Arkema SA

PAR:AKE

Earnings Call Transcript 2020-Q1

[Operator]

Ladies and gentlemen, welcome to the Arkema's Q1 2020 Results Conference Call. I now hand over to Thierry Le Hénaff, CEO; and Marie-José Donsion, CFO. Madam, sir, please go ahead.

[Thierry Le Hénaff, Chairman & CEO]

Good morning, everyone. Welcome to Arkema's Q1 2020 Results Conference Call. With me today are Marie-José Donsion, our CFO; and the whole Investor Relations team. So the global situation has continued to evolve since we last talked at our strategic update on April 2. With the health crisis are expected further increasing intensity in many countries and a number of regions are beginning to show signs of stabilization. Meanwhile, the economic environment, as you know, has continued to deteriorate with the second quarter currently expected to be the low point of the year, concentrating, as you know, most of the lockdown measures implemented by governments in many countries around the world. First of all, I hope that you and your families are well. And before I start this conference call, I'd like to express my gratitude to everyone who's bringing his contribution one way or the other in any part of the world to the fight against this terrible virus, primarily, of course, for the health workers who are at the forefront of this fight. Very quickly, as many companies, Arkema showed in its own way the social commitment in this crisis through free delivery of gel to hospitals, supply of essential polymers to make protection equipment or medical devices or financial donations. Our management and our teams can be proud of this. Beyond this expression of our solidarity, the health and safety of our employees is our utmost priority, and we have swiftly installed crisis cells to focus on employee safety. In parallel, we are making sure our operations are running as smoothly as possible, assuring most of our plants have been running since the beginning of the crisis. And we implement quick and significant measures to mitigate the impact of this crisis on our results. To support this conference call, we have posted on our website a set of slides with details of our first quarter performance and outline some elements of the outlook. As always, we will answer your questions at the end of this call. I will now make a few comments on the first quarter achievements before letting Marie-José go through the financials in more detail. I would like to underline the following key points. First, Q1 results were in line with our expectations. They were impacted by the emergence of the pandemic in China first and in Europe in the second part of the quarter. The picture varies significantly by end market and by region. Overall, we estimated the impact of the COVID-19 in Q1 at around EUR 100 million on our sales and EUR 45 million on our EBITDA. This is in line with the guidance of EUR 40 million to EUR 50 million we gave at our Strategy Update on April 2. Most of the EBITDA impact came from lost volumes, and from a regional standpoint, around 2/3 of the total relates to Asia and the rest to Europe. Volumes were down nearly 5%, a drop that more or less corresponds to the estimated impact of the COVID-19 on our top line. This reflects more particularly decline in the transportation, oil and gas and the electronics markets, which affected especially Advanced Materials and were amplified by the pandemic. This overshadowed solid demand in a few end markets such as packaging, notably within additives; on nutrition; and in total emerging niche application used for the fight against virus such as disinfection, medical and protective barriers and masks in which Arkema was able to use its know-how. A simple way to analyze the evolution of the group's EBITDA in the quarter can be the following: we have 3 well-identified specific levels: the COVID-19 with this negative impact estimated at EUR 45 million; the national strikes in January in France linked to the new national pension scheme, which affected transportation by rail and cost us nearly EUR 10 million; and the impact of [ equaling ] costs in European Fluorogases which amount to around EUR 20 million and which should prevail up until end of May. Excluding these elements, our EBITDA was stable with a different picture by segment. The decline in the EBITDA of Specialty Materials essentially came from the impact of the COVID-19. This was a rather resilient performance, if you keep in mind the underlying challenging economic context, which was prevailing at the end of last year in a few end markets. And Adhesive Solution continued to perform very well, recording double-digit EBITDA growth, thanks notably to operational excellence measures, lower raw materials and synergies from acquisitions. Beyond the COVID-19, EBITDA from intermediates were impacted as expected by illegal imports in European Fluorogases and so further normalization in PMMA. We have put in place a number of strong measures in order to adapt to this crisis to mitigate its effect on our volumes and to focus first and foremost on cash flow generation. I will give 2 examples: reducing fixed costs in 2020 by EUR 50 million relative to 2019 or EUR 100 million relative to our budget, including decreases in all dimensions of the company, operation from manufacturing to SG&A; reducing capital expenditure by EUR 100 million related to the initially budgeted level of EUR 700 million, while preserving much of the significant step-up in investment dedicated to our [ polyamide plant in Sika ]. Finally, we must look beyond the current [ number ]. Even if the short term requires all our attention and a considerable amount of effort, it is critical to continue to think our work for the longer term, whether this be the gradual rebound after the crisis or the implementation of our 2024 strategy presented at the recent investor event. During the quarter, despite the pandemic, we continued to make progress towards our midterm goals. In January, we closed the acquisition of LIP who's a niche leader in tile adhesive, water proofing system and floor preparation solution, which delivered a good first quarter. At the end of the quarter, we started the capacity expansion of our biochemical plant in Kerteh, Malaysia to support the growth of the animal nutrition, refining and petrochemical markets in Asia, building on the rapid success of the first unit. We moved on with a site preparation of the bio-based polyamide project in Singapore and ensuring that the CapEx cut we will implement this year does not affect this critical development for Arkema. Finally, in Q2, we expect to close the divestment of our functional polyolefins business with SK, which we announced last year. This initiative will contribute to our ambition, which we presented at the Strategy Update on April 2 to become a pure Specialty Materials player by 2024. So I will now turn over the call to Marie-José, who will detail the Q1 financial performance.

