Arkema SA

PAR:AKE

Earnings Call Transcript 2018-Q1

[Operator]

Ladies and gentlemen, welcome to the Arkema's Q1 2018 Results Conference Call. I will now hand over to Thierry Lemonnier, CFO. Sir, please go ahead.

[Thierry Lemonnier, Chief Financial Officer]

Thank you. Good morning, everybody, and welcome to this conference call. With me today is the IR team. As usual, we have posted on our website, in addition to the press release, a set of slides, which details the first quarter performance that I'm pleased to present to you today.As you have seen from the press release this morning, Arkema started the year very well, with an EBITDA at EUR 383 million, up 8% against a very good performance of the first quarter of last year. This is the highest EBITDA and the highest EBITDA margin ever delivered in the first quarter.Before looking at the results in more details, I would like to highlight a few key points. First, we have managed to far more than offset the negative FX impact resulting from the significantly stronger euro and have delivered an excellent performance. Excluding the impact of currencies, EBITDA would have increased by [ 15% ] against the very strong performance of last year and even more, taking into account the transactional effect. It's a combination of the ongoing positive internal momentum and a few driver specific to the first quarter, such as the strong contribution from specialty molecular sieves.The second is a very good 7.3% sales growth year-on-year at constant scope of business and ethics. This is reported by prices up 5.4% reflecting our actions to increase our selling prices in our downstream specialty businesses in order to offset higher raw material cost. Price effect also reflect the continuing positive environment in both Fluorogases and in MMA/PMMA. The third point is the 33% provision of our adjusted net income and adjusted EPS, which reflects both the higher EBITDA and the lower tax rate.Finally, excluding the impact of the acquisition of XL Brands in early January, net debt is stable compared to the end of last year. This is a very solid performance given the usual seasonality of the working capital during the first quarter, which mechanically results in a cash outflow. Since the beginning of the year, we also continued to actively implement our strategy to step-up the development of our specialties. In [ Bostik ], we closed the acquisition of XL Brands, a leader in soft flooring in the U.S. at the very beginning of the quarter. After a quarter within Arkema's, the integration and development of this business are going well and XL Brands had very good and promising start of the year. In Technical Polymers, we announced a 25% global production capacity increase for polyamide 12 in Changshu in China. We also announced a few days ago the start-up ahead of schedule of the 20% capacity increase in PVDF in the U.S. only one year after a similar expansion was started in China. All these developments will enable us to support the strong demand from our customers in this region for this higher value added solutions for markets such as new energies, water filtration, consumer goods and automotive. In composites, we signed a partnership with Hexcel, a leader in composites for aeronautics to develop thermoplastic composite solutions for aerospace using our expertise in PEKK together with the Hexcel ones. A joint R&D laboratory will be setup in France as part of this partnership. So as you can see another busy quarter implementing and delivering on our strategy.Now let's look in more details to the first quarter performance. At constant exchange rate and business scope, sales were 7.3% up at EUR 2.2 billion with a 5.4% price effect and 1.9% volume effect supported by High Performance Materials with a strong quarter in specialty molecular sieves. Currency effect at minus 6.6% mainly reflects a stronger euro versus the U.S. dollar. The small net [ cost effect ] corresponds to the integration of XL Brands and CMP within Bostik and the divestment of the oxo-alcohol business. At EUR 383 million, the 7.9% growth in EBITDA was driven by the High Performance Materials and Industrial Specialties segments and was achieved despite a stronger euro versus the U.S. dollar with a negative EUR 26 million impact of translation. On top of that, we estimate that the negative transaction effect which mostly affects Advanced Materials could add 1/3 to this figure. EBITDA margin stood at 17.6%, up 110 basis points year-on-year. Recurring operating income amounted to EUR 277 million, up 13.5% on last year, it includes EUR 106 million depreciation and amortization, EUR 5 million below last year level, benefiting from the positive currency effect. REBIT margin is also significantly up at 12.8%. Operating income increased to EUR 265 million, it includes EUR 4 million non-recurring charges corresponding mainly to restructuring expenses and EUR 8 million of depreciation and amortization related to the revaluation of assets carried out as part of the Bostik and Den Braven purchase price allocations.Financial result stood at minus EUR 23 million, EUR 2 million lower than last year