Arkema SA

PAR:AKE

Earnings Call Transcript 2020-Q2

[Operator]

Ladies and gentlemen, welcome to the Arkema's Q2 2020 Results Conference Call. I will now hand the call over to Mr. Thierry Le Hénaff, Chairman and CEO. Sir, please go ahead.

[Thierry Le Hénaff, Chairman & CEO]

Thank you very much. Good morning, everyone. Welcome to Arkema's Q2 2020 Results Conference Call. So with me today are Marie-José Donsion, our CFO; and the whole Investor Relations team. To support this conference call, we have posted on our website a set of slides, which detail our second quarter performance. Otherwise, we will answer your questions at the end of the call.Overall, given the challenge of the current economic environment, we delivered a solid set of results in Q2. And really, I would like to thank all the group's employees of their strong commitment and the quality of their work during this period. Our results and our cash generation clearly demonstrate a good level of resilience. My feeling is that we have resisted well relative to our industry peers, but I will let you be the judge of that. This confirms the merits of our ongoing strategy to increase the share of specialties in our portfolio and become a pure specialty materials player by 2024.As we all know, the second quarter was marked by the exceptional context of the COVID-19 pandemic. In these circumstances, the health and safety of our employees continues to be our utmost priority, and we have taken all the necessary steps to ensure a safe workplace environment. In April and May, in particular, economic activity was severely impacted by the lockdown measures implemented in many countries important for Arkema, affecting our customers across various sectors of the economy. We confirm these 2 months should be the low point of the year, and we started to see some improvement in June, driven by market segments linked to construction. This especially benefited Bostik. And I know some of you were expecting higher results for Adhesives in Q2, but you have to be aware that construction virtually stopped in April and May in countries with strict lockdown measures, for example, in France. This mechanically weighed obviously on our volumes and therefore, EBITDA, and by the way, in this environment, prices still held up well. So the decline in EBITDA is linked only to lower volumes.Now the great thing about construction-related Adhesives is that when the rebound materializes as it did in June in Europe and in the U.S., we immediately see the results in our earnings. So Bostik's EBITDA in June was nearly flat year-on-year after the 2 very difficult months in April and May. In July, although we don't have the final numbers, we are tracking broadly in line with June with construction on the same trend and industrial markets still mixed.Overall, so for this year, really I'm convinced, so there is absolutely no worries there that Adhesives will prove to be one of the most resilient businesses in our portfolio and I would say, for the chemicals industry in general.Beyond the numbers, this past months have been very busy for us as we prepare for the medium and long term. It is a paradox that this period has yielded many opportunities for innovation in the areas of batteries, hydrogen, [ composites ], nutrition, including for face mask. In all of those areas, Arkema has a lot to offer with its cutting-edge innovation. In addition, the use of technology, which became a day-to-day tool when working from home or organizing virtual investor interactions, has allowed us to actually accelerate certain projects in partnership with some customers. It is our conviction that some niche markets like 3D printing, for example, where growth paused during the COVID crisis will come back strongly, and we will be well positioned to serve and work with our customers when growth returns and in a sense, this difficult period actually reinforce the relationship we have with our customers.Furthermore, and it's very important, we finished the second quarter in a quite good shape. We have kept our financial flexibility intact. And surely, we have reduced our debt significantly despite the difficulty of the environment, and this is important as my sentiment is that in the next year or 2, there will be many opportunities for a company like Arkema in terms of both organic and external growth in Specialty Materials.I will now comment on the second quarter's performance before letting Marie-José go through the financials in more detail. Just the following key points. First was that Q3 EBITDA level reflects a strong impact of lockdown measures on the economy across many important countries for the group. Our balanced geographic footprint, diverse end market exposure and also product innovation helped us weather the downturn. Sales were down 15% -- 15.6% to be exact and volumes around 12% in Q2, reflecting declines in the transportation, construction and industrial market, especially.In particular, the abrupt decline in construction strongly impacted, as I said before, our Adhesives business, specifically in April and May, before bouncing back in June, thanks to the lifting of lockdown measures mechanically. Meanwhile, we continue to see solid demand in a few end markets, such as packaging, nutrition, in various niche applications, such as medical and protective barriers and masks.In this context of lower volume, pricing remains [Technical Difficulty] in our Adhesive Solutions and Advanced Material businesses are demonstrating the quality of our product portfolio and initiatives in '19 to improve the product mix. Together with support from lower raw material and [Technical Difficulty] measure, this helped our Specialty Materials EBITDA margins stay above 15%, which I would say is a good achievement in this context of double-digit volume declines.As noted during Q1 results in May, we have implemented significant cost-cutting measures across the organization to mitigate the impact of this crisis on our results. We reacted quickly, and those efforts are already visible in our Q2 numbers. I could confirm that we are well on track to deliver our goal to achieve EUR 50 million cost savings in 2020 relative to '19. This is also true for the EUR 100 million reduction in capital expenditure related to our original plan of EUR 700 million, while largely preserving the pace of investment dedicated to our polyamide 11 plant in Singapore.Cash generation was clearly the highlight of the quarter for Arkema. We generated a record level of free cash flow for the second quarter, even significantly better than last year, which was already quite high for the second quarter. It was also true for the first half, as -- strongly year-on-year, as the decline in earnings was more offset by tight control of working capital by the teams in the context of low activity levels and raw material decline.I would really like to once again thank our employees at Arkema of their hard work, delivering these results, both in terms of working capital and fixed costs. This has not been easy, as you know, to achieve since our industry is mostly with continuous processes, so we can really be proud of these results.Finally, while we continue to remain more focused in managing the short term, we are also making progress toward our long-term goals and the implementation of 2024 strategy presented recently at the April Investor Day. Having closed the acquisition of LIP in Adhesive in January and by the way LIP is delivering -- it's a Danish company and is really delivering on expectations despite the COVID. So I've included this acquisition of LIP. We closed the divestment of our Functional Polyolefins business to SK in June. So in the middle of the COVID, we closed this divestment. I think it was a good milestone for our group. Then 2 weeks ago, we announced the acquisition, a small one, but important one, of Fixatti, which will strengthen Bostik global offering of hot melt adhesive solution. It means that we don't want to slow down the pace of virtual acquisition for Bostik. Fixatti is a great example of the strategy in Adhesives. This company is quite profitable, offer significant synergy potential, both from a technology and market standpoint. Product ranges are very complementary with the one of Bostik. Last but not least, as you'll now know, we appointed a bank to support us in exploring the potential sale of our PMMA business and underlined as a same day. So we move forward, not only on the short term but also on the long term.On the organic project side, we started at the end of the Q1 the capacity expansion of our thiochemical plant in Kerteh, Malaysia. It was expected and in spite of the pandemic. And we are very close to the authorities in Singapore. Singapore is a little bit complicated in terms of COVID. We started the first step of the construction of the bio-based polyamide 11 project in Singapore. Together, with important partnerships we announced with Nutrien, all these initiatives will certainly contribute to our ambition to become a pure specialty materials player by 2024.So now I propose to turn over the call to our CFO, Marie-José, who will detail the Q2 financial performance.

