Arkema SA

PAR:AKE

Earnings Call Transcript 2020-Q3

[Operator]

Ladies and gentlemen, welcome to the Arkema Results Conference Call. I will now hand over to Marie-José Donsion, CFO. Madam, please go ahead.

[Marie-José Donsion]

Thank you very much. Good morning, everyone, and welcome to Arkema's Quarter 3 2020 Results Conference Call. I'm here together with the Investor Relations team. And as usual, in addition to the press release we have posted on our website the slides which detail the third quarter performance. So before going through the financials in a little more detail, let me highlight the key points of the third quarter. So first of all, I said the third quarter results are solid in view of the context and showed a significant improvement relative to the second quarter. Overall, organic sales in Q3 declined by 8.9%, slightly better than the guidance of 10% organic sales decline that we provided in late July. In spite of a negative ForEx and scope effect, the quarter 3 EBITDA, a decline of 20% is also moderated versus the second quarter. Another important highlight is -- of the quarter is the cash flow generation, as we generated free cash flow of EUR 285 million, which is a record for third quarter, thanks to the strict working capital management and contained capital expenditure. In the M&A front, we closed the acquisitions of Fixatti and Ideal Work on 1st of October, which means that in this year of COVID, we have closed 3 bolt-ons in the Adhesives segment, including LIP at the beginning of the year. These past months have also been particularly fertile with regards to CSR initiatives. So in June, we announced that we have joined the World Business Council for Sustainable Development, working in partnership with this network to accelerate the transition to a more sustainable world. In October, we successfully issued our first-ever green bond for an amount of EUR 300 million, giving investors the opportunity to contribute to the development of sustainable solutions in Specialty Materials. This project is the first of its kind insofar as it is fully dedicated to the financing of one project, namely our new world-scale plant in Singapore to manufacture the 100% bio-based polyamide leather. As you may have seen as well, last month, the Wall Street Journal published its list of the 100 most sustainable managed companies in the world, and I'm very proud of the fact that we were ranked 11th, amongst 165 global companies shortlisted. In fact, Arkema ranked #1 in the chemicals sector, which rewards all the efforts we have put in to improve our sustainability profile. We are also proud of Arkema's ranking as the 14th best employer in France according to the Forbes Magazine's World's Best Employers list for 2020, which I believe reflects our ongoing actions to promote work-life balance, diversity in the workplace and enriching career path. And last but not least, a word on innovation. Among the many achievements this year, I will highlight 2 key ones in the past month. So just a few days ago, Arkema was awarded the 2020 Pierre Potier Prize for its Elium liquid thermoplastic resin. Pierre Potier is a major prize for the chemicals industry in France, which rewards innovative products linked to sustainability and eco responsibility. And this is the third time actually that Arkema has won this prize after the success of Kynar back in 2016 and Rilsan in 2013. I also wanted to elaborate on our Zero wastE Blade ReseArch project, named ZEBRA, announced in September. Arkema will actually take part in a consortium to create the first 100% recyclable wind turbine. So recycling end-of-life wind turbines is a key environmental challenge for this industry, and together with Bostik's structural adhesives, Elium thermoplastic resin is key for this project. And it is completely recyclable and has exceptional physical mechanical property. So this project is fully in line with our circular economy approach and confirms Arkema's leading contribution in sustainable materials. So let's now take a closer look at some of our financial figures for the third quarter 2020. So as you could see, sales were essentially down 13.9% compared to last year at EUR 1.9 billion, which corresponds to a minus 9% organic variance versus the quarter 3, 2019. Volumes declined by 4.4%. So it's basically evenly split between volume and price effects. The volume reflects mainly the lower activity levels in advanced materials, I would say, especially in the oil and gas, consumer goods and general industry markets, which overshadowed, in fact, good growth in batteries and solid sales in the medical and crop nutrition sectors within Performance Additives. In Intermediates, we saw lower volumes in Fluorogases on the back of challenging end markets. The trend in PMMA have improved this quarter, supported by positive trends in auto. Bostik volumes were broadly stable, which means basically back in line with 2019 or, let's say, pre-pandemic situation, as the strength in construction offset, let's say, softer volumes that we've seen in hygiene in our industrial markets. And finally, decorative paints were strong and drove higher volumes within Coating Solutions. Regarding the price effect, which contributes for the other half of the organic variance, the decline is mainly linked to 2 factors. I would say, on Intermediates, price declines are linked to lower volumes amidst challenging market conditions. In Coating Solutions, the price effect is mainly due to the lower propylene price. And we can see basically both in Adhesives and Advanced Materials that we benefited from a resilient price situation overall. Moving on to the EBITDA. So unlike the second quarter, EBITDA of the third quarter was affected by 2 elements, adverse elements. The