[Marie-José Donsion]

Thank you, Thierry. I will complement Thierry's comments, starting with the bridge on turnover. So sales are down 5.7% compared with last year at EUR 2.1 billion. Beyond the negative volume impact of close to minus 5% that Thierry commented, the price effect has also had a negative 5% effect on sales compared to Q1 '19. This impact mainly comes from lower propylene prices within the Coating Solutions segment and the tough market conditions in refrigeration within the intermediates. The price effect was slightly positive in Adhesives, thanks to the measures taken last year to improve product mix and we're quite conciliate in Advanced Materials with a limited minus 1.7% effect. Please also note that we enjoyed a positive 3.4% perimeter effect coming from the integration of ArrMaz, Lambson and Prochimir acquired in the second half of last year as well as from the acquisition of LIP within Adhesives that was acquired in January this year. We have as well a 0.7% positive currency effect, mainly reflecting a stronger U.S. dollar versus the euro. Basically, the rate for the first quarter 2020 was at 1.10 compared to 1.14 for the first quarter of '19. This effect on volume have led to a Q1 EBITDA of EUR 300 million, which is 19% lower than last year's level, including an approximately EUR 45 million negative impact linked to COVID-19, as detailed by Thierry on the various segments.Depreciation and amortization reached EUR 140 million, up EUR 17 million year-on-year as a result of the start-up of several production units and the integration of acquisitions. Therefore, recurring EBIT amounted to EUR 160 million and REBIT margin stood at 7.7%. Nonrecurring items include a EUR 14 million [ PP ] amortization and a EUR 14 million nonrecurring charges mainly relating to restructuring expenses, asset write-offs and acquisition costs. Financial result stands at minus EUR 23 million, which is slightly lower than last year. The difference coming mainly from noncash actuarial changes in certain employee benefits. A tax rate where 3 exceptional items remained stable at 21% of recurring REBIT. Consequently, our Q1 adjusted net income amounted to EUR 100 million, which corresponds to a EUR 1.31 per share. Moving on to cash flow and net debt. You see that Q1 free cash flow amounts to minus EUR 38 million to be compared to the EUR 73 million in Q1 '19 and to a minus EUR 25 million in Q1 '18. Free cash flow reflects the impact of a lower EBITDA and includes a regular seasonal increase in working capital linked to sales phasing of Q1 versus Q4. The working capital ratio on annualized sales stands at 16.5% versus 15.1% last year. And as highlighted by Thierry, a tighter monitoring has been put in place to track inventory evolution and cash collection. Total capital expenditures amounted to EUR 92 million in the quarter versus the EUR 109 million in the first quarter of '19. So as Thierry mentioned, we intend to reduce capital expenditures by EUR 100 million compared to our initial target of EUR 700 million. And as a result, we should end up with a total recurring and exceptional CapEx expenditure at around EUR 600 million this year. Net debt reached EUR 2.48 billion at end of March 2020, including the EUR 1 billion of hybrid bonds. This represents a slight increase of EUR 150 million relative to our net debt of last December coming mainly from the M&A done in January for EUR 95 million and from the operating cash for the period. As a reminder, please note that we temporarily carry a EUR 300 million hybrid bond in duplicate since we took advantage of favorable market conditions in January to issue a EUR 300 million of undated hybrid bonds at the January coupon of 1.5%, in advance of our initial EUR 300 million hybrid bond maturing in October this year, which had an interest rate of 4.75%. Our balance sheet remains extremely solid, and net debt, including hybrid bonds, represents 1.8x our last 12 months EBITDA. We are also very comfortable with our liquidity level, which stands at EUR 1.5 billion at the end of March. I'd say, moreover, our pension obligations stand at around EUR 400 million, which is a very manageable level in the current volatile capital markets. I thank you for your attention, and we'll now hand it over to Thierry for the outlook.

[Thierry Le Hénaff, Chairman & CEO]

Thank you, Marie-José. So as I mentioned at the beginning, the COVID-19 continues to spread across the world and how the sanitary situation evolves as well as its precise impact on the world economy are still quite uncertain at this stage. So like most of our peers, we decided a month ago that the 2020 guidance we gave when we published the 2019 result was no longer relevant. Our feeling is that in terms of year-on-year demand variation, Q2 will be more strongly impacted. One element being the drop in building and construction-related segments in Europe and in the U.S., therefore, affecting the Adhesives and Coating Solutions segments. Our sales evolution for the month of April is estimated to be around minus 17% year-on-year, including a perimeter effect of around plus 3% like in Q1, which means at constant scope in April, a sales evolution of around minus 20% year-on-year. The gradual improvement should materialize from our standpoint from June, provided that the lockdown measures are lifted in Europe and the U.S. as currently expected. We also believe we should be in a position to have a clearer view of the prospects for the full year in the summer.I stated at the Investor event on April, we are very confident to go through this crisis and emerge in good shape. We are benefiting from a diversified base of end market and countries. So ongoing development in each application, keen to fight against the virus and other innovations; a strong balance sheet, including a relatively low level of pension obligations; and a strong liquidity position. Our adaptation measures on cost and CapEx and some benefit from lower raw material will help mitigating the drop in demand. As you can see, we focus on what we can control and are implementing a very strict and relative steering of our activities and operations. As you know, Arkema has long been action-oriented, and our teams have stepped up the level of determination and initiatives quite well. Beyond our focus on costs, cash and liquidity, we are fully attentive not to return in any way our ability to rebound once the recovery materializes. Our focus on sustainable innovation, corporate social responsibility and portfolio evolution is unchanged. And we remain fully committed on not slowing down the execution of the 2024 road map towards becoming a pure player in Specialty Materials. I thank you very much for your attention, and we are now, together with Marie-José, ready to answer your questions. Thank you.

