Arkema SA

PAR:AKE

Earnings Call Transcript 2022-Q4

[Thierry Le Hénaff, Chairman & CEO]

Thank you very much. Good morning, everyone. Welcome to Arkema's Full Year 2022 Results Conference Call. Joining me today are Marie-Jose Donsion, our CFO; and the Investor Relations team. As always, the slides used during this webcast are available on our website and together with Marie-Jose, we will be able to answer your question at the end of the presentation. In '22, our chemist teams can be proud of what they achieved.

And I'd like to highlight some key points. We delivered an all-time high EBITDA of €2.1 billion, fully in line with our guidance with growth in all 3 Specialty Materials segments and our EBIT margin at a high level of 13.5% in a demanding operating environment marked in particular by the war in Ukraine, supply disruptions and persistently elevated raw materials and energy costs. I will let Marie-Jose provide more details by segment later on.

The 20%-plus growth in sales in this inflationary environment demonstrates our agility and pricing power and enabled us to more than offset lower volumes. We also delivered an excellent recurring cash flow of over €900 million and an EBITDA to cash conversion rate above our long-term target of 40%, a performance which really sets us apart from our competitors. I would really like to thank the teams for this achievement and for the hard work in this challenging context.

Our balanced geographic footprint and diversified end market exposure proved once again to be a real asset as strength in some areas enabled us to offset weakness in others.

2022 was a year of two halves. With a very strong performance in H1, which benefited also from an exceptional tightness in some product lines, essentially acrylics and PVDF, while in H2, we were impacted by the slowdown in the European economy, particularly in construction as well as by significant destocking in Q4. But in those different environments, our expertise in material science and the accelerating shift towards higher value-added, high-performance materials were the underlying structural driver of our success.

In fact, Specialty Materials now make up 91% of our sales, positioning us on track towards our 2024 road map. Beyond these excellent financial performance, we continue to strengthen our profile in 2022 with a value-creative acquisition of Assurance Performance Additives, which we have successfully integrated into the group as well as a couple of bolt-ons. We also made good progress in our organic CapEx projects to support our customers' sustainable growth.

Sustainability is indeed the key driver of our growth. First of all, through our innovative materials. Innovation is sustainable megatrