -- we have some upsides that we can generate in the way we manage this energy exposure. But don't expect big swings due to energy market price variations.
We will take the next question from line Wim Hoste from KBCS.
Yes. I have 2 questions, please. Can you maybe guide us towards the debt service costs in 2024, now that the whole debt portfolio has been reshuffled and some new [ debt lines ] are installed. So that's the first question. And the second one, coming back on soda ash, not only the short-term outlook but more around the midterm outlook for these markets. Yes, in light of what is happening, for example, to the Chinese construction market, I know China is a bit shielded in terms of soda ash from the rest of the world, but still sometimes there is a Chinese capacity that starts to show up in seaborne markets, et cetera. So is what's happening to the current demand trends in China and globally, changing your outlook for the medium term, which was, if I recall well, calling for a gradual tightening of capacity utilization rates for the next 3 to 4 years beyond '24?
Yes, I would probably start with the question on soda ash, and then I will hand over to Alex to address the question on the debt service cost. So on, the midterm perspective on soda ash, I think, are very good. Why? Because demand for soda ash is really supported by the big trends. We're serving flat glass, container glass, detergents, production of bicarbonate, so that's feed, food, pharma, depollution. So all these segments are growing with the GDP and sometimes even much faster than the GDP as it is the case for bicarbonate. So we reiterate our vision that the demand is sustained in this segment. And except for the big capacity that I just started up in China end of last year. Today, there is no new capacity being built at least no significant new capacity being built, except the one that we were mentioning that we are constructing in Green River, the expansion that will be available in 2025. There are big projects announced in the U.S. by our competitors. And also, we are working ourselves on this type of project. But today, the construction has not started, and it's true that we can, I would say, envisaged that the market will become tight at some point in the coming months and years because we lack capacity. So to come back to your question on China, it's, I would say, it's true that today construction is down in China. If you look at the evolution of the -- the consumption of soda ash in China between '22 and '23, you realize that the decrease coming from the construction has been completely offset by the increase of consumption in other segments, such as in particular solar panels. I mean the soda ash consumed to produce solar panel in China is growing extremely fast. And so all in all, the soda ash consumption in China is not decreasing. On the contrary, it has continued to go up, not as much as in the past because of the situation in construction, but it continues to go up. And we see also, I would say, a pressure on some of the least competitive capacities of soda ash in China today coming from the startup of the new natural capacity. So we have not seen any change, I would say, in the export of soda ash coming from China. But that being said, it can have in the short term, some disturbance or some ripple effects that we can observe here and there. So this is what I can say. I would say about the soda ash market. And now maybe I will turn to Alex for the very serious question of the debt.
The very simple question. The annual cost for the debt and for the total net debt is about EUR 100 million, okay, EUR 100 million.
Okay. That's very clear.
Easy to remember.
We will take the next question from line Jaideep Pandya from On Field Research.
The first question is on your cost bucket. I appreciate you will probably disclose this in your annual report, but could you just give us some color on what were the energy costs/raw material costs last year? And based on your hedges that you have in place this year, what is the year-on-year delta that you expect in the energy costs/raw material cost bucket? That's my first question. Second question sort of goes back to the CMD, where you presented the historical EBITDA progression. So if I just average that and remove the EUR 100 million, I get to around EUR 900 million as an average, which for a lack of better understanding, I would sort of say, mid-cycle, which is what your sort of low end you're guiding to. But then flip side, you're saying EUR 260 million is sort of the cash flow that you generate from that. So God forbid, if you enter these low cycle conditions, what will happen to that EUR 260 million, i.e., how much flex do you have to actually reduce your CapEx below EUR 250 million to sustain the EUR 260 million ticket size if EBITDA actually goes down. And then the final question really is, when you look at the capacity increase of the natural soda ash coming in China, and you put that in context with the last time you saw capacity increase from Turkey. What impact do you feel this time is going to happen? Is this going to be a game changer like the Turkish capacity? Or is this not because it's purely geared towards the Chinese market.
On the cost of energy and raw material, I think you have the number, Alex.
No, we will not comment now. I mean, this is quite a technical question. We are not commenting on detail. In the annual report that will be available soon you will have to do. Second question, you want to take it? Or...