[Operator]

[Operator Instructions] We have a first question from Martin Roediger from Kepler Cheuvreux.

[Martin Roediger, Equity Research Analyst]

I have 3 questions, if I may. First, can you talk about the sequential development so far? I mean how April compares to March? And what does your order book tell you for May? Secondly, you say that you want to reduce fixed cost by EUR 50 million, can you elaborate on the actions you are planning? You mentioned SG&A, but can you help me to understand if these actions are more temporary only or also sustainable? And thirdly, on your cut in CapEx budgets. Is that a postponement of maintenance CapEx? And if so, is that -- does it mean that the CapEx has shifted into next year? Or anything else related to that?

[Thierry Le Hénaff, Chairman & CEO]

Okay, Martin. First of all, thank you for your question. I will start by the last one and come back to the second and first one after. So they are relevant questions. So on the CapEx budget, in fact, it's more -- first of all, it's not one CapEx specifically, so all across the board. We are not considering any investment we wanted to make because we believe they were all important even if we are ongoingly reviewing our most important CapEx. So it's more about a delay, which means that, first of all, physically, it will take more time because of the containment measures. This means that things we simply cannot do because I didn't have subcontractors, okay? So you will have natural delay. On top of that, we have decided to delay some CapEx on which, based on the sales prospects, we can wait a little bit. We are also using this period to renegotiate certain CapEx envelope. This means that we obtain because the oil price has decreased because the economic is down, we are able to take unit prices down. And with all that, we are able to reduce CapEx this year. We have also just to put it on next year because at the end of this year will not be above what we thought 3 months ago, next year will be. So it's just a natural delay that we will keep to a certain extent for about -- for many years. And we certainly don't take a risk, as you know, on maintenance and safety. We never do that. So I think it's reasonable CapEx. It's across the board. It's mostly delay and renegotiation. And I think this corresponds to 15% all in all. I think it's reasonable in the current context. With regard to the fixed costs, again, it's all across the board. It goes from SG&A and -- but it includes also manufacturing, R&D. Everybody is contributing. As I mentioned, we try certainly not to jeopardize any ability to revolve. So again, we try to reach a balance, to be reasonable, to be strong in what we want to achieve but also to be reasonable. Example of -- examples you want, they are everywhere. Starting from renegotiation of any purchases to -- certainly, travel is absolutely obvious. In operations, there is some sense right now to adapt the momentum of certain sites, et cetera, so it's everywhere, to cut the marketing cost because we don't need them when the customer wants order in [indiscernible]. So it's a really important probable. With regard to the order book, I think it was your question on the first point and how we see May and June after April. I would say we consider that May is more or less like April. There are a lot of uncertainties now for you, for everybody. But our feeling is after what we told you before, and we wanted to share this number with you, they should be, let's say, more or less some kind of an evolution, and we should start to see some gradual -- I see a really gradual improvement starting in June if this lifting of lockdown are implemented the way everybody is expecting in the different countries around the world.

[Operator]

Next question from Alex Stewart from Barclays.

[James Alexander Stewart, Chemicals Analyst]

I have 3, but hopefully, very quick questions. On these cost savings, you talk normally about being able to offset 50% to 100% of normal fixed cost inflation through specific measures. Can you just confirm whether your expectation for 2020 is that you will now be able to offset all of the normal fixed cost inflation, given that you've announced another EUR 50 million program? So I'm interested in understanding the net effect of that fixed cost inflation.And secondly, in Adhesives, you talked about a better product mix which is accretive to the price component. Can you talk about whether your customers are asking for like-for-like price decreases with the lower oil price? In other words, the same ton of adhesive this year compared to last year would be very helpful. And then your comment finally on MMA/PMMA. You talked about, I think, normalization continuing. Can you confirm whether spreads -- the spreads that you're seeing are still higher than this time last year, which is what you saw in the fourth quarter last year or whether they've now started to track below the same level last year? That would be very helpful.