first one is the perimeter effect as a result of the divestment of the functional polyolefins business back in June, and as well an adverse currency effect of more than 3%, reflecting a weaker U.S. dollar versus the euro. So we are currently basically at 1.17 for the third quarter 2020 versus 1.11 third quarter '19, but also, let's say, weaker emerging currencies overall. So our performance as however supported -- was however supported by our cost-savings program and lower raw material prices. So EBITDA, therefore, stood at EUR 307 million, which translates into an EBITDA margin of 16.1%, which clearly remains at a high level. Looking at the results by segment. Adhesive Solutions EBITDA rose to EUR 73 million, thanks to the rebound of volumes. And the segment's EBITDA actually, in terms of margin, has even increased 50 bps to 14.1%. Advanced Materials EBITDA is down 20% relative to last year at EUR 127 million. The decline is clearly driven by lower volumes and negative currency impact, which partly offset our efforts to reduce fixed costs. This being said, at 21% EBITDA margin, the segment margin is clearly resisting well at a high level. Coating Solutions EBITDA is at 17% lower year-on-year at EUR 68 million due to challenging market conditions impacting upstream. So the nonintegrated acrylic acid, which represents around 30% of the segment's sales. Results of the segment's other activities are broadly flat year-on-year, reflecting the good trend that we had in decorative paints. I would say, in line with what we observed in construction for Bostik. And at 14.5%, the EBITDA margin remained at a good level, thanks to the benefits of the integration, upstream and downstream, and lower fixed costs. In the Intermediate segment, EBITDA of EUR 55 million is around, let's say, 40% below last year's level, driven by lower prices and volumes. But also impacted, of course, by the scope effect linked to the divestment of the functional polyolefins. Sequentially, though, the EBITDA of PMMA has improved, while the situation in Fluorogases has remained challenging. For the rest of the P&L, I'd say it's a little surprise that depreciation and amortization has reached EUR 136 million, unchanged versus last year. Therefore, the recurring operating income stands at 9%. Financial result is better than last year. So the improvement is mainly attributable to the decrease of U.S. interest rates impacting the net debt swaps in U.S. dollar in our portfolio. Regarding tax, the year-to-date rate, excluding exceptional items, is around 22% of recurring operating income. So in line, let's say, with the guidance. And finally, the adjusted net income amounts to EUR 109 million, which corresponds to EUR 1.4 per share. So moving now to cash flow and net debt. I think free cash flow is clearly, once again, at a good level, EUR 285 million, reflecting the strict working capital management as well as lower CapEx. At just below 14%, the working capital ratio on annualized sales is well below last year's level of 16.4%. I'd say we are almost, let's say, at the year-end level as we -- where we stand right now. So in the context of lower raw material prices and also lower sales. So I expect this level, let's say, to be maintained in Q4. Total capital expenditure amounts to EUR 139 million versus EUR 148 million last year. And we confirm our guidance of around EUR 600 million spend for the full year. Net debt stands at EUR 1.9 billion at the end of September, including hybrid bonds. And therefore, the balance sheet remains, of course, solid as net debt represents 1.6x at 12 months' EBITDA. To conclude my remarks, a quick word on the outlook. As you are all aware, the fourth quarter is marked by a second wave of the pandemic in many countries, notably in Europe, which creates uncertainty, definitely, with new sanitary restrictions being deployed by major countries. We cannot yet fully assess the impact of those lockdowns on demand. But let's say the restrictions so far do not seem clearly as drastic as they were in April and May. So overall, we estimate that activity levels should be in the continuity of the third quarter specifically, and this is our base case for now. Sales in the fourth quarter could be around 7% below last year's level at constant scope and ForEx. We think construction should continue to be supportive for Bostik and Coating Solutions. And we expect a more sequential improvement in high-performance polymers. As a result, our Specialty Materials EBITDA should decline less year-on-year in Q4 than in Q3. As for the intermediates, they should, however, continue to be significantly down with a similar year-on-year decline in Q4 when looking at Q3 and Q2 as well. Looking at the various regions, we see the U.S. holding up relatively well. China is probably the strongest region and East Asia is gradually improving. Situation is more uncertain in Europe with the return of lockdowns in the past few weeks. But as I said, we see clearly a less stringent, let's say, restrictive measures than what occurred in the past quarter 2. Arkema will continue, therefore, to focus on elements within its control. So notably, the initiatives on the costs and the strict management of working capital and capital expenditure. And we will, of course, also continue to roll out the long-term strategy, including the implementation of major organic growth projects, targeted acquisitions and the innovation efforts in Specialty Materials, to meet sustainable development opportunities of our customers as well as the strategic review for the Intermediates, in line with the ambition to become a pure specialty player by 2024. So this concludes my comments. Thank you very much for your attention, and I'm now happy to answer your questions.