[Marie-José Donsion]

Thank you, Thierry, and hello to everyone. I will start with the quarter 2 sales bridge. As you can see, revenues are down 15.6% compared to last year at EUR 1.9 billion. The 12% drop in volume, which Thierry already commented, is obviously the main driver for this decline. The price effect was of close to minus 6% and is mainly linked to the lower propylene prices in the Coating Solutions segment and more largely to the tough market conditions in the Intermediates. Prices in Adhesives and Advanced Materials were marginally down, demonstrating their resilience in the context of much lower volumes.In the quarter, we benefited from nearly 3% of net effect, thanks to the successful integration of ArrMaz in Advanced Materials, Lambson in Coating Solutions, Prochimir and LIP in the Adhesives. It also includes, of course, the disposal of the Functional Polyolefins business on the month of June itself. The currency effect is a slightly negative, 0.4%, mainly reflecting some weak Latin American currencies versus the euro in the quarter.Quarter 2 EBITDA came at EUR 286 million, down around 30% versus last year. The challenging market conditions in Intermediates and the lower volumes in Specialty Materials are the 2 concepts that really weighted on our earnings. But a few positive factors helped to mitigate this decline.Firstly, the quick implementation of cost -- fixed cost savings, which we announced in May. You should bear in mind that the cost savings are mainly transitory as we expect them to return at the previous level of -- as the level of activity picks up. Secondly, we benefited of lower raw materials and some product mix improvements in our specialty businesses. Thirdly, the solid results of Performance Additives helped by ArrMaz and the resilience of its end markets like crop nutrition also supported the performance.The EBITDA margin stands at 15% for the group. So while Intermediates saw a significant margin contraction year-on-year, Coating Solutions and Advanced Materials showed good resilience. In Coating Solutions, our upstream, downstream integration served us well. Given the severity of the crisis, our EBITDA margin at 13.5%, I think, held up really well. In Advanced Materials, our EBITDA margin was close to 20%, benefiting from a good product mix, lower raw materials and cost reductions. The EBITDA margin of Adhesives Solutions was, I think, extensively commented by Thierry. It stands at 11% in quarter 2. And as mentioned, it was temporally impacted by the strong decline of construction in the months of April and May in particular. And we expect a recovery from Q3 following a better month of June.Depreciation and amortization reached EUR 142 million, which is slightly up year-on-year as a result of the startup of production units and the integration of acquisitions. Therefore, the recurring EBIT came at EUR 144 million. Nonrecurring items were a positive EUR 92 million in the quarter. They basically include roughly EUR 240 million gain from the sale of the Functional Polyolefins and around EUR 150 million of various items, so asset write downs, PPA amortization, restructuring and acquisition charges.Financial expenses stand at EUR 22 million, which is lower than last year, thanks mainly to 2 factors: first, the redemption of our EUR 480 million bond in April, which carried a coupon of 3.85% and that we refinanced actually last year with a EUR 500 million bond at a coupon of 0.75%. The second effect is lower interest rates in the U.S., which we benefit from actually in the portion of debt that we swapped into U.S. dollars.The tax rate at the end of the first half stands at around 22% of recurring EBIT. It should be a good proxy actually for the year. And consequently, the quarter 2 adjusted net income amounted to EUR 90 million, which corresponds to close to EUR 1.2 per share.Moving on to the cash flow and net debt. So as mentioned by Thierry, our quarter 2 free cash flow amounts to EUR 288 million, establishing a new record for Arkema in the second quarter. The performance -- this performance reflects the good work to tightly manage the working capital.The working capital ratio on an annualized sales basis stands at 16.5% versus 16% last year. The free cash flow figure also includes EUR 55 million tax saving related to the use of tax losses in France.Our total capital expenditure was stable quarter-to-quarter at EUR 123 million. We reiterate that the total recurring