[Thierry Le Hénaff, Chairman & CEO]

Okay. So question discussed in [ a nutshell ]. With regard to the cost savings. So to give you the full picture. Every year, we are able to save about between 1/2 and 2/3 of the inflation of fixed costs by fixed costs and variable costs, which is what -- which is [ outside of ] what we have said. It's a variable cost component which is every year, that will be this year, which means that when we build that, what we call the budget for 2020 compared to the date of '19, we had an increase of EUR 50 million of fixed costs. This increase of fixed cost was net of the savings that I mentioned in fixed cost and in the variable cost, what we will be -- what we'll be achieving in 2020. And we are quite confident because, in fact, to complete the answer to Martin, we have already collected the action of everybody of the initiatives, and we are exactly where we thought we will be. So we are very confident, and this is one of the strengths of Arkema, to be able to react quickly. So from this budget, which we plan, that with a better market environment, which was plus EUR 50 million we'll go to minus EUR 50 million, okay? So all in all, compared to the budget 2020 where we said EUR 100 million compared to the '19 reference point, we said EUR 50 million. And which means that also your question, yes, we will deliver the variable cost savings. We'll deliver the fixed cost savings. But on top of that, we'll adjust compared to the budget with the lack of sales, clearly. And on top of that, we will save EUR 50 million compared to the '19 level. So it is quite a significant savings because you have, in fact, all the savings together, the one which you have that was set inflation, you have to save to adapt -- to try to adapt as much as you can to offset, and on top of, you make savings. There was a question, which maybe also Martin, I think was it the long lasting or just one shot? But clearly, we should not read, and it's true for every chemical company or every company. A significant part of what we will say this year in this specific context is not the kind of things you can maintain for the long term. If I take [ cars ], for example, obviously, we are not going to stop traveling while the reward is coming and when the -- our finance will disappear. So what would be interesting that is not a topic for today that we start to think about it is how we think about the longer term, how can we, through other measures, replace what is really short term by something which is more long lasting. It is not a topic for today, but it is, by definition, something we need to have in mind. And what is interesting today is the way we work with people at home. You see that it can certainly make things more simple or more efficient. So there are ideas which are emerging that we try to collect, but for the longer term. Now with regard to the Adhesives. Clearly, yes, there is a little bit of pressure on pricing, but no Adhesives is some of niches. We are working a lot on the product mix, so our product mix is really changing a lot over years. So -- and when you talk about the raw materials, as you know, between when the price is decreasing and when you get the benefit in your account, you have 6 months. So all the elements mean that there is a little bit of pressure on pricing, but which is reasonable because you cannot -- your Specialty Materials and the -- and I think we managed that rather well in the R&D. But the main element, as I mentioned, is really the evolution of our mix on the higher -- the price -- the product and higher-margin products organically, but also in terms of acquisition. On PMMA, I don't know if I understood well your point, but the spread is not improving there. We have some further normalization, which is reasonable. It's clear that with the current context where the automotive is down, you have some unique price pressure. So we get it. We have also some raw material benefits, which attenuate this. But overall, the spread of MMA/PMMA, as we mentioned I think both in the press release but in the call, had continued to normalize but in a reasonable way.

[Operator]

Next question from Emmanuel Matot from ODDO BHF.

[Emmanuel Matot, Analyst]

Three questions for me, please. First, why are you saying in your press release this morning that the negative impact from illegal imports in Fluorogases in Europe will stop in June? Is it just due to the basis of comparison? Or do you expect that business to recover? Second...

[Thierry Le Hénaff, Chairman & CEO]

Maybe I can answer on basis of operations. This means that we had the impact last year starting end of June, which means that our end of May, we should have a bit of comparison, which is comparable. Okay.

[Emmanuel Matot, Analyst]

Okay. There is nothing else related to the authorities that are being able to stop those imports?

[Thierry Le Hénaff, Chairman & CEO]

All the authorities, they are in confinement. So they are true. So it's more difficult in this world to -- so I think that we are still [ creditor riders ]. But to get the law to be applied, which should be the normal world. But I don't think that this is a main topic of the current quarter with all this confinement and sanitary measures. So I will not bet on that. What we bet on is that the base of operation will be easier.

[Emmanuel Matot, Analyst]

Okay. Second, you saw...

[Thierry Le Hénaff, Chairman & CEO]

And even -- sorry, even in a normal world, so I put the COVID aside, you remember, we say that we should expect an improvement at the end this year. We have never said in the course of this year. [indiscernible] cost, yes.

[Emmanuel Matot, Analyst]

Okay. Second, you talked a little bit about raw materials for Adhesives, but at the group level, several raw materials were down a lot since the beginning of the year. If they do remain unchanged until year-end, could there be a significant support for your EBITDA margin this year? And if yes, could you quantify it?

[Thierry Le Hénaff, Chairman & CEO]

I will not quantify this point, that's because the situation is still very volatile. Secondly, the main impact of the year will be volumes. So that's a raw material benefit. But -- so all these elements, costs and raw materials have helped to mitigate but partially mitigate. But the main impact of this year will be about volume. So then you have some positive elements. Fortunately, we'll go with our loan, which will be, in particular, our cost and our raw material. After that, with regard to raw material, we have a very strong drop of the oil price 1 month ago, let's say, a few weeks ago, between -- and then you have the food chain from oil to refinery, petrochemicals, intermediate chemical, basic chemical and terminal chemicals. And then for our downstream business, this is what we buy, intermediate chemicals. So you have a food chain and then you have stock. So basically, in the chemical industry for specialty chemical like us, what you anticipate when assuming the oil price stay more or less stable, which has to be confirmed, you have 6 months between when it comes and when it arrives to us. So you have to -- there will be some benefit, but not in the short, short term. It's more of a -- you have some lag, but it will be an element which will help to mitigate as cost and -- which is normal, of course together with the volume growth.