[Operator]

[Operator Instructions] The first question comes from Mubasher Chaudhry from Citi.

[Mubasher Ahmed Chaudhry, Vice President]

Just 2, please. How should we think about the raw material picture in Bostik as we go into, say, the fourth quarter and then going into 2021 as well? Could it potentially turn into a headwind? And are you likely to introduce any pricing initiatives, even if it turns into a headwind? One.And the second question is more around your comments around the batteries in high-performance polymers. Can you provide some color on how big that business is at the moment in Arkema, please? It looks like it isn’t delivering strong growth. But just some context around how -- what the size of that business is. And then finally, on thiochemicals, if you can just provide some comments around the volume picture and how that's evolving, given the ramp-up. That would be very helpful.

[Marie-José Donsion]

Okay. Thank you, Mubasher. So regarding the raw material effect, I would say that the index is clearly showing a decrease in raw material price. I'd say my assessment right now overall for Arkema is that there is, let's say, kind of net 0 to slightly positive net effect on pricing. So the pricing to customers minus the pricing on the materials. Again, the profile of Bostik, the prices are very much, let's say, fixed for, in average, I would say, a year. So we are in an annual type of negotiation process, which have revealed, let's say, some headwind when the prices are going up. And it's clearly more supportive when prices are going down since it creates a lag in between -- what the market and the raw material price is doing and what you pass on to the customer. Access in the volumes are right now pretty back compared to last year level of activity. I'm thinking the situation should remain, I think, slightly positive in the same way it is currently. I don't see a short-term issue popping up. Yes, you are correct. I mean, in the end, pricing is a constant fight, and in the current environment, it is something we monitor extremely closely. But right now, I would believe it's still a phenomenon that is supporting the margin rather than the opposite. Regarding the batteries in high-performance polymers, actually, this business is clearly developed, frankly, very well. So it's probably one of the few businesses that in the current year has grown, I would say, double-digit in volume compared to last year. The thing is when you start with low volumes, of course, even if the growth is double digit, it still obviously needs to increase further to have a very material impact on the bottom line result. But definitely, it's an area that is extremely encouraging and should continue to further increase its contribution as we move along. As you know, there are a limited number of players in this market. We think our technology has clearly a good differentiation to be successful. And actually, the growth is proving that it's well received by customers. We are mainly on lithium-ion technology, but actually R&D works also on solid technologies. And despite we don't disclose the size, let's say, by type of application, it's definitely, I think, a very positive feature in the portfolio of the Advanced Materials. Regarding thiochemicals, I would say the picture is kind of a mixed bag since you know this activity serves, I would say, roughly 50% nutrition, 50% oil and gas. So oil and gas is quite depressed at the moment, which was actually not at all the case last year since the regulations regarding desulfurization of maritime transportation was actually pushing a lot of volume. So this year, clearly, this part of the activity is clearly less supportive. But nutrition continues to be quite resilient. So again, a mixed bag overall for this business, but I would say it's still part of the strong businesses that we have in our portfolio.

[Operator]

The next question comes from Matthew Yates from Bank of America.

[Matthew John Peter Yates]

The first question is, can we just get an update on where you are in terms of the PMMA disposal process? Anything you can say about time lines there and the extent to which that process gets complicated by COVID restrictions.The second question is for your downstream coating business. Just because DSM said the other day that they felt the resin market needed to consolidate, but they didn't want to play a role in that. I know when Arkema tends to get asked about M&A, the focus usually is on Adhesives. But can you talk a little bit about your strategic ambitions in the coatings area and what you can do to further reduce the length you have in the acrylic molecule.

[Marie-José Donsion]