and exceptional capital expenditure should amount to around EUR 600 million this year.Net debt reached EUR 2.1 billion at the end of June, including EUR 1 billion of hybrid bonds. This represents a decrease of nearly EUR 350 million related to net debt of close to EUR 2.5 billion at the end of March, so coming mainly from the inflow related to the sale of the Functional Polyolefins business, the strong free cash flow generation over the period and integrating the payment of the dividend in May, which amounted to EUR 168 million.Also, please remember that we temporarily carry a EUR 300 million hybrid bond in duplicate since we took advantage of the favorable market conditions last January to issue EUR 300 million of hybrid bonds at a yearly coupon of 1.5% in advance of our initial EUR 300 million hybrid bond maturing next October at a 4.75% interest rate.So as a conclusion, our balance sheet remains extremely solid, as net debts, including hybrid bonds, represents 1.7x the last 12 months EBITDA. We also remain comfortable with our liquidity level, which stands at EUR 1.8 billion at the end of June. And as you may have seen in the press release this morning, we also renewed our revolving credit facility for EUR 1 billion with an initial term of 3 years and the possibility to expand further 2 years.I thank you for your attention, and I will now hand over to Thierry for the outlook.

[Thierry Le Hénaff, Chairman & CEO]

Thank you, Marie-José for this analysis. So what can we say of the outlook? So first of all, based on the initial lifting of lockdown measures in some important countries for the group, we estimate that demand should improve gradually in the second half of the year in the continuity of June, while remaining obviously below last year's level. The pace and strength of this recovery are still uncertain, depending on the evolution of the health crisis and will continue to vary greatly between end market and geographies.Undoubtedly, we will have to live with the uncertainty around COVID for the foreseeable future. Barring a second wave, however, the improvements we saw in June should be confirmed for the coming months. We hope activity in construction will consolidate at June's level and we are seeing light at the end of the tunnel in decorative paints with higher volumes, thanks to strong customer activity and innovation.With regard to industrial market, activity from our standpoint should improve gradually, but will be more uneven, especially as we are further down the supply chain or the value chain. So we hope to see an improvement a bit later in the year.As a result, at this stage, we estimate that in the third quarter sales, at constant scope and fixed rate, will decline by around 10%, which will be a clear improvement compared to the roughly 20% decline in Q2. So in this context, we will focus on what we can control. We'll continue to focus on this element, which are at our end, in particular, of course, capital expenditure, working capital in order to maintain a strong level of liquidity.As we said earlier, we are quite confident to deliver this EUR 50 million of fixed cost savings in 2020 relative to '19. By the way, in Q2 -- just on Q2, we were more than half of this savings already. And also, we are on track to reduce our CapEx by EUR 100 million relative to our initial plans.We will, however, preserve completely our innovation efforts in Specialty Materials to meet our customers’ numerous technological and sustainable development challenges. Thanks to those initiatives, following a robust performance in Q2 given the external context, which led to an even stronger balance sheet, we remain very confident that we will emerge stronger from this crisis, drawing on our balanced geographic exposure, diversified end market and preserved financial flexibility.So I thank you very much for your attention. And together with Marie-José, we are now ready to answer any of your questions.

[Operator]

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

[Martin Roediger, Equity Research Analyst]

Just a few questions from my side. Marie-José, you said you had some windfall profits, i.e., raw material prices eased more than selling prices. Can you quantify them? The second question is on potential reimbursements from governments for short time work or furloughs. Can you also quantify them? And finally, can you provide us with an update on your intended disposal of your MMA/PMMA business?