as a result of the refinancing achieved in 2017 at more favorable market conditions. As mentioned, taxes are down on last year at minus EUR 52 million compared to minus EUR 66 million in the first quarter of 2017. Tax rate excluding exceptional items is at 21% of recurring operating income, significantly lower than last year and notably reflecting the benefits from the tax reform in the United States. Consequently, adjusted net income is up 33% on last year at EUR 195 million, that is EUR 2.57 per share.Let's now go through the performance of our 3 business divisions. Sales in High Performance Materials amounted to EUR 998 million, 6.9% up on last year at constant exchange rate and business scope. Volumes are up 7.3% driven notably by the large number of projects carried out over the first quarter in specialty molecular sieves as well as the ongoing benefits from innovation. Price effect is globally stable for the division. Excluding molecular sieves, price effect was at around 2.5%, which reflects action to increase selling prices, which we will continue to implement in the coming months. The 1.5% scope effect reflects integration of XL Brands within Bostik and finally currency effect was negative at 6.1%. At EUR 176 million, EBITDA was up 6% on last year despite stronger euro and higher raw material costs. This reflects a strong contribution from molecular sieves and integration of XL Brands within Bostik and the overall good performance of other businesses driven by innovation. For the second quarter, we expect the performance of Advanced Materials to be impacted by national strikes at the French railway company which affect the transportation by train of certain products and raw materials and thus the operation at certain sites, mainly in Advanced Materials. EBITDA margins stood at 17.6%, [ up ] on last year.Let's now move to Industrial Specialties, at constant exchange rate and business scope, sales were 9.6% up year-on-year supported by a 13.6% positive price effect and continuing high prices in Fluorogases in Europe and in Asia as well as tight market conditions in the MMA. Volumes were down 4% compared to last year. This mainly results from the anticipated lower quotas in Fluorogases. Currency effect was negative at 7%. EBITDA of the division was 15.7% up year-on-year at EUR 162 million and EBITDA margin stood at 24.5% confirming the excellent performance of this division across its different business lines with a year-on-year EBITDA growth in each of 4 business lines.In Coating Solutions, sales were 5.2% up year-on-year at constant exchange rate and business scope at EUR 507 million driven by a 6% price effect, which reflects ongoing actions to raise selling prices across the entire acrylic chain. Volumes were 0.8% down versus a high basis of comparison in the first quarter of 2017, which benefited from some restocking effect in the context of [ rising ] raw materials. Weather conditions in Europe and in United States also impacted negatively volumes this quarter especially in Coating related businesses. The minus 1.5% scope effect results from the divestment of the oxo-alcohol business. Currency effect was negative 7.2%. As expected, EBITDA was at EUR 66 million, down on the high basis of comparison of the first quarter of last year when acrylic unit margin in China temporarily reached peak levels. For the rest of the year, margins are expected to improve as a whole compared to last year, in line with our initial assumptions. At 13%, EBITDA margins [ resisted well ] in the first quarter.A few words now on cash flow and net debt, free cash flow was nearly balanced at minus EUR 25 million and up on last year. This is a very solid performance taking into account the usual seasonality of working capital at the beginning of the year. However, working capital ratio on annualized sales is slightly down at 15.3% versus 15.6% in the first quarter of last year. This is another good achievement by our team. Consequently and excluding M&A, net debt was globally stable versus the end of 2017 taking into account [ EUR 165 million cash tariff ] for the acquisition of XL Brands, net debt stood at EUR 1.2 billion with a gearing slightly up at 27%.I will now comment on elements of the outlook, which are mentioned in the press release. On macroeconomic environment, market conditions are in the continuity with the start of the year with a stronger euro and higher raw material cost. As usual, beyond the economic context, we will continue to focus on what we control which is our internal momentum and more specifically, innovation in Advanced Materials and the integration of XL Brands within Bostik. We will also continue our operational excellence program as well as our actions to further increase selling prices. Finally, we expect market conditions in our more intermediate businesses to remain overall robust. Taking into account the strong start of the year and are confident for the rest of the year, Arkema confirmed its objective to increase EBITDA in 2018 compared to the excellent 2017 performance.So I thank you very much for your attention. I'm now ready to answer your questions.