Okay. Thank you, Matthew. So regarding PMMA process, what we have mentioned is that, obviously, we've been quite open regarding the strategy of exit of this business from the portfolio. So as you know, we have initiated work on the carve-out internally. So since it is a disposal, actually, it's quite classical that the company can prepare in advance a number of things. So information memorandum and due diligence. So the data room is built. So again, the process is ongoing. There is a bank to support us in this process. We see actually a good interest from the market, also in light of also the resilient performance of the business in quite an adverse economic environment. So, so far, I would say, there is little more to be said. What we think is that in light of the current situation, we think the process should happen, let's say, in the coming months of -- in terms of execution. So we don't expect a resolution of this process in a matter of a few days or weeks, but we also don't expect it to take several years and finish by 2024. So if I had to bet, I think in the first part of the strategic plan, there is a likelihood the process can be executed. So now to be precise on the time line is very difficult because, as you know, the definition of a business plan and the valuation is something that is not fully stabilized in the current environment. So this is probably what will impact, let's say, the time line of the process. But so far, I would say there is no particular news flow that deserves any communication. Let's continue to progress and have the various interested parties express their views and then we'll see. Regarding the downstream of coatings business, you are correct, this remains an axis where we want to reinforce the portfolio. So the level of integration, as I said, in Europe and U.S. is still, let's say, around 50%. So clearly, any further integration that we could do in this area will further strengthen, in fact, the resilience of the margin, which already today, I think, is at a good level, in fact. Then the question is the nature of the integration because, as you know, there are activities that utilize a lot of acrylic acid, but for which, let's say, the relative margin contribution is not as robust maybe as what we ourselves already have in the portfolio. So I'm not really pushing for buying, for instance, superabsorbents despite it would be a major downstream acrylic, let's say, further reinforcing the level of integration of the portfolio. So it's fair to recognize we have a certain selective approach where what we would like, in fact, to look at is more in line with what Coatex or Sartomer type of downstream represents where you can go into water treatment, into 3D printing. So it's a type of diversification that allows, let's say, some high-end downstream rather than just any downstream. So this is the type of selection that we try to implement when looking at potential M&A on downstream coating business.

[Operator]

The next question comes from Geoff Haire from UBS.

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

First of all, a simple one. Are you sort of suggesting that the EBITDA that you're going to generate -- actually, EBITDA margin you're going to generate in Q4 will be higher than the one you generated last year, first of all? And then secondly, just on CSR stuff that you're talking about. Can you tell us how much CO2 Arkema emits a year? And what percentage of that and -- that percentage of CO2 is exposed to carbon trading schemes around the world, please?

[Marie-José Donsion]

So in fact, we have not guided on EBITDA. We are guiding on revenues. So I have not expressed any comment on EBITDA, but I'm rather surprised by the conclusion that may derive from what I said on the volume, actually, since my comment is that we expect, let's say, Q4 to be at minus 7% organic volume compared to last year Q4. So logically, you should conclude that EBITDA should actually be lower in Q4 than…

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

I was asking about the margins, the EBITDA margin, not the absolute EBITDA.

[Marie-José Donsion]

Okay. Yes, sure. But in fact, you see basically the size of fixed cost on our structure. So again, I'll let you make your own conclusions. But I think it would be probably quite challenging. So then regarding CO2, so as you know, we have communicated on an ambition of reduction of our CO2 emissions below -- I mean it's greenhouse gas, which is equivalent in kilotons of CO2, which, in terms of target represents below 3,000 kilotons of CO2 by 2030. So this is the target we have. And basically, when you look at what was generated back in 2019, we were above 4,000 kilotons of CO2, equivalent CO2 issued by the group. So this is an information that basically is available on the Arkema side. So the trajectory that we have, as you know, is a science-based trajectory, which complies with the Paris agreements and basically supports well below 2-degree approach for Arkema. So now regarding your -- you were asking me if some of those CO2 were subject to what?

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

Carbon trading schemes -- carbon emission schemes around the world.

[Marie-José Donsion]

We -- I'm not sure -- I see well -- I mean what the question is about. Today, we are balanced in terms of CO2 credits. So we are not acquiring or needing to acquire any CO2 credit at Arkema level. So we are in excess, in fact, of credit limits for still a number of years. So I hope it answers your question.

[Operator]

The next question comes from Emmanuel Matot, ODDO BHF.

[Emmanuel Matot, Analyst]

Emmanuel Matot speaking from ODDO. Three questions from -- regarding Intermediate, when do you think prices will start to improve for Arkema? How do you explain that there was no improvement in Q3 for Intermediates despite less declining volumes compared to Q2? Second question, can you update us on your EUR 50 million cost-saving program related to COVID-19 for this year? Are there some of those cost savings which can become structural and not only temporary? Are you also thinking about increasing those savings next year in the context of low visibility related to the pandemic? And my last question is about Fluorogases. Have you started the process of selling Fluorogases? And do you think it may be more complex than for the PMMA business?

[Marie-José Donsion]