[Thierry Le Hénaff, Chairman & CEO]

Sorry, Martin, I did not understand your first question. So I'm looking at Marie-José and to better...

[Marie-José Donsion]

Okay, is it the impact of raw materials you're asking for?

[Martin Roediger, Equity Research Analyst]

Yes. Actually, the delta between lower raw material costs and lower selling prices. You had passed on lower raw material costs, but obviously, the raw material costs eased even more than your 6% price decline.

[Thierry Le Hénaff, Chairman & CEO]

Okay. So on the first question, start of the question, so we don't quantify each of the element. I would say that on the Intermediates part, more or less, we could say that pricing and the raw material are more or less in line. Even I would say that some pricing in fluorogases, for example, but also in MMA, have declined more than raw material because by nature of these businesses of Intermediates, okay? They are more cyclical. And this is why we put them in this separately and they are more subject to supply-demand. And demand is significantly lower in Q2. So pricing was affected beyond raw material decline.With regard to Specialty Materials, I would say that we generally sell. We do not quantify precisely, but we generally sell between pricing and raw material because as you could see on Specialty Materials, our pricing has been quite stable which confirms the specialty nature of this businesses. They are not in supply-demand mode naturally in terms of the application value. And we benefited from a raw material decline, knowing that between the oil price and what we buy, there is a long chain. So you have not a direct correlation and you need 6 months about to get the impact down on the P&L. But we got a little bit of positive because of raw material, especially in Advanced Materials and in Additives.With regard to the potential reimbursement, so I will talk roughly for France where the system is still in place. As we said, we have not -- we have decided not to use any aid from the state for what they call partial unemployment. This means that we have no -- we don't expect anything. This is really Arkema own cost structure. And it was clearly said even externally because we consider that we have a solid balance sheet, and there are -- there was -- we prefer to leave that to the other companies. Then with regard to third question...

[Marie-José Donsion]

PMMA.

[Thierry Le Hénaff, Chairman & CEO]

PMMA, so as we mentioned, we don't want to comment more, but we said it already clearly. We didn't wait so long after the Capital Market Day, and despite the COVID, to initiate exploring the potential sale of PMMA, and we have appointed the bank, as we said. So this is known by everybody. But as I mentioned, I think at a recent conference, we are not going to comment every week or every month where we are in the process since the process of exploring this potential sale was launched. And we'll tell you when things are becoming far more concrete. But be a bit patient because we are in the midst still of -- in the COVID period and we -- even if we try to do it in a rather speedy way, it takes more time than in a normal period.

[Operator]

Next question is from Mr. Matthew Yates from Bank of America.

[Matthew John Peter Yates]

Couple of questions, please. The first one is on Adhesives. Forgive me, I'm not really sure how to eloquently ask this, but you had a very good start to the year with profit growth in Q1. And then obviously, things fell off a bit of a cliff in April and May, and you're talking about a nice improvement through June and July, which I guess is consistent with what we've heard from the coating players as well. So are you able to be a little bit more explicit in terms of absolute profit expectation for Q3 or at least directionally year-on-year for the Adhesive business?And then the second question, maybe comes back to this idea around raw materials. You're talking about group sales being down 10% in Q3. I wondered if you could just disaggregate that into volume versus price.

[Thierry Le Hénaff, Chairman & CEO]

Okay, with regard to Adhesives. So thank you for underlining the fact that based on the momentum that we have implemented in Adhesives since several years, we started the year very strong. And then we had this phase coming, mechanically, there was nothing to do. I would say even more strongly, maybe it's a paradox on the construction business. This means that in countries where we are, I will give you a few names, you can -- for example, France, South Europe, Philippines, India, there was nearly a stop of 2 months which were April and May, as I said. This means we mostly our construction and -- when we say construction, it's construction and do-it-yourself and consumer, 3/4 construction and 1/4 do-it-yourself, the whole being 50% of the orders came down. We are completely the -- or the fixed rate. And we had a complete stop because we are selling through distributors and people were not -- were at home. So which means that in April and May, our construction on certain countries, it was minus 90% of sales.So despite of that, we generated a decent profit mostly but significantly below last year, purely mechanical. But what has happened, and this is the beauty of the Adhesives. The big difference with many chemical business, and you're all experts in chemicals, is that as soon as the lockdown was lifted, mechanically, we came back and it's rare in the chemical industry. We are not talking about wait 1 year, 2 years, 3 years, I mean, just a month after, in June, we are already, not in sales, but in profitability, close to the '19 level in June. So what we plan for -- even if I don't want to guide that because -- but what we have in mind for Q3 and certainly Q4, so for the second part of the year, we think for Adhesive to be quite close to the '19 level. At which level or exactly, it's too volatile, the world is too volatile to be more precise. But it shows you that despite quite a challenging macro, which is still challenging, in the Adhesive, with the momentum, with the nature of this businesses, while mainly results to improve your position, including some on raw material, very quickly, you go back to levels which are close to '19. So absolutely, as I mentioned, no worry on Adhesive, even if I recognize that April and May were may be lower than maybe some would have expected. But it's purely linked to people not being in the street, shops being shut down.So -- but if I take one, to finish on the Adhesives story, we bought LIP, this small Danish flooring and construction chemicals company. They are also in Denmark. They serve mostly the Nordic countries. In Nordic, the lockdown was very limited and LIP profitability was above last year. So you can see the beauty of this Adhesives business in this kind of environment.With regards to raw material, I don't want to guide precisely on what will be the minus 10% between volume price, but clearly, pricing will be rather close to what we get in, I would say, in Q2. So by difference, you can assume what would be the organic volumes, I would say, Matthew. Okay.