So the second question, I mean, again, the EUR 260 million is a number that we can deliver whatever happens. So whatever the situation of the market is, even if we are in a scenario that does not provide any recovery in the economy during the year, we are organized with what we control, which is our costs, our CapEx and in particular our discretionary CapEx, we are organized to deliver those EUR 260 million. I don't know if you want to complement, Alex?
Yes. Maybe because we see this question coming quite a bit. I have not calculated the last 10 years. We have invested in the past 10 years. So I would say, [ EUR 900 million ]. The low end of our guidance, take it more at the trough more than the mid-cycle at least with the existing Solvay. I think what matters is, I mean, the -- that we want to improve our return on capital employed. We will invest when it creates values. And the free cash flow generation give us that ability. So first, when we have a trough like we will face in the 2024, we have CapEx, but we have other levers also to manage and secure the cash and secure the dividend. And when things come back, we will invest for value. I mean, strategically, our long-term intent is to improve the return on capital employed.
Yes. So maybe just one point. I think you mentioned at some point that EUR 900 million is the mid-cycle. In reality, what we see, and as Alex said, we are probably at the trough in particular in some of our businesses like soda ash. We see the low range of our guidance, which is EUR 925 million at the low point, right, at the low point of the cycle. And again, I mean, I don't like the word cycle because -- and this is why I think we need to continue to explain what type of business we're operating. Those businesses, they are, again, less cyclical that I think you might think. So we're talking about macro cycle, so impact coming from the macroeconomic situation, it's not really like the cyclicality that you can see in some of the traditional chemical commodities, it's nothing compared to that. Now to get back to your question on the soda ash capacity in China, so this -- this is nothing compared to, I mean, what happened in Turkey, because the Turkish capacities were clearly implemented to export volumes everywhere in the world. And the new capacities are currently starting up in Inner Mongolia, in the northern part of China are for the domestic market, right? So again, we're not saying that in the short term, you cannot have some impacts on the balance between import and export. But the intent and the destiny, I would say, of those capacities is really to supply the Chinese market. So the situation is really, we think, completely different.
Sorry, if I may just come back to my first question and ask it slightly differently. What is the hedging policy you have for natural gas, power and coal? Are you hedging still in the traditional old way of Solvay, which was to take yearly hedges to blank out the delta between soda ash price differences? Or have you changed your hedging policy meaningfully? Just for our modeling purpose, like how should we think about the delta of change for these cost items?
Yes. We will give you [ additional, would we ] Alex?
Yes. I don't think you should take that, that should be that precise in your modeling. But I think there are 3 levels. Again, we have not changed our hedging policy. We have probably improved it. That's part of the simplification that we have with the new Solvay. It's a simpler, more standardized type of hedging. But we have -- strategically, we need to reduce our dependency on the fossil fuel. So energy transition is our main hedging policy. Then we have pushed since 2022 towards natural, what I would call natural hedging, which means that our customers are indexed, our customer price are indexed in a way that covers most of the risk we have on the supply because the variability in the fossil fuel prices is not something we can fully -- we can fully protect against. And then on the short-term tactical basis for the remaining exposure, we are doing something very similar to what you would do for FX. It means progressive hedging of the coming exposure, and we are trying to do that as systematically as possible. But -- so yes, you will have more details in the annual report, but I think that gives you the overview.
Great. We've waited -- we'll wait [indiscernible] for the annual report, then.
We will take the next question from line Sebastian Bray from Berenberg.
My first one is on labor cost. Can you just give us an idea of how you would expect the bonus provisions at the company to vary year-on-year in '24. If we do see a down cycle as to something that gets flexed. And related to that, the commitment on living wage, I haven't heard before. Just out of interest, when exactly was this expected to be hit? And how much is this going to cost in total? Just as a separate question, I appreciate, I'll keep it brief. How much of the Inner Mongolia capacity do you think is currently actually available? There is a problem when assessing the soda ash market in the nominal rates of utilization can differ quite markedly from what we see in price data. It looks as if Chinese prices are heading downwards, if this capacity now ramped up properly.