Thank you, Emmanuel. So regarding the cost-saving program, clearly, the efforts are paying off. My expectation is that probably we will exceed, in fact, the EUR 50 million cost-saving cost program for year-end by a bit. So right now, clearly, the program is well on track, and we should exceed, in fact, this ambition by end of the year. Now I agree with you. In fact, the issue is how much of that can be materialized structurally versus just opportunistically because, yes, the people are not traveling, and therefore, obviously, costs have been shrinking. This is a difficult question because despite we have not been exposed to a lot of measures of subsidies or we have not really applied to anything in the various geographies where we operate. So I think this very specific impact, which would come from the support of the various governments, I think remains quite modest at Arkema.So on that front, I do not expect kind of any kickback effect into next year. Yes, it's fair to recognize that all the marketing actions on the traveling has been much lower, the number of indirect costs in terms of subcontracting and logistics are also significantly reduced. So mechanically, some of the costs clearly is linked to the level of activity that will take place. If this level of activity is not coming back, clearly, the pressure is maintained on the structure in the same way it has been so far. We are clearly looking at various avenues to see if there are some synergies that can be implemented across platforms. So as you know, we've communicated earlier on the year, when we announced the creation of the Coating Solutions platform, for instance, the segment that by grouping a number of businesses there. In fact, Richard Jenkins was working on a setup to see how we could, in fact, put some structure in this new combination. So we have definitely a number of opportunities. We are investigating to see how we can further contribute to saving structure in light of an environment, which is uncertain. Now regarding Intermediate, prices are definitely challenging. I would say, of course, we all know this part of the business is more exposed to volume volatility. If I take the case of PMMA, in fact, this business has been quite resilient in volume, but with obviously a mix, which is little different. Because auto remains below what it was in volumes. So of course, there is some impact there. Fluorogases, clearly, is the outcome of the combination of low demand, plus, as you know, a pressure on price that had been initiated already last year with illegal imports reaching Europe and impacting us almost for the full year last year already. So it's fair to recognize that Fluorogases weighs significantly on the overall Intermediates performance. And unfortunately, I don't see a recovery in Q4. This is the reason why, in fact, the guidance we give at minus 7% basically incorporates actually a quite negative perspective, in fact, still on Intermediates. And despite we see some -- clearly, some progressive recovery in the Specialty Materials front compared again to, I mean, clearly, to Q2 and even to Q3, we still see a significant adverse impact coming from that particular segment. Regarding acrylics in Asia, frankly, no big change in the situation. I would say volumes are more stable, but prices are still at a low level. Today, utilization of assets in Asia is clearly not very, very high. Regarding the disposal process of Fluorogases, typically, yes, I see a more complex process if I compare to PMMA because, in fact, it reflects the complexity of the market. And of that business, as you know, this business is highly regulated with very different situations in U.S., in Europe, in Asia, mainly China. And therefore, we think exit most likely is not going to happen through just the pure selling of the business. We believe probably the solution lies in a more specific approach, continent by continent, not to mention potentially even product by product.So this clearly is the way we think about it. And that is why for sure today, my main focus is mainly on MMA/PMMA because this is the scope where you can actually work even before you know what the buyer -- who the buyer is and what the buyer is willing to do because it's a full-fledged carve-out, and therefore, you can prepare in advance internally. For Fluorogases, this is more complex because still you know which geography, which product -- what type of agreement. Is it a joint venture? Or is it -- what type of outcome will happen? It's very difficult to build anything in advance. So for sure today, I would say the full attention of the teams internally is very much focused on PMMA. I see more the MMA situation of Fluorogases, let's say, happening in the second part of the road map to 2024. So as I mentioned before, PMMA, I think, would happen in the first 2 years of the plan. I guess Fluorogases, I see it more clearly in the second part of the plan.

[Operator]

The next question comes from Alex Stewart from Barclays.

[James Alexander Stewart, Chemicals Analyst]

In Fluorogases, I don't know what the exact split is, but is it fair to say that the lack of office working across the world has caused a significant drag on AC gas demand? And is that a big part of the lower volume? It'd be interesting if you could quantify that or maybe how much of the market is -- that is. Secondly, and actually, finally, the announcement a couple of days ago that BPI has taken a 5% stake in Arkema. Does that change your ability to pay or return cash through a buyback at some point in the future as you laid out in early April? How do you view on that, too?

[Marie-José Donsion]