[Operator]

[Operator Instructions] The first question comes from Martin Roediger with Kepler Cheuvreux.

[Martin Roediger, Equity Research Analyst]

I have 3 questions. Firstly, on High Performance Materials and here in particular about the phasing effect in, especially in molecular sieves. There was a large number of projects carried out in Q1, which drove volumes up. What is your view regarding such projects in the next 3 quarters of 2018? And staying with High Performance Materials, and here switching out to pricing effects, you say that selling prices were up by 2.5% in the segment, if we exclude molecular sieves. But including the [ dilutive factor ] from molecular sieves, selling prices at HPM were down by 0.4%. So if I make the math and molecular sieves pricing must have collapsed. Can you explain that? And the third question is on Industrial Specialties. Regarding EBITDA, you forecast robust perspective moving forward. Does this mean the tight market situation in MMA/PMMA will stay in the next couple of months, and there is no normalization in the market ahead or what do you mean with robust perspective?

[Thierry Le Hénaff, Chairman & CEO]

Okay, Martin, good morning. So, I will try to answer to your 3 questions. So as regards to the molecular sieves business, as you know, it's volatile -- this business have some specificity -- which are significant to the fact that it's an activity which is not [ linear ]. So depending on the calendar of projects and replacements of molecular sieve. Year-on-year, we may have some differences between the quarter. Globally, we expect, and we are confident in 2018 to deliver a strong performance in [ TMS ] comparable to the one that we had in 2017, but the difference is that between '17 and '18, the calendar is very different. In '17, the sales were relatively well spread about the fourth quarter of the year, while this year, it will be more concentrated on the first quarter. So that's the only specificity. It's an element that you have to take into your account, but it doesn't mean that we have any worries around this businesses. It is a business. We have a clear view on the outlook relative to the replacement schedule of the existing leasing equipment. It's just specificity of this activity which make the calendar different from -- 1 year to the other. So that for the first question. The second is about the prices effect. In fact, due to the way that we are calculating the price effect, when you have big change, especially in volumes which is a case in molecular sieves and when you calculate the price effect, you are basing your calculation on the volumes of the preceding year. So since the preceding year for you were significantly lower, you have a mix effect which is significant on molecular sieve. So you have a very important positive volume effect and a negative price effect which is just reflects the effects of the difference between the mix during the 2-year. I agree a little bit difficult to identify in our figures, but globally the [ consideration ] during the first quarter for [ TMS ] has been most important than last year. And when you look separately to volumes and price, you have 2 different effect. Large volume -- positive volume effect and a large negative price effect, but it's relative to the mechanism, which is applied to compute both effects. For -- and PMMA, the tough comment I will make is that, it's important to have in mind that the good performance of Specialty -- Industrial Specialties during the quarter is not only related to MMA/PMMA. The 4 business lines performed very well. As such MMA is concerned, we're still expecting some normalization during the year, and it will probably not happen during the second quarter, but during the second half of the year, probably and it is the assumption that we've made at the beginning of year. So far, we have not changed these assumption, if we were wrong, it could be an upside, but we have no reason to believe that there will not be some normalization with the addition in capacities in Saudi Arabia.

[Operator]

The next question comes from Alex Stewart from Barclays.