[Operator]

Next question is from Mr. Emmanuel Matot from ODDO.

[Emmanuel Matot, Analyst]

3 questions for me. First, do you confirm that for this year, we should not have the same usual negative seasonality in your results between H1 and H2? Just looking to Q3, with a 10% organic sales decline, you should have a level of sales in absolute value similar or slightly up compared to the EUR 1.9 billion in Q2. So it tends to be encouraging for the EBITDA in Q3 compared to Q2. So that's the first part of my questions.Second, regarding illegal imports on fluorogases in Europe, do you expect any more negative impact in H2? Or everything now is over? I mean overall during the last 12 months, how much EBITDA you lost from that situation on Fluorogases? And do you think it can reverse one day?And my last question is about your balance sheet. Do you think you may have some goodwill at risk in your balance sheet due to the COVID-19? Could it lead to some noncash impairments following the deterioration in economic performance?

[Thierry Le Hénaff, Chairman & CEO]

Okay. I will let the last question to Marie-José but you will see that it's quite -- very, very limited. With regard to the first part, I will not answer in detail. First of all, we remain more cautious -- sorry, about the environment, as we said that clearly, the traditional, we are 55-45 in terms of split of EBITDA, which is your question between H1 and H2. And our feeling is that this split between the 2 will be more balanced than it was in the past because of the nature of the COVID of April and May. So your point is right. I will not quantify because we have set to gave, let's say, an estimate of what could be the sales evolution, but not the EBITDA for the full year. So we prefer to let you make the math. But to your question, yes, we believe it could be more balanced. I don't say balanced, but more balanced between H1 and H2.With regard to the flow of the Fluorogases, and take also into account the scope effect, don't forget that will be used. So it will mitigate also that we lose Functional Polyolefins on the second part of the year. And ArrMaz was already there last year. So when you compare the performance of the 2 semesters, there are 2 elements that you have not in the H1, that Functional Polyolefins disposal. And ArrMaz was already there last year. But once we said that in terms of top line, as you could see, like-for-like, this is why we decided to give you a minus 10% at constant scope and fixed rate. We'll compare minus 10% compared to the minus 20% of the Q2, which confirm that on the momentum of June, we see a net improvement, quite significant improvement in the sale development between the 2 quarters. So hopefully, I answered your question.With regard to Fluorogases, so yes, illegal import, I would say, it was a story last year up until end of the May, so -- which means that it started -- which means that in comparison, for us, the situation is not improving as such. But in comparison with the base of last year, you had the negative impact up until end of May last year. So what does it mean for Fluorogases? I would say then you are more in a normalized situation of more cyclical business in a macro environment which is tough, which means that ForEx and -- plus the COVID, which means that you have 2 effects, 1 which is supply-demand, and hopefully, in Asia, the results are quite challenging in -- for our Fluorogases and also in Europe, while it's more resilient in the U.S. And the second thing is that people -- because of the lockdown, which is lifting, but not fully lifted by far, they are not fully open in the U.S., they are not in the office. So they use far less air conditioning than they were using last year. So you still -- and you have [ closed ] the automotive. So you have seen macro environment which are going in the wrong direction, including in the second semester, but also specifically to your question on illegal import, this negative year-on-year base in Europe is certainly disappearing progressively.Now will it reverse, which is your -- the last part of your question, it's too early to say. Clearly, this year, we will have no reverse. Maybe it will start to have reversed next year depending on how effective are the pressure which is put by the European Commission on the state to get rid of this completely crazy situation. So our best case is that you have no reverse, I would say, to be cautious. Hopefully, next year, you could have some start of reversal. But I prefer to take this issue step by step. But anyways, we'll be...

[Emmanuel Matot, Analyst]

How much you lost overall from that situation on your EBITDA for Fluorogases?