Thank you, Alex. So on Fluorogases, I would say the split of the market, as you know, for us is, I would say, 25% nonemissive and we see this as a key raw material for our fluoropolymers. And then 75% would be what we consider as the emissive part. And this is the part on which we would like to clearly find an exit solution. The emissive part, in fact, the main area the product goes into, so you would have air conditioning for car. So this is a significant application, let's say, maybe 30%. Then you would have definitely HVAC. So it's air conditioning, let's say, for industry, for buildings. So this probably is another 1/3 or 1/4. And then you would have also applications such as isolation for buildings, foams, this type of application.So regarding HVAC, I mean, it's, of course, the decrease in volume of activity, the shutdown on some plants from industry, the fact that people stay at home rather than go to the office, and therefore, buildings are potentially empty. Of course, it has an impact on the level of demand that is closing. In fact, the current situation and pressure on margins that we see in this business. I believe automotive has also some contribution since people stopped driving. They stay at home. In fact, you also have the impact of the auto industry that indirectly, let's say, weighs also on the demand on Fluorogases as well. So I would say it's probably a combination of the different drivers when -- during lockdown down in Europe, the construction works were stopped. I guess, all isolation forms, et cetera, were also impacted by some shortfall of volumes during a period that normally corresponds to the peak season, let's say, of consumption of this refrigerant gas. So not only, in fact, Q4 is normally anyway a very low point in terms of seasonality for this business classically [indiscernible]. But on top of it, it's fair to recognize that the pandemic has had the maximum impact in Q2, which is normally, in fact, the strongest period of consumption. So of course, maximum effect on the contraction of margin for this business at that time. So all in all, the demand in Fluorogases, yes, has been impacted and will continue to be impacted, I believe, in the Q4, I would imagine, at least similarly to what happened in Q3. Now regarding the BPI investment into Arkema. So thanks for asking. In fact, Bpifrance -- sorry, through their fund, which is named LAC 1, has declared, in fact, the stake in Arkema over 5%. Clearly, what has driven the entry of this shareholder is, I think, Arkema's strategy and road map to become a pure specialty player as what we presented, in fact, during the last Capital Market Day. So we understand this is what attracted them and fits with their investment criteria. They seem to have a passion, in fact, for technology. So they are very keen to favor investment in companies with a high technology content, strong CSR commitments. So the strategy was extremely clear and well received by them. The shift also to become a pure player of specialty materials, I think, is a key driver for their decision. So I see a very, very good alignment and support to the strategy and the cash allocation specifically that we presented during the strategy update. So there is no inflection of this strategy. On the contrary, there is full support from this new shareholder regarding the strategy that we presented to you and to the market back in April.

[Operator]

The next question comes from Georgina Iwamoto from Goldman Sachs.

[Georgina Iwamoto, Associate]

Good to hear you. I've just got one question left and it's very similar to one that you had earlier on Adhesives. I was just wondering can you confirm the net impact on price versus raws in Coating solutions, was slightly negative in the third quarter? And then if you can maybe talk about how that trend might develop in the fourth quarter and beyond. And then perhaps like on that note, if you can give us an idea about how you see pricing power in Coating Solutions. Is it somewhere that you expect to be able to react to raw material price increases?

[Marie-José Donsion]

So your question is mainly on Coatings rather than on Adhesives. Am I correct, Georgina?

[Georgina Iwamoto, Associate]

Yes, I was saying you had the same question on Adhesives earlier in the call right at the beginning. I was just wondering if you could give us an overview on Coating Solutions.

[Marie-José Donsion]

Okay. So as I mentioned, on Coatings, still the -- so the integration proportion, I would say, is around 50%. So for sure, the portion that is more merchant, as you know, there we have normally a pass-through of the evolution of propylene price. I would say in a matter of a month or a couple of months is max. So it's pretty straightforward and this, obviously, creates a lot of volatility on the pricing you see. Not necessarily on the contraction of your margins since, in fact, the downstream, which basically absorbs 50%, roughly, of that volume can absorb and benefit, in fact, from this reduction of acrylic acid. And definitely, basically retains some of that at their level, which allows us to, as you can see, compared to Intermediates, margin erosion remains rather contained. We are talking about less than 1 point of margin difference year-on-year. So the resilience is actually quite good. And that's why I mentioned earlier in the call I think it's important to -- I mean, going to the downstream and reinforcing the downstream in Coatings, for us, it's very important to focus on the high end in terms of value -- of product value rather than on volume. So the integration is not for the sake of increasing the share of integration because, as I mentioned earlier, superabsorbent, for instance, which would allow Arkema to significantly increase the level of integration yet the volatility of the margin in superabsorbent remain actually pretty high. So it doesn't really fulfill the objective that we have to increase the resilience. So it's fair to recognize we are quite selective when assessing the potential downstream integration that we could further do in Coatings. At this point, I still feel, let's say, as I mentioned, that is similar to Bostik, in fact, a slightly net positive effect of the net pricing for that segment.

[Georgina Iwamoto, Associate]

Marie-José, that was really, really helpful. And I was just wondering if I could be very cheeky and ask a very crude question. It's fantastic to hear from you, but Thierry is conspicuous in his absence. And just wondering if there was anything that you could say on that because he does normally join these calls.

[Marie-José Donsion]

Yes, he decided actually I can do it on my [indiscernible] maybe for once. So thanks for asking. But he's actually healthy and well. He addressed actually the press in parallel. So then we splitted the workload. No particular signal or…

[Georgina Iwamoto, Associate]

Glad to hear that he's well.

[Operator]

The next question comes from Charlie Webb, Morgan Stanley.