[Alex J. Stewart, Chemicals Analyst]

My question, I think, at the time you announced the acquisition, you gave the revenue contribution from CMP and you gave the [ inside ] EBITDA contribution from XL. But you didn't give enough to calculate the implied margin. So could you possibly tell us whether either XL or CMP were dilutive or accretive to the High Performance Materials margin in the first quarter.

[Thierry Le Hénaff, Chairman & CEO]

So the contribution of XL and CMP, it has been far larger than CMP is in line with our expectation based on the figure that we provided at the time of the acquisition. We are absolutely in line. There is no better price there. So their -- the contribution is positive and is in line with what we expected. In term of margin, also it's at level at which we expect it to be and it's accretive with in terms of contribution as regard to the global EBITDA of HPM, it's relatively small. So the impact is very, very limited.

[Alex J. Stewart, Chemicals Analyst]

So, you believe it is accretive to margins --

[Thierry Le Hénaff, Chairman & CEO]

Yes, absolutely.

[Operator]

The next question comes from Thomas Wrigglesworth from Citi.

[Thomas P Wrigglesworth]

Firstly on Coating Solutions, so you note 6% price increase. Is that -- is there any differentiation between to the acrylic monomer business embedded in that and coating resins. Could you give us some -- could you give us just a bit of an market update as to where you are noting that prices are now starting to move higher in that chain. And secondly, if I may, we talk about negative 4% volumes including the fluorogases, what would have volumes been if you took out fluorogases and obviously as we start this -- we are starting to see -- impact of HFC fade out. What's the expected volume impact that we should think about from rolling forward both for '18 and also into '20, if you have a guide for that. Thank you.

[Thierry Le Hénaff, Chairman & CEO]

Okay. Thomas, so I would try to answer to your 2 questions. As regard to acrylics, the price -- the value reflects higher selling prices with differences of market conditions between the different geographic area, and as I said earlier, last year, we had a very strong basis of comparisons in China, which was related to the fact that for specific reasons, we had high margin, it was significantly higher than what we expected. So now, we are back to a more normal situation and given this there are some difference between the geographic areas, but we remain confident that market condition will continue to improve for the -- [ same ] part of the segment. For the resin part, obviously the challenge is to continue to pass price increase to customers. And during the first quarter, volumes were affected by weather conditions, which were not very favorable neither in the U.S. nor in Europe. But otherwise, globally the situation is improving according to what we expected. For fluorogases.

[Thomas P Wrigglesworth]

Sorry, Thierry, just on that -- do you have danger if -- weather it would be normal, is there any sense you could give us for quantifying that weather impacts in the quarter?

[Thierry Le Hénaff, Chairman & CEO]

It is difficult to quantify. We can expect some recovery in the second quarter, which is because of the seasonality of these activities. And traditionally, the strongest quarter of the year, so probably we could recover some volume during the second quarter in coating resins but we have to be cautious about the specific market -- [ the currency spend ], depends which is not very good to -- really more difficult to say. We can expect some compensation during the second quarter. But it is difficult to quantify. For fluorogases, well we remain confident and positive on the outlook for the coming quarters, and even beyond the [indiscernible] quarter of 2018. In terms of volumes, obviously, we have to take into account the impact of the reduction of the quarter. But in term of price, market conditions are pretty good. And due to this situation, we are in a situation now, which is much better balanced between the U.S. and the rest of the world. And we don't expect this situation to change. We expect strong Q2 because of the seasonality of fluorogases and the weaker H2 once again because of the seasonality. But we are positive and we benefit from the mix of portfolio of products in fluorogases during the -- benefiting [ significantly ] during the first quarter and we will continue for the coming quarter. So we are positive on fluorogases.

[Operator]

The next question comes from Charlie Webb from Morgan Stanley.

[Charlie Webb]

Just a couple from me. Just getting back to the intermediates discussion. At the end of last year, you talked about positive acrylics, fluorogases, largest stable year-on-year through this year versus last year, MMA/PMMA normalizing and I guess, slightly down year-on-year. Given fluorogases continues to be net positive pricing over volume declines and acrylics, you still have confidence that continues to get better this year. MMA/PMMA still stands very strong you think into Q2, you can see continuations in that themes. Is that not theme very conservative right now? First question. And then second question, just on I guess, health in the demand globally, how is China right now, as you move into Q2? Has demand picked up and likewise in the U.S. post that cold weather, you talked about, are you seeing demand improving?