[Emmanuel Matot, Analyst]

Okay. And my last question, why have you not been able to cut your working capital in line with your annualized sales in Q1? Do you think this ratio should improve in the coming quarters?

[Thierry Le Hénaff, Chairman & CEO]

First of all, a welcome question which we have on the cash flow. In fact, last year, as you remember, was a bit typical for asking now with a positive cash flow in the first quarter. In the -- we are in the Q1 rather comparable to the Q1 2018, which was considered to be a good performance with a limited negative outflow. Now clearly, what has happened on the -- and we have to be modest on that. On the sale is actually -- you had, starting mostly in Feb, the sudden and brutal sales drop, okay. And after that, you need to adapt all your plants everywhere in the world when -- which are affected. And you are on continuous process. You need to adjust your raw material, and it takes a little bit of a time. You cannot, in our businesses, just adapt overnight to a drop in sense. So this is the explanation. But if I remember what has been asked in my -- in each period of sudden sales drop, we have been able to adapt quite -- rather quickly compared to the rest of the industry. So I'm not worried about that. It's an element of attention, and thank you for mentioning it, but I think it's normal when it's just arrived. We have a few months of -- in order to adapt. That is an element of attention, so we will follow it, but we are really working on it. And don't forget, we -- most of our plants are continuous process, can just adapt overnight.

[Operator]

Next question from Mubasher Chaudhry from Citi.

[Mubasher Ahmed Chaudhry, Vice President]

This is Mubasher Chaudhry. Just on the working capital. Are you seeing any signs of your customers having any financial difficulties in meeting their commitments? I guess to put it another way, are your bad-debt provisions in line with what they've been historically? Or are you seeing them move upwards? And then the second question is on thiochemicals. If you can provide some color around the utilizations in that division. Are they still -- are the plants still running in line with utilizations seen at these levels last year? Or are they running at lower utilizations? And then finally, on Bostik. The raw material tailwind was expected to come through in 2020. But now if the current oil prices persist, can you provide some color around how long before these get baked in? And what the potential margin expansion could be, please?

[Thierry Le Hénaff, Chairman & CEO]

Sorry, for me. On the last point, you could repeat?

[Marie-José Donsion]

The positive margins.

[Thierry Le Hénaff, Chairman & CEO]

That's okay. That's okay. Okay, so on the first one, it's -- as stock has a lot of attention for everybody. So far, I think we have a little bit of a stretch that which is quite limited and are there on our receivables. So it's an element of attention because in this world, which is quite challenging, some customers may have some difficulty. We put a lot of follow-up on it, and we are very strict around the payment. And -- but so far, it's -- we manage it. The situation at the end of the first quarter is that it needs a lot of energy and attention. Maybe Marie-José, you want to complete on that?

[Marie-José Donsion]

So as you know, Mubasher, we are -- the contract -- insurance contract actually on receivables are -- which are actually very strong performance year-on-year, which supports the low premium we paid for this contract. So we obviously monitor with [ COFA ] the credit limits that evolve and are updated on a regular basis by the agency. So it's a very close attention that we are paying to this metric. At this point, no increase in bad debt balances across the company. We definitely see a tendency from customers to ask for longer time in term. So this is something clearly that require approvals at a high level in the organization. At this point, clearly the focus is in line, let's say, with the historical monitoring that we have on the bad debt balance sheet.

[Thierry Le Hénaff, Chairman & CEO]

Thank you, Marie-José. On thiochemicals, so far, I think these are the few product lines for which the demand is behaving rather worse. You have the part of nutrition. And you can imagine in the world today, it's one of the few markets which is resilient. And even the oil and gas in January was rather okay, but now we expect to have some weakness. But overall, for the thiochemicals, we see rather good resilience. I would not say we are at the level of last year, but it's good resilience. So with regard to Bostik, the Bostik, you have to think structurally or short term. Short term, they will be impacted particularly in Q2 by the construction, which is half of their business in the U.S. and Europe because of the confinement. It's mechanical. It's nearly physical. The construction from Apple in France has nearly stopped for a couple of months. So they will be impacted by that. But I think your question was more if we look ahead beyond this specific quarter, first of all, Bostik like all the actions we have presented at the Investor Day, structurally, we continue to improve this margin. We don't change our mind. And coming back to the question of Emmanuel on the raw -- [ adhesive ] raw material and your question, yes, in the course of the second semester, we should see some benefit from our raw material, we can see the price stay on where it is today.

[Mubasher Ahmed Chaudhry, Vice President]

Sorry. Just as a quick follow-up, how much of Bostik is purely DIYs?

[Thierry Le Hénaff, Chairman & CEO]

I would say we speak into industrial and construction, including do-it-yourself, it's 50-50, okay? And of this, do-it-yourself is really a minor part -- minority part of the what we call CNC, which is really the construction and the distribution part. It's around 10% of the total sales of Bostik. But in the second quarter, when we say construction, this is a whole construction and do-it-yourself, which will be impacted by the lack of people, our customers being on the works and with the shops which are closed now. So it's really nothing to see with Bostik. It's just a world which is like in the -- in April. It started mid-March, mid-March then April and May, I would say. Okay?