[Charles L. Webb, Equity Analyst]

Maybe just one on the current kind of volume underlying organic trends you saw through the quarter. In the past, you've kind of helped us understand how that progressed sequentially. Just understanding how that was through in the various months up to September. And then maybe, if possible, also a sense on how October has gone so far. That would be -- or have gone, sorry, it's not done. That would be helpful from an organic growth perspective.And then second one, just around construction activity. Obviously, a very strong recovery in European construction activity, French construction activity in the third quarter. How do you see that going into the end of the year? Obviously, there's some seasonality to consider, but just how do you see that trending into the fourth quarter? And as we think about that, how does that look for Bostik and for Adhesives?

[Marie-José Donsion]

So thank you, Charlie. So basically, when releasing the guidance for Q4, I mean, clearly, we have the -- like the support of October in this exercise, which basically is aligned with the guidance I'm giving today. So at this point, we see no disruption. In fact, no major disruption. That's why we say it's pretty much in line or, let's say, the continuity with the quarter 3 performance and quarter 3 trend. So this is the basis, let's say, the base case scenario that has led us to the guidance of minus 7% revenues, organic revenues in Q4 versus last year that we are putting out today. Now in terms of mix of activities, what we see is, actually, construction remaining at a good level. As you know, these new lockdown measures are clearly very different from what happened in the past quarter, too, so when construction works have been stopped, shops were being closed, et cetera. So today, the context is very different. So for me, I mean it would be, frankly, extremely drastic to consider Q4 is a return to a kind of Q2 pattern right now, this is not at all the case.And then from a worldwide perspective, definitely, I see Asia in better shape today than it was back in quarter 2. I see. U.S., in fact, economy resilient across the pandemic. So for us, right now, the main signals that we observed are again in the continuity of what we saw in quarter 3 because the environment is uncertain. Of course, our industry doesn't enjoy account of a 6-month backlog or a huge visibility on what's going on. As you know, the average time between receiving an order, delivering is a matter of maybe 3, 4 weeks. So there is no such concept of a backlog, in fact, in chemical industry. And therefore, it's very difficult to predict what's going to happen. Now this being said, from what I see in October, from what we see happening in November. So basically, the small visibility we have, this should confirm -- or at this point, basically confirms the guidance we are putting in the market. The caveat, of course, is that if anything new was going to materialize, then probably we would reconvene or use it like any other company would do probably at the same time. But let's say, today, it's fully consistent with what we see, both from October month and, let's say, the small visibility we have on November. In terms of sectors in the economy, it's a bit of a mixed bag because, as we mentioned, in fact, we see some positive signals coming from auto. And still, for us, frankly, the volumes are not very, very different or evolving very differently compared to quarter 3. So we still see industry and automotive, including automotive, basically having a very progressive recovery rather than a V-shape type of pattern in the recovery. So for me, construction should remain, in fact, at a good level, kind of back to a pre-crisis level. Some segments that have been doing really well during the pandemic. So we mentioned nutrition, we mentioned health care, packaging as well that had a very resilient performance. We see maybe some destocking there, some -- a bit of destocking. So that is why, overall, I see Bostik relatively stable, let's say, compared to what we have in Q3. I think Advanced Materials because industry recovery is very slow. Even if there should be a gradual improvement, it should remain kind of modest at this point, I believe. And again, what I mentioned before is that I still see Intermediates weighing on our results. So overall, I think it's -- this minus 7% is a fair assessment. Again, because coatings has enjoyed the benefit that we saw on construction, I think on that aspect, from the decorative, it performed well. Clearly, on the industrial side of the business, it has been clearly more impacted again by the overall industry performance. So again, another mixed bag picture. So all in all, again, some very progressive improvement compared to Q3, but no drastic change in pattern, frankly.

[Operator]

The next question comes from Andreas Heine from MainFirst.

[Andreas Heine, Managing Director]

Actually 2 only very small ones after this extensive call. In thiochemicals, oil and gas is down, as you outlined. The nutrition part is up. Am I right to assume that the increase in nutrition is, by far, not enough to offset the decline in oil and gas and that in oil and gas, you do not see any recovery? That's the first question.And second on the net working capital, which helped this year a lot in terms of free cash generation. Are now inventory levels at your end too low, so do you have to assume in Q4 and maybe in Q1 that inventories go up again, so that we see on the flip side, Obviously, strong free cash flow in Q3 or year-to-date and in Q4 and then beginning of next year?

[Marie-José Donsion]

Thank you, Andreas. So what I mentioned is definitely oil and gas is -- has an adverse impact on volumes for us overall. So earlier on in the call, in fact, the question was more about the content of our thiochemicals business, which basically addresses 50/50 on nutrition and oil and gas to simplify it. I would say nutrition was resilient, but people -- I mean -- or animals are not eating more. So I see this part, let's say, resilient, but not growing, in fact. So -- and on the other side, oil and gas is clearly impacting negatively the volumes. So all in all, definitely, one is not offsetting the other. So this is something I needed to clarify.