[Thierry Lemonnier, Chief Financial Officer]

Okay, Charlie. So 2 questions. As regard to the intermediate business, it is too early in the year to change anything around or offer estimate for the global performance of the 3 activities. Fluorogases, we said that we expected the performance to be stable to slightly up on last year high performance. I agree with you that the first quarter is -- showed very positive sign. But it's really too early to extrapolate the global performance for the full year. Even as I said, we're pretty confident about the environment and the performance of fluorogases. As I said also for PMMA as long as we have not really seen what could be the impact of the normalization. It's difficult to change our view on this specific subject and for acrylic acid, we are expecting, as I said, the normalization and to be back at mid-cycle condition somewhere in 2018. So globally, at this state of the year, I will not change the general outlook. We will see at the end of Q2, because then we will have behind us a quarter, which is traditionally strong for fluorogases and I hope that we will have some clear view on what would be the impact of the new Saudi capacity in MMA on the market. So at this stage, I will not change. This is conservative, too early to say. We will update you at the end of the second quarter. For China, as far as our projects are concerned, still relatively slow start of the demand after the Chinese New Year. We are at a level at which we expect it to be, so there is no negative signs. Obviously, there are many questions around what could be the consequences of the duty that could be imposed on import on the U.S., but for the time being, its more theoretical than and in any case, it would be very limited for activity. So globally, no, we have no signs of slowing down. We have a steady level of performance and demand -- level of demand which is at the level at which we expected it to be.

[Charlie Webb]

Perfect. And then maybe just one last quick question. On raw material inflation, what are the key raw materials, especially in HPM that you're seeing notable inflation, that you obviously haven't made the price adjustments for? Are there [indiscernible] or is it quite broad-based?

[Thierry Le Hénaff, Chairman & CEO]

It's a broad-basis but within the broad-basis we have some specific situation where the supply is extremely tight and price increase goes beyond what we could expect from just the raw material price increases, you see that in other activities in the chemical chain. So it's very specific situation, which -- in which we have price increase, which are amplified by the specific supply situation. So it takes a little bit longer to pass the price increase because they are very significant. If you look at the price increase of [ along certain ] so insignificant, but if you add to that the impact of the specific tight supply situation, it's more than that. So it takes a little bit longer to pass the price increase because we have to pass it to your customer, we have to pass it to its customer. So it's a chain and it's a little bit longer. But globally, we're successful in implementing this price adjustments.

[Operator]

The next question comes from Emmanuel Matot from Oddo Securities.

[Emmanuel Matot, Analyst]

Several questions for me, please. First in 2017, your EBITDA growth was plus 17%. The same figure each quarter from Q1 to Q4. You achieved this time an EBITDA growth of plus 8% in Q1 2018. Are you seeing that trend is well representative of what you should achieve on a full year basis? Do we have to expect more volatilities in the next 3 quarters? My second question is about the strike in France at SNCF. You mentioned an impact in Q2. Will it be just for High Performance Materials or could you also address other businesses, could it be significant if those strikes are running until the end of the quarter. And my last question is about the forex impact, so minus EUR 26 million in Q1 for translation. Could you address also on transaction, if you remind us how it works at the group level. Thank you very much.