[Operator]

Next question from Laurent Favre from Exane.

[Laurent Guy Favre, Research Analyst]

I've got 2 questions. The first one actually is a double one on operating leverage. So first of all, on timing of savings, so either on the EUR 100 million gross savings, on the EUR 50 million net. I was wondering if you could talk about how much you crystallized in Q1, bearing in mind what you just said on the fact that you cannot change the company overnight? The second question on leverage is given that we have a new divisional structure, we can't really look back at history to track what happened on operating leverage. So I was wondering if you could talk a little bit about the areas where you would say Q1 op leverage was higher than what you would hope where maybe it was bang in line. And in particular, some comments on Advanced Materials would be helpful given that the EBITDA drop was bigger than the sales drop, which is a bit on pricing. That's my first question on op leverage. And the second question, specifically on PMMA. We are hearing a lot of anecdotes on computer screens demand on work-from-home, but also protective measures in retail environment, which is helpful for PMMA demand. I mean against that, obviously, there's a drop in autos. I was wondering if you could tell us how you think about those, I guess, diverging factors for demand for PMMA? Is it just a small story? Or should we actually assume PMMA demand to be resilient?

[Thierry Le Hénaff, Chairman & CEO]

Okay. With regard to the [ core ] decrease, I would say it's limited in Q1, it's quite limited, maybe a few millions, but this is the order of magnitude. So which means that we split the rest over the last 3 quarters for most of it. Okay, the 50 -- I talk about the EUR 50 million because now you have 2 result compared to '19, which is the simpler way, but I wanted to explain the mechanism we have to the minus EUR 50 million. But now also the minus EUR 60 million, I would say, a few million in Q1 then the rest being split. Maybe it's a paradox, but if we re-amplify on the second semester, also you should have a weighted average of the 3 quarters, which is more on the last 2 quarters, but you -- we will have some already in the Q2, okay?With regard to Advanced Materials. So your question, I would say, for me, but I look at Marie-José. There is a good correlation between the sales and EBITDA, so it...

[Marie-José Donsion]

I would say the mix oil and gas is probably [ on the gas -- on the gas sale. ]

[Thierry Le Hénaff, Chairman & CEO]

Yes, we had some -- in the [ toiletry ] also, we have some good margin business, which has been impacted. So maybe in terms of product mix, it completely fell over because we have lots on some high-margin applications, it's temporary, but linked to the confinement. And it's a difficulty with the COVID because it's a little bit different from month-to-month and quarter-to-quarter. The product mix can change very quickly because it depends really on what is happening in every country and which is changing every month. So maybe in this -- we shared that in this quarter, we were maybe more impacted on higher or higher on margin -- higher-margin products that we have, but it's not long lasting. And the margin, we are losing 4 points of margin which is certainly -- imply that we are still close to 19%. But with regard to PMMA, first, it's good to participate. It's an element of progress for workers to participate to the projections through this sheet. But clearly, our sheet plant, we don't have so many, but they are full in France and in the U.S. And fortunately, we didn't see any drawback. Compared to what we see in resins, it's a far smaller business, so it's a good business to have. It's quite developing. There is a lot of expectation from our customers. We have been able to react very quickly. But at the end of the day, in terms of impact on the profitability, it's nice to have but it's far from being sufficient to offset for the automotive group.

[Operator]

Next question from Daniel Chung from Redburn.

[Daniel Chung, Research Analyst]

Just 2 from me. First was on China. So just in terms of the various sources out there suggesting a recovery in China, would be great if you could provide some sort of color on what you see on the demand side by specific end markets. It might be too early to ask, but how much do you think that is structural versus a pent-up in demand on restocking? And my second one is back on strategy, if that's okay. Do you envisage any further noncore assets in the portfolio for pruning or divesting beyond what was mentioned at the strategic update on PMMA and Fluorogases? I remember that there was a target of divesting EUR 700 million of sales before this, and there was still some headroom there. So it would be good to get your views on that side.

[Thierry Le Hénaff, Chairman & CEO]

So on the first one, on the recovery in China, I would say China sequentially is better between Feb and March. After that, what is happening in China is that China is depending a lot on export to Europe and U.S., even north to U.S., and the stock has slowed down. So in fact, what is happening in China, with some plus and minuses, China is not rebounding anymore, really. So we are still -- like in March, we have seen a level of sales, which is more or less minus 10% compared to what it was last year over the same period, with some notable differences, depending on which product line and end market we are talking about, but it's more or less minus 10%, which means that China is not coming back yet to where it was the previous year. And the main reason or one of the reason being the fact that China is depending on export. And this export are impacted by these lockdown measures in U.S. and in Europe.

[Marie-José Donsion]

And Southeast Asia. And Southeast Asia.

[Thierry Le Hénaff, Chairman & CEO]

And Southeast Asia. Yes, for sure. Marie-José is right. We have to mention Southeast Asia. Yes, sometimes people don't have in mind that in Asia, you have really 2 Asia. You have in China, which is not at the same level of last year, but which have recovered for a big part of it. And you have Southeast Asia, which is nearly fully absorbed. So -- and it's one of the elements also of impact in the Q2 on Arkema because we have the strong position there, which are in longer term very good, but then we will suffer from it for a few months. With regard to the -- I will not come back to the CMD today. Obviously, this is the purpose, today was very clear on what we want to dispose. And I don't see what you mean like agile process. I think we have enough on our plate, and the strategy was very clear. We know exactly what we want to dispose of, and we are working on it in order not to lose time when the market condition will come back to normal.