[Andreas Heine, Managing Director]

And there is no recovery at all in the gas…

[Marie-José Donsion]

On oil and gas, at this point, I don't -- projects are more or less have been frozen. So decision-making, in fact, is kind of on hold at the moment. So we don't really see a lot of excitement, let's say, to reinitiate large investments in refineries at this point. So right now, again, no major change in spend compared to what we saw in Q3. Now regarding working capital, I would say you have 2 phenomenas, in fact, in the performance of working capital that we have, I would say one phenomenon is kind of mechanical, to be very, very open. Since, of course, let's say, overall, we are, let's say, at around 14%, 15% working cap on sales. So if the sales declined quite logically, working cap declined. So this is valid, I guess, for everyone in this situation in any industry. Still, it requires obviously a discipline internally to watch the credit limits of your customers, to make sure you don't start piling up overdues that -- and therefore, you continue having a good discipline internally at the time where chasing after volume may lead to a decreased level of attention in the ability to collect. So this is still, I think, a necessary discipline that you need to entertain in the company. But it is fair to recognize that there is some mechanical effect that plays in favor of a positive movement of working capital. The same for, let's say, the evolution of raw material prices because in a context where you have a decrease of raw material prices, it's fair to recognize the valuation of stock is also decreasing. So of course, mechanically, it favors the working capital. At the same time, I would say, same as for the receivables. It requires a discipline, an internal discipline in the company because I can tell you, internally, the business, let's say, natural instinct would be to buy cheaper pile of stock to explain that than tomorrow, they will enjoy this low-cost raw material for the finished goods. When you have limited visibility on demand, I think it's a very good discipline still to make sure you have a very stringent decision mechanism process in the company to decide what type of stock is strategic or not strategic to buy an asset basically that the price is cheap because everything is relative. And I think in those 2 fronts, Arkema, I think, has a strong discipline and shows through the performance of working capital, that this discipline is paying off. So some of it is mechanical, and then you can think that, of course, there is a significant recovery in the sales than mechanically you will have consistent, let's say, of the nominal value of working capital. So for sure, if the business recovers and volumes regrow significantly, there will be some consumption of working capital attached to that growth. So I suppose no surprise there like for any company having positive working capital in their balance sheet. I would say similar answer in case of raw materials starting to increase significantly up. So there as well, we will see a mechanical effect regarding those 2 phenomena. It doesn't prevent, of course, the company to maintain a strict discipline regarding the monitoring of stock levels and the credit limit for customers. So at this point in time, my stock is too low. So sometimes when I discuss target with businesses, they complain about the target. So I suppose it's a matter of opinion. Do I think I'm missing sales because of my level of stock? I don't think so. So I think it is okay.

[Operator]

We have the last question from Laurent Favre, Exane BNP Paribas.

[Laurent Guy Favre, Research Analyst]

Actually, all my questions have been answered, but I just had one cheeky one then to follow Georgina. On the guidance, I don't remember Arkema ever not guiding on EBITDA or margins at this stage, even in the deep dark days of 2008, 2009, 2014 at this stage of the year. So I'm just wondering if there's anything we should be aware of in terms of volatility or lumpiness on some businesses, that means that you have more confidence in guiding on a specific organic sales number than on a range on EBITDA or EBITDA margin. I know it's cheeky, sorry.

[Marie-José Donsion]

So thank you, Laurent. So actually, you have a better memory than I do since I've only joined the company in 2018. So what I can say is that, of course, what we monitor is a lot based on the volumes and the flow business that occurs every day. So this is basically the main driver, I would say, for the level of activity for you deciding to allocate your resource, allocate, in fact, the effort in terms of running the plants. So this is basically short term, clearly, the main driver that we track. And now the translation of that into EBITDA, for sure, depends on the type of market and how the mix is moving. That's why I'm trying to give you still, I think, valuable indication regarding the situation in Bostik, the situation regarding Advanced Materials, regarding Coatings, regarding Intermediates, which I perfectly know the respective EBITDA contribution is quite different from one platform to the other. So hopefully, this has been helpful, and therefore, should still allow you to have, I think, a good appreciation for the type of performance we can generate this year. I see, for sure, around me, clear giving EBITDA guidance with a margin of maneuver, let's say, of various tens or hundreds of millions of euros. So we can all debate which one is more valuable. But we think the guidance we are giving today is valuable and should allow you to have a good understanding of how we see the performance of Arkema for year end. Thank you all, and I wish you all actually a strong -- to stay healthy and well across the next coming months. It's been my pleasure to be with you today, and hopefully, I will enjoy this experience more in the future. And looking forward to see some of you live at some point. Again, thank you very much for your interest, and see you next. Bye-bye.

[Operator]

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