[Thierry Le Hénaff, Chairman & CEO]

I don't want to -- we don't comment specifically the result but you have overall an estimate of Fluorogases with all the elements we have given you around the past few years, frankly speaking, I'm sure you can have something which is very precise on that. So I rely on you to make your own math but you will not be far. But it was a lot smaller. The good thing is that we got it [ if we shell out the wallet ]. So now we have an EBITDA which is far more sustainable, at least, if I could put aside the macro challenges due to the COVID.Now I will hand it over to Marie-José.

[Marie-José Donsion]

So regarding balance sheet and impairment risk, so you saw, in fact, now we have -- frankly, had a very limited impairments in the current environment compared to, let's say, the overall impact we see around us. So you have in the financial accounts, actually, the sensitivity to EBITDA variance as well as the sensitivity to weighted average cost of capital. What I can say is that compared to last year, the main change in assumption has been the change in WACC in Asia, which we had at 8.5%, and we increased that 9% actually to perform the inbound debt for the semester. And the sensitivity that we flagged in the account is potentially over the Acrylics Asia Cash Generating Units where we will obviously monitor the evolution of the WACC. And then there is some residual goodwill there. I would say risk is limited as I see it right now. So you should not have anything major coming through over the second half.

[Thierry Le Hénaff, Chairman & CEO]

I think the good -- to confirm what Marie-José is saying, we had a question in the chat about our acquisition strategy. We are very proud of what we have achieved in terms of acquisition because they are still to be quite compared to the guidance we worked out a few years ago. Even in the COVID situation, we take an amount of reserve in line with last year. So I mean, how many businesses, you can -- you can discuss strategy but even this year, there will be a significant [indiscernible] when we work from Total, it is positive [indiscernible] is suffering from automotive. That is temporary and is very small. So it's about us being quite resilient. So frankly speaking, I think we have been very cautious in our acquisition strategy. We have made sure that we have strong synergies, we have high-quality businesses, we have diversified in terms of end market and you see that in this [ value generating ]. I think these 2 impairment we have are not even linked to acquisition. Some are very -- some are small pieces and very specific because we did this analysis very accurately. They're very, very small sort of things and nothing at all to our acquisition strategy.

[Marie-José Donsion]

Yes, that's correct. Actually, when you look at the accounts of last year, you see the sensitivity test on EBITDA variance was made with minus 10% volatility on EBITDA. We actually expanded the sensitivity test in the accounts of the semester with a minus 25% sensitivity to a variation of EBITDA and this could lead to new additional impairments. So that's why I said I'm confident with the numbers we end up with end of June.

[Thierry Le Hénaff, Chairman & CEO]

So the company is, as I said at the beginning, from more of a general standpoint is really exiting the second quarter already in good shape with very strong balance sheet, no concern about quality of the -- let's say, valuation of the assets. So it's quite a good position to be in even if the macro environment remain challenging. I think there will be opportunities for a company like us, as I mentioned, just because of this strong balance sheet and because we can rely on the acquisition that we have been making in the recent years to take us at a higher level in the coming year. So we feel comfortable on this platform. And it's a good message to tell you.

[Operator]

Next question is from Mr. Mubasher Chaudhry from Citi.

[Mubasher Ahmed Chaudhry, Vice President]

Just on the Fluorogases, I wanted to get your thoughts on this investment with Nutrien where 50% of its product is for emissive HFC. So I just wanted to get your thoughts around investing in effectively banned or going to be banned products and how that fits with your ESG metrics?And then secondly, on shareholder returns and M&A opportunities. How are you thinking about capital allocation going forward? And if a large strategic opportunity was to come by like the size of ArrMaz, is that something that you would execute on? Or having announced potential buybacks, would those take precedence? I just wanted to get your thoughts on capital allocation priorities.

[Thierry Le Hénaff, Chairman & CEO]

Okay. With regard to Nutrien, I think it's a very good investment for different reasons. The first one, you mentioned ESG, thank you for that. You know that the traditional way of getting HF, which is the main raw material of our -- when you say fluoro, it's fluorogases but also fluoropolymers, all our specialty fluoro chemicals. The traditional method is to start from mineral, from the mining and in terms of energy, it's quite consuming. The beauty of this investment, which is an investment combined with a very good company, which is Nutrien is that we will use the right product and to transform it directly into HF. So it's really the perfect process to get HF.The second thing is that we have never been comfortable on the HF long-term cost competitiveness starting from mining, especially in Europe and U.S. There have been a lot of tension and despite this current COVID crisis, I believe that the tension can stay for a while because of the environmental constraints which are put on the mining. And with this, we would be quite competitive. So it will serve twofold. The first one is the polymer, is fluoropolymer which, as you know, it's a fantastic product line of Arkema, standing in a high-performance polymer product line and will not only secure, but make sure that we are competitive long term. So this one we sell site application of [indiscernible] electronics for 5G on which we can use this HF. So we are very comfortable on this part. And then on top of that, you know that we are exploring different options for emissive fluorogases. It's a positive to the extent that it will make them even more competitive. So we gain on many different elements, and I think it's a very good investment.On capital allocation, I think -- I will not rephrase what we said very clearly at the Capital Market Day. Capital allocation, as you know, it's a long term -- it's a very important long-term element of our strategy. So it was very clear at the Capital Market Day between what we want to spend in M&A, what we want to spend in return to shareholder with this dividend policy, which is a growing one. And then we, and it's different with the past, want more space for share buyback in an opportunistic way. I would say that currently, in the middle of the COVID crisis, we have a strong balance sheet, but we have still a level of debt which is 1.7 times EBITDA. So I don't think the topic, and you can see it with all the groups, our listed groups, it's not so much share buyback. The topic is really to continue to be very solid, very resilient, so to make sure that when the COVID is behind us, we are all in perfect shape to benefit from opportunities of the market. So this is what we are doing. But clearly, our capital allocation strategy is very clear defined at the Capital Market Day. And as for M&A, this is what we intend to do.