[Operator]

Next question from Geoff Haire from UBS.

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

This is Geoff Haire from UBS. I just have 2 very quick questions to ask. I was wondering, could you split out the uplift in margins you saw in Adhesive Solutions? Can you split out the contribution from raw materials and net lease? And then secondly, I didn't hear the answer properly to the first question on the phasing of CapEx beyond this year. So you've taken EUR 100 million out this year. Are we to add that in over the next couple of years back in to the projections that we had before the -- sorry, around Q4 time of EUR 700 million for next year?

[Thierry Le Hénaff, Chairman & CEO]

Okay. On the last one, Geoff, no, in fact, if you -- we are talking about 15%. 15%, it means 1.5 months. So basically, the answer would be we delayed by 1.5 months in average all our CapEx, okay? This is the way we look at it. So it will not be added to next year. This 1 month -- 1.5 months, which is for this year, a lot. But if you look at it on the long period, let's say, to 2024, it's nothing. This will be with a big cut up. This means that it will not be added up next year or the year after, which means that we are, the word is not arrears, the word I think is delayed by 1.5 months, which is what we apply to our CapEx. So it's more the delay, and you will not get this added up for next year or the following year. It's a delay, which is now restructured. Is that clear on this part?

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

Yes.

[Thierry Le Hénaff, Chairman & CEO]

On raw materials, on the first quarter, on the price because we look at pricing versus raw material, we cannot say we'll get any material benefit. A little bit analysis, but in the continuity of what we got in the first quarter, the same in Advanced Materials, it's more an element of continuity, better what you, I think you referred to, which is this big drop in oil price. This is what I tried to explain before. You have to be a bit more patient because of the time it takes to go from the oil price to the raw material sold by intermediate chemicals and then to our stock in our P&L. Normally, we have a delay which is not so far from 6 months.

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

So just to confirm then, the 130 basis point increase in EBITDA margin in Adhesive Solutions, that was all a combination of cost reduction and mix?

[Thierry Le Hénaff, Chairman & CEO]

There was a little bit of raw material, [ sucrose ], but it was mostly mix and cost reduction. And it's a raw material benefit we got because there was some. It was more the combination of pricing and raw material in the continuity of what we did last year, in fact. Okay? If you look at the margin development towards the second semester, in fact, you have the continuity of the first quarter. Okay?

[Operator]

Next question from Matthew Yates from Bank of America.

[Matthew John Peter Yates]

A couple of follow-ups on some questions that were asked earlier in the call. The first one is around thiochemicals. I just wondered if you could be a little bit more granular about the different applications for that product, a sense of how much is nutrition versus the fuel desulfurization and the polymer agents and how those latter businesses are doing in this sort of environment. And then the second question is on the strategy execution. I think earlier, you said you are working on it. I'm just wondering if you can elaborate what exactly that means. Does that involve legal separation or actively talking to potential parties?

[Thierry Le Hénaff, Chairman & CEO]

So with regard to -- thank you, Matthew, for your question. With regard to thiochemicals, it's about 50-50 between nutrition and what is refinery and petrochemical and other oil- and gas-linked application. Clearly, nutrition is behaving well for reasons you all know. I would say, oil and gas has been -- when you say oil and gas, it's not oil, it's more refinery, petrochemicals, gas is -- gas is around, so it's a very resilient application. And we have plenty of niches also including the nutrition, which are not the typical refinery to a type of application. Overall, it has been quite resilient in the first quarter. There is a little bit of more weakness there, obviously. But compared to what we see in other kind of market is still okay. But the big driver for the time being is really nutrition. And overall, thiochemicals is, if we look at all our product line, is -- has a good level of resilience. With regard to the strategic execution, we have to be a bit patient because last time we talked was at the Capital Market Day, it was 1 month ago. And as I mentioned, 90% of our energy is really focusing on managing the second quarter, managing the COVID. And is really a level of complexity, which, as you can imagine for a company like us, which is global with so many sites, so many product lines, this takes really time. Overall, when we say the first message is that we don't want to break any momentum at all. This means that we explore possibilities. Our teams are working on it, but to have contacts just today. Contact, we have permanently, but even before the Capital Market Day, we worried about that. After that, as our counterpart were there, we are really focused on managing the company in the COVID. And so it's not the month where things will accelerate. But my message is that while there is no discontinuity, contacts are intact. We are also working on exploring potential possibilities. But again, the capital market was just a month ago.

[Matthew John Peter Yates]

And if I can just ask one more, just around the high-performance polymers. You've mentioned repeatedly on this call auto exposure, which is totally understandable. But are there any other significant end markets or products we should think about as being important for bringing a second half recovery in volumes in the polymer business?