[Thierry Le Hénaff, Chairman & CEO]

Okay Emmanuel, so first on the EBITDA growth, it's a nice try, but we have never indicated that we expected EBITDA to grow by 17% in 2018. So, you will recall that our guidance is that -- our objective is to make EBITDA grow over the year, we didn't indicate any quantified target. So if we come to answer to your question, the 8% growth of the first quarter was driven by different factors, but you have to take into account the very negative forex impact and I will come back on that. No, I cannot guarantee to you today that we will have 8% growth per quarter, which will mean [ 8% ] growth for EBITDA for 2018. We will probably as usual give you more detailed information when we will publish our second quarter result, but at the end of the first quarter, we remain more qualitative than quantified and don't forget that during this first quarter, we benefited from the calendar of molecular sieves sales. So I will move to the strike point later on. Let me switch directly to the FX exposure because it has an impact -- significant impact on EBITDA. You will remember that we indicated that we estimate the conversion effect of the dollar-euro rate evolution at EUR 50 million on EBITDA for a 10% variation of the exchange rate. We [ were above ] that during the first quarter and on top of the U.S. dollar, you have also other currencies and the EUR 26 million only relates to the conversion effect. The transaction effect is much more difficult to evaluate, it's related to the fact that we are exporting product from the Eurozone and depending on the rate -- the competitiveness could be effective which is a case right now and [indiscernible] base in France. You know that on the longer term, we are working on reducing this exposure through the investment of a new platform in Asia, but for the time being, this is the area what we are [indiscernible] to this competitiveness effect and globally, we indicated that we estimate this impact to be at around 1/3 of the conversion effect, it's not an exact figure, but I think that it is close to this actual impact, but mostly concentrated on the HPM and Specialty Polyamides business, which by the way is significantly lower than what it was 10 years ago when at the time because we had much more exports coming from France to the other part of the world, our exposure to the competitiveness and [ promotional ] effect was estimated at 50% of the conversion effect. France strike, in fact the impact of the strike is related to 2 elements: transportation of finished good but also the transportation of certain raw materials and because of the reduction of the availability of the suppliers -- certain raw materials, certain raw material, we have to reduce the operating rate of certain of our units, [ the units ] which are working under continuous processes which means that they are not running at the optimum which has a significant impact on the yield and the margin of those activity and even if it's little bit early to give precise figure, we estimate that it could be comparable to maintenance turnaround in terms of EBITDA impact, which means a large maintenance turnaround which means that probably a little bit above EUR 10 million. It does not affect our general guidance for the year, but clearly for the second quarter and more specifically for HPM, strikes will have a negative impact because of this effect.

[Operator]

The next question comes from Geoff Haire from UBS.

[Geoffrey Robert Haire, Managing Director and Equity Research Analyst]

All my questions had been asked, thanks very much.

[Operator]

The next question comes from Patrick Lambert, Raymond James.

[Patrick Gerard Jean Lambert, Research Analyst]

Congratulations Thierry for the future. I think just 1, yes, 2 questions regarding HPM, actually the margins development basically, if you could help us put some colors on margin development in both Additives and Bostik and the others and the other parts of HPM, it seems that Technical Polymers must have done pretty well to get to the 17.6% EBITDA margin. And second related to that, a lot of companies in construction have -- chemicals have of course mentioned U.S. and [ Northern Europe ] disruption of weather. Is that the same for the Additives business of Arkema and also do you see that coming back into Q2 in terms of maybe not catching up from Q1, but solid start of Q2 in terms of construction and exports business. Thank you.

[Thierry Le Hénaff, Chairman & CEO]

So for the question around the margin for HPM is concerned, don't forget that in the 17.6% EBITDA margin that you were mentioning, you have obviously the impact of the molecular sieves and obviously which [indiscernible] brings the figure up as compared to the [ other business unit ] which are affected by the raw material price increase and in terms of gross margin, we are still lagging behind the adjustment of the selling price to [indiscernible], which means that year-on-year gross margin are still under pressure -- have been still under pressure during the first quarter.