[Operator]

Next question is from Mr. Daniel Chung from Redburn.

[Daniel Chung, Research Analyst]

Just 2 questions from my end. I might have missed at the beginning, but in terms of your communication on the gradual improvement in 2H, so with the visibility you have had from your order book, could you put this into context for July's activity? It'd be really useful to infer what the run rate of July volumes are versus June?My second question is on the various moving parts in 2H. So has coronavirus or the demand outlook changed the sort of start-up time line for expansion in PA12 and PVDF?

[Thierry Le Hénaff, Chairman & CEO]

Sorry, the line is very bad. So we can give you [Technical Difficulty] just in 1 minute what we have understood of the question and...

[Marie-José Donsion]

[Technical Difficulty] and the last is about the timing for the current quarter, for the time line of [Technical Difficulty]

[Thierry Le Hénaff, Chairman & CEO]

Okay. Thank you. Marie-José has a very good ear. I'm impressed. So this why we have our team. So the management is making the question and making the answer. So as I mentioned, for us, so July is not -- is nearly finished but we haven't got the final number of the -- yes, but I would say July is in continuity of -- with less days because June was long [Technical Difficulty]. We should not forget. But I would say, like for like, July is in continuity of June. So what is better is still better, what is still challenging in terms of end market is still challenging, it is same for other countries, but we are in continuity of our June. And basically our guidance, let's say, our estimate of this minus 10% sales for the Q3 reflect this continuity with June. And this is why we have a significant improvement of the minus 20% organic sales in -- at constant scope and fixed rate between Q3 and Q2. This is because we -- in fact, we plan a continuity with June. So we confirm that.With regard to the schedule, if it is your question on the PVDF development and polyamide 11, we maintain the timing. So we have in fact, if you move forward, you are -- at the end of the year, let's say, it can be only next year but in the current context, it's just a matter 1 month or 2 months, we have the PVDF. We have -- batteries have been a little stable on the first semester because of the crisis, but they will, I'm sure, on the second part of the year, start again their growth. And this PVDF investment was mostly for battery. So it's still valid. So will it be end of the year, early next year, we feel that is very close to our original schedule. We have some investment on the PA12 downstream polymer compounding in China also for the Q3, which should be on time.With regard to the polyamide 11, as I mentioned, we have tried to protect really the Singapore development. So in fact, it is not because of us cutting CapEx that it will delay, it will be because of the COVID in Singapore. But I must say that the Singapore government has been very, very helpful for us. And we are -- so far, we're now planning quite close to what we announced already around the mid-2023. So we are on target, and it's a matter of a couple of months for each of the investment that we are on target. Does it answer your questions?

[Daniel Chung, Research Analyst]

Yes, it does.

[Operator]

Next question is from Mr. Geoff Haire from UBS. So we have our next question from Mr. Andreas Heine from MainFirst.

[Andreas Heine, Managing Director]

Yes, please. Only very small questions left. Could you highlight a little bit more the regional trend in the progress from June to July? So is that also in continuity? Or do you see different trends by region? That's the first question. Then coming to your sales decline of 10% in the third quarter, so quite some operational leverage, which is usually the case if you have a very strong sales decline as it was in the second quarter. Is it fair to assume that this operational leverage is much less than in the third quarter, where the volume decline is also much less? And this is the second question.And the third one, a small one. And on Fluorogases, coming back to these illegal imports from China. My understanding is that, that happens only at the very end of the life cycle of the product. And then you have a change to the next-generation and a pickup of sales of more innovative products. When is that going to happen so that really the next-generation gives then, let's say, a push up in earnings again?