[Thierry Le Hénaff, Chairman & CEO]

First of all, to complete your point on the current situation, you have auto, which has a range of transportation. We don't mention it too often, but it's a fact of what is bus and truck is suffering nearly as auto. You have electronics. You have oil and gas. I would say they are the 3 which are suffering the more. With regard to the second part of the year, which is not at all Q2, and we are clear, Q2 will be certainly the low point. But we look more after the gradual, very gradual recovery in the second part of the year. But clearly, things which are linked to [ battery ] will certainly end. I would not be so pessimistic on the electronics because it's very linked to consumer, et cetera, in the world of today. I think things could normalize quicker than the other market. There is all this application with regard to the COVID. For example, I was mentioning for the mask, but also medical. There are plenty of possibility, which are one by one are just incremental. But when you put them together, it will be part of some improvement. Packaging also will continue to be stronger all along the years. So we have application in adhesive, but also in Advanced Material. It will be some. It will be not one market construction or could be better also because they will suffer a lot in the second quarter clearly, but there will be some catch-up at each level. So this element is still very qualitative, sorry for that. And there is a part of speculation because there is still a lot of uncertainty. But if you think about it, it could be there.

[Operator]

Next question from Andreas Heine, MainFirst.

[Andreas Heine, Managing Director]

I have 3. I'd like to come back to the question before. If you look on April, and you said your sales were down by 17% and excluding scope, 20%. Are there big differences between your business line? Or is that all over the place in this magnitude? And secondly, we heard that automotive restarted production. Is there anything in the incoming orders where you see a pickup? Or is that still very, very slow? And maybe one word on ArrMaz, in the current environment, how is that business doing in this changed environment?

[Thierry Le Hénaff, Chairman & CEO]

So ArrMaz, which is linked to nutrition and mining, is quite resilient. So it's good to hear because 2020 is not so long ago, and we are pleased because it's one of the business which are resilient as well. And just to come back to your point, the derivation between -- you see that when you talk by country, by end market, the picture varies, not only it's very different, depending on which country, which end market you are talking about, but the picture is changing from week-to-week, months-to-months. For example, as it is which has been quite resilient in the first quarter will temporarily, at least a couple of months, suffer significantly just because of contraction that is linked to lockdown measures. And when this lockdown measure will ease, then we'll pick up quite quickly. So it's really a very evolving situation. It's very difficult to give you guidance by end market, by country. And sometimes, it's just political measures. You take Southeast Asia. Singapore was quite okay for everybody. Certainly, it was not down. Philippine was assumed to start again, and it's important for as it is in early May. After that, it was mid-May and so an ever-changing situation. So this is why the global picture is certainly more accurate than where to start to dig in because I can tell you things which will be wrong tomorrow. So far, with regard to the global picture, we have not been so wrong. Even if we don't share everything with you because there is uncertainty, and we certainly don't want to commit to things that we will change tomorrow. I think it was important for us to share this information on April saying that our sales in April were around minus 17%, which means minus 20% at constant scope. I think it's an information which has value for you. With regard to May, again, we believe that May of course will be in the same kind of magnitude. But again, it's not a guidance for May because we are still in 2020, and sometimes there are political uncertainties. And our feeling, but again it's a feeling which is not a guidance, it's a feeling, is that with a progressive lifting of the lockdown in different countries, June should start to be a little bit better. This is what we see. With the second semester, we should show some improvement. But again, there are a part of speculation on our feeling, but this is what we wanted to share with you, but we don't to be more precise because again, there are plenty of elements which don't depend at all on Arkema or you or any company, just how the sanitary component will evolve. And these are still uncertainties, including my own country. What I see in France, you listen to politics, there are still a lot of questions. So we try to give you a sort of global framework on which you can work. And we will certainly, hopefully, in the summer, we want to be more specific, okay?And the important point again is that this is something we say clearly at the Capital Market Day. And we say it again. We are beyond the difficulties of the context with regard to the solidity of Arkema, our ability to go through the crisis, our ability to rebound, when it will be time to rebound, we have no doubt.

[Operator]

We have one last question from [ Ryan Gold ] from [ Media Market Business ].

[Unknown Analyst]

Thierry, just one for you. There were reports in February that claim that Arkema attracted the interest of activist investor, Elliot, with Arkema taking preemptive action to review its portfolio. I was just wondering, in light of a little bit of what you said about the strategy, could you give an update as to where the overall M&A plans stand right now? And whether that strategy has been affected by coronavirus at all?

[Thierry Le Hénaff, Chairman & CEO]

No. I think we have made a good answer, but I will answer very simply. We have a strategy, which has been very clear, which has been presented. I'm sure you understand it by call at the Capital Market Day. Everything is there. So our strategy is very clear. It's a month ago. I think we cannot be more clear than that. We know exactly what we want to do, it's the road map for 2024. It's very consistent with what we have been saying after I answer many of the questions that you guys were asking to yourself about Arkema. So I think just look at it, really. Your question on the Capital Market Day, we'll be certainly open to answer more in detail. But I think really, the document is very well written and the script is very clear. So listen to the script. Everything is there. We know exactly what we want to do, and we've got a lot of support about this road map.

[Marie-José Donsion]

Nothing has changed.

[Thierry Le Hénaff, Chairman & CEO]

And nothing has changed at all. It's -- we are very determined on this road map. Okay. So thank you very much for all your questions. I think it's quite difficult, but we appreciated all the different questions. I wish you good luck in the context. And with regard to our sales, we continue to work as hard. Thank you.

[Operator]

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