[Patrick Gerard Jean Lambert, Research Analyst]

If I look at -- sorry, is it in line with the end of last year in terms of margins or --

[Thierry Le Hénaff, Chairman & CEO]

Well, it's difficult to -- we have not provided the figure for [indiscernible] end of the year and the difference is mostly between the first quarter and this year and the first quarter of last year. It will probably continue during the second quarter and it’s tough to leave us on the third quarter. As the construction market is concerned, as other chemical companies, we have been affected by the weather conditions in the U.S. and in Europe, it's generally speaking, mostly in the coating and construction businesses. For adhesives, it has been relatively limited. It's more sensitive on the coating solutions and to a lesser extent to certain application within Technical Polymers.

[Patrick Gerard Jean Lambert, Research Analyst]

And looking at Q2? Are we back on track?

[Thierry Le Hénaff, Chairman & CEO]

I will make the same comment that I made that fluorogases, it is Q2 obviously because of the traditional seasonality, the strongest quarter of many -- most I would say for production, so it will be a key quarter and we can expect some compensation with as I said when I was commenting the performance of coating solutions with certain cautiousness around the decorative paint market.

[Operator]

The next question comes from Peter Clark, Societe Generale.

[Peter Anthony John Clark, Senior Analyst, Chemicals]

I got a couple of questions, I just want a clarification first. I think, you were suggesting on Bostik, yes if the margins down year-on-year because of the raw materials but you expect catch-up for full year. I'm just wondering, if we could say that for all the downstream businesses under pressure including the resins and coating solutions, the margin can catch-up with the second half and then be pretty similar year-on-year if not above. And then something about 6 months ago, and I know clearly PMMA MMA is going to normalize and created a normalized margin is well below what you've been reporting. But the 17% to 19% I am wanting to remembering was [ set ] when fluorogases was recovering also many other trough and that did fully recover when [ amines ] being a little skepticism about to back then, so perhaps just a little comment on that guidance. I'm sure, you're not going to tell me much. And then finally, just a clarification, am I missed this as well on the tax. Obviously the 21% that you saw underlying in the first quarter, your guidance, [ I think around those ] full year is 23%. Just want to check on that.

[Thierry Le Hénaff, Chairman & CEO]

As far as margins are concerned, for the specialty businesses, yes we expect for whole of them some improvement during the second part of the year and to continue to be under some pressure during the first half of the year, which mean after Q1 it will -- we expect it to continue in Q2 because as I said, the pass-through of raw material price increase is positive, so it will be the same for the other businesses. For the second question around the chemical business, I will make the same comment as the one that I did earlier. It's a little bit early to adjust these necessary global guidance because the visibility on [ key M&A ] impact for -- of the new categories remains limited but we are confident that we should maintain good performance for the 3 businesses which are part of the income and [indiscernible]. So stable year-on-year. We will see later on when we will have more visibility in after the second quarter for fluorogases if some more information could be provided around this guidance. For the tax rate, you're right, your figures are right. So we have guided on the 23% rate for the year. It's very difficult to extrapolate tax rate for the quarter on the full year. And with the improvement of fluorogases in Europe, we can expect also some additional taxes coming from fluorogases in Europe. So for the time-being, I think that the 23% remains an adequate indication for the year.

[Operator]

The next question comes from Chetan Udeshi, JPMorgan.

[Chetan Udeshi, Research Analyst]

Just couple of quick ones. On -- first one in HPM. Can you just give us some sort of sense of what was the volume growth excluding the impact from phasing impact in the Molecular Sieve. And #2 question was on fluorogases. Given the price increases that we've seen in the legacy refrigerant gases market, do you see a tipping point anytime soon where those gases become so expensive that people move to newer generation HFO refrigerant gases where you don't have an exposure at the moment at least. Thanks.

[Thierry Le Hénaff, Chairman & CEO]

So on -- first on HPM, without [ QMA ] the volume growth would have been limiting to positive [indiscernible] with positive volume effect. But don't forget that our priority in HPM is not on volumes, it's on margin. So it's mix of the two and is always complex mix to optimize those volumes and margin in an environment where prices are going significantly up. So to answer to your question, yes, the volume effect is positive without TMS but limited. For . For fluorogases, the risk of seeing not rapidly new generation of gases replacing the old one is relatively limited because the price difference still exist. What it means only that the price will not continue to rise indefinitely for all the phased out gases. But they will continue to remain high and if -- even in the assumption that it could be in competition [indiscernible] to replace or to adapt the equipment in surplus, so that is -- we have no specific concern around this risk.