[Thierry Le Hénaff, Chairman & CEO]

Okay. With regard to the regional trend, yes, it's also a continuity in regional trends. There are still many questions with regard to region which are linked to the lockdown and the development of the COVID. If you take, for example, the U.S., we assume a continuity in Q3 versus June because when I discussed with my team, clearly, you don't see any significant improvement in the sanitary situation in the U.S., even you see some deterioration. Once said that, it is maybe a paradox. U.S. is lot more heated from an economical standpoint than Europe, which means that the sanitary situation in Europe seems to be more under control. But at the end, in terms of the economic impact, it's quite comparable.With regard to Southeast Asia, which was one of our elements of concerns, also there the lockdown in textile are to be lifted. So we don't see any significant difference between June and Q3. So I would say, even for -- and China is back to normal level. The only weakness in China is coming from their export. So it's more -- I would say, for me, it's more an end market dynamic, which is changing from April, May to June and then to Q3 than a regional dynamic, which finally is more of a -- which is more stable.With regard to the -- your question on the sales decline in the third quarter, first of all, when we say minus 10%, but it's obvious for everybody that constant scope and fixed rate but I will not reiterate that. With regard to the fixed cost, clearly, in April and May, we have been quite aggressive on the fixed cost data because of the low sale, a, our team have done a fantastic job, which means that in Q3, since we assume inorganic sales has declined compared to what we got in Q2, in terms of fixed costs, we did not gain as much in Q3 that we gained in Q2 where we cannot have a certain level of recovery of sales and continuing to cut cost as much. If you take, for example, 1 example, which is Bostik. Bostik in April and May, they have really cut costs like hell in construction, marketing, et cetera. But in June, they started back to put costs again. So overall the quarter, they were significantly below last year and I think in Q3, they will be a little bit below but not far from last year, but the results will be close to last year. So you see it's -- we try to be clever in the way we manage cost. So overall of the year, we consumed minus EUR 50 million compared to -- net -- compared to last year. But as I mentioned, the majority of it was already on one -- more than half was already on one single quarter, which was Q2. Q3 will be below last year, but not in the same direction as we had in Q2. Is that clear?And with regard to Fluorogases, I will not spend too much time on the call on Fluorogases while our strategy is really to develop, as you know, Specialty Materials, so we have to be reasonable in our speaker's time. But you are true to say that the more we grow, but it will take more time than people who are expecting. Next generation will be a key part. And certainly one day, we'll update you on where we are, but we have got to play in the new generation. But illegal is still a factor in Europe. Illegal import is still a factor because of the prices of the quotas, and we have been hit. And fortunately, to come back to the question of Emmanuel is that, next year, is that, second part of next year, at a certain point, we should have some reverse of -- not reverse because of what you say is that we move more to new generation -- but we should have some reverse of what we lost, which should help a little bit. But for the time being, I would say, on the second semester, the Fluorogases topic is not achievable, it's not illegal, it's really simply the macro as it is. So we are back in more a world of Fluorogases with a macro which is as for any intermediate, working against that performance. But I would like to -- because we come to the end of the conference really to reanalyze the fact that you can see -- the fact to split Specialty Materials and Intermediates was quite important because you can see the behavior of each of the platform compared to last year, quite clearly, we're more resilient in Specialty Material, which is virtually better, had to be proven again. And company is quite in good form from a balance sheet standpoint. And again, there will be opportunities not necessarily in the next month, but in the coming 18 months just because of the opportunity, which will be given by this COVID period if we are able to emerge stronger and I think it will be the case for Arkema, even if the COVID for the time being is not yet behind us, there are still some cautiousness linked to this COVID.As a last question, maybe the last of the last, and then we will cut the conference.

[Operator]

We have one last question from Laurent Favre from Exane.

[Laurent Guy Favre, Research Analyst]

Thierry, my question is regarding the, I guess, the dividend cut for 2019. And I think when you announced it, you talked about I guess, giving back, I guess, that cut in terms of consideration either through dividends or buybacks, as you've demonstrated flexibility or -- sorry, resilience in Q2, and you sound a bit more optimistic on Q3. I'm just wondering if you have early thoughts on the timing and mechanism of how this payment could be.

[Thierry Le Hénaff, Chairman & CEO]

It's a good question. And we have not forgotten what we said, which means that this, let's say, the difference on dividends will be returned back to shareholders when I would say the macroeconomic would come back to normal. I don't think we can consider today that it has come back to normal. Even if we did a fantastic job in terms of cash flow, we had no space for balance sheet. So our job will be, we'll have to be a little bit more patient. But in fact, we do exactly what we said when things come back to normal, which is not yet the case. We all know that. We're committed to return back this decrease of dividend compared to the initial dividend we proposed, which was great. So we've still that in mind but give us a little bit of a time until the situation is becoming normalized again but it's part of our road map without any ambiguity.Okay. So thank you to all for all your questions, and wish you a good summer. And if any sort of question, don't hesitate to contact. Béatrice and her team are ready to address those and maybe ready to answer for you. Thank you very much.

[Operator]

Ladies and gentlemen, this concludes the conference call. Thank you all for your participation. You may now disconnect.