So maybe I will start with #2 and #3, and I will let Alex comment on how we expect to see the cost of the remuneration evolve. So first, on -- on the living wage, very clearly, I mean, we -- you can expect very, very minimal impact on us as we -- we are already very much at the right level, okay? So the impact will be almost nonexistent, and we will confirm this obviously. On soda ash in China, again, I mean, there is not a direct link between the Chinese -- the domestic Chinese price that you can see in particular on their domestic market and the seaborne price on the export market. So as I said earlier, there can be some volumes available in a spot basis. But this will not -- as we see, I would say, impact significantly the soda ash market in the mid- to long term. So this is why we don't expect those big volumes to disturb the global balance as anyway historically and even in the projections that we see, Chinese exports are always, I would say, in the range of, let's say, 1 million to 2 million tons per year net, right? So maybe, Alex, on the labor cost part?
Yes, just to put it on the living wage, because you asked when, in the implementation. So 2026 is our commitment on the -- on the full rollout. And again, financially, it's not a huge curve. So it's not a big impact, but I think as an employer, this is critical. On the first part, the variable remuneration in 2024 -- sorry, 2023 at the end on a full year basis, but not extremely material, so don't expect 2023 to 2024 to have a big impact.
We will take 2 more questions from the queue. We will take the next question from Alex Stewart from Barclays.
I wanted to come back to something that Jaideep said, because the rating agencies gave Solvay a BBB- rating based on a level of EBITDA of about EUR 1.1 billion. I think that was closer to reported than adjusted. This year, your guidance is somewhere around EUR 900 million to EUR 1 billion. But in 2022, you took EUR 390 million of net pricing. In 2023, you took EUR 310 million of net pricing. Now I understand that 2021 wasn't a great year for soda ash. But that's EUR 700 million of net pricing over 2 years. And the guidance for this year of EUR 900 million to EUR 1 billion, if I take a really brutal assessment and deduct EUR 700 million off that, you're not left with a huge amount. So can you please explain to us why you think that [ EUR 950 million, EUR 1 billion ], whatever the number is, just the new run rates when you've taken hundreds of millions of euros of net pricing over 2 years.
So maybe you want to start on the rating, Alex?
Yes, I mean, it's -- I don't think -- I mean, as we said, I mean, the [ MAC-4 ] are not favorable, there is a consumption of geopolitical and macroeconomic factors, which is creating a decrease in demand in 2023, early 2024, at least, like fundamentally, I mean the basics of our businesses, the fundamental are unchanged. So I mean, the discussion we had with the rating agencies, and okay, this is an ongoing discussion. And you've seen they have confirmed our rating when we had the separation. This was known, this is integrated. I mean, the current environment is integrated in our midterm guidance. So okay, we'll continue to dialogue, but I don't see a major issue there.
And on soda ash, I mean, when we look at even the part numbers, we don't see soda ash going further down. And it doesn't be the case, I mean, it would be -- it would mean a different situation compared to what we've seen even in 2021. And if that would materialize, which is really, really, I would say, very unlikely, then we would have to act, right, and to change our [ cost basis ].
Sorry, to add 2021 was a very low baseline. I mean this is the pressure on price at the time was just after the COVID. So yes, you're right, in the pricing, but some of that was a pricing recovery on a very depressed point of view.
If those prices would come back. Well, first, the cost basis was not the same. So I don't think it's realistic to see those level of prices coming back. And then obviously, we also have our cost-saving program, right, that will contribute to also support the business.
We will take the last question from Martin Roediger from Kepler Cheuvreux.
Again, on your guidance, can you provide the parameters for the low end as well as for the high end of your guidance range?
Yes. I would say, in a nutshell, the low end corresponds to the situation is not getting better versus Q4 2023. So we continue on the same trend for the whole year. And frankly speaking, I think if this would materialize, we would probably accelerate our cost savings and cash measures. And so this is really, I would say, the lowest point that we can ever imagine to reach, right? The midpoint is the situation as we see today. And so with efficient cost measures and at the same time, potentially a situation that will slightly improve in second part of the year. And the upper limit, I would say, the high end of the range would be a recovery in the second part of the year that is a little bit more impactful. Does that make sense?
Yes.
Thank you. And as there are no further questions, I'm handing back over to your host for closing remarks.
So thank you very much for having [ being ] with us in the call today. We will be on the road in the next couple of days in London, Paris, Brussels, for example. So feel free, and feel free obviously to call us and take contact with the Investor Relations team if you have any follow-up questions. Thank you very much.
Thank you.
Thank you. Take care.
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