[Operator]

The next question comes from [ Jaideep Pande ] from [indiscernible]. Please go ahead.

[Unknown Analyst]

Just one question really because I have to ask something to you before you leave. Could you give us some update on the project you guys are contemplated in the U.S. on thiochemicals with Novus.

[Thierry Le Hénaff, Chairman & CEO]

On thiochemicals, no, I have no specific comments to make around Novus. We have second thoughts about an extension of capacity together with Novus, but it's at [ relative year ] in stage discussion, so it's a little bit early to discuss that. But it's something which we are working together with Novus.

[Operator]

The next question comes from Martin Evans, HSBC.

[Martin Evans]

Just one question on raw materials. I'm just trying to get my head round your references to it because they are not hugely specific in terms of which product streams have hurt you. Are your internal budgets assuming that we are at the top or at the peak of the current squeeze and that essentially your budgets will be in place by passing through the current negotiated selling price increases, in other words, is the second quarter going to be the worst period for you or is there a slight risk to the second half that both the inflation continues and you begin to meet a little bit of resistance at the other end for accepting these inflationary price rises? Thanks.

[Thierry Le Hénaff, Chairman & CEO]

Good morning Martin, good to hear you. Well, you see the question is difficult to answer in the present environment. The answer is that yes we expect as I said the second quarter to be under some pressure because after the raw material price increase and to see a situation [indiscernible] one of them being the fact that after new capacity will be put on stream for certain intermediate raw material for us but obviously if the price of [indiscernible] during the second part of the year, we will have to face the same situation as the one that we are facing each time the price of raw material is moving upwards or downwards which is lag time between the price increase and the selling price adjustments, but in the present environment and we have no reason to consider disruption of the environment, yes I confirm that second quarter will continue to be under pressure and that it [ should ease from the second and third ] quarter.

[Martin Evans]

Thanks very much. Just a very quick technical question, just back of molecular sieves where you do refer to amongst other things ongoing benefits from innovation in these products. Can you just maybe give us an example of that because these are obviously historically very mature chemical processes. So what's the sort of innovation or the increased demand that you are seeing for molecular sieves? Thanks.

[Thierry Le Hénaff, Chairman & CEO]

Okay, it's difficult to give a precise answer to such questions, but we have different innovation underway for HPM as you know in water treatments, lightweight materials that will continue to drive a progression but it's difficulty to be more specific at this stage.

[Operator]

The last question comes from Daniel Buchta, Mainfirst.

[Daniel Buchta, Vice President]

One quick question remaining on fluorogas as you mentioned the pricing environment also is favorable in Asia, I think in 2017 in particular you have benefited from several environmental outages I would say in China. Can you say a bit more how that situation is evolving now and whether you expect these sites basically be shut permanently because I think your comments on fluorogases were quite positive. That would be very helpful. Thank you very much.

[Thierry Le Hénaff, Chairman & CEO]

Okay, Daniel. Okay, we are not providing a detailed -- precise detail by geographical area. What is for sure in China is that globally, the environment in terms regulatory control is much more stringent than what it was in the past. [indiscernible] required to continue to run the business and it helps to [ offset at least ] a little bit the supply in fluorogases, but the key element for us -- obviously, it is important for us to have better market conditions in Asia, but [indiscernible].

[Operator]

Thank you. We currently have no questions. [Operator Instructions].

[Thierry Le Hénaff, Chairman & CEO]

Okay, if there are no more questions, we will end this conference call and I will thank you very much for your participation and collaboration during [ those ] past years. Thank you very much and good-bye.

[Operator]

Ladies and gentlemen, this concludes today's conference. Thank you all for your participation. You may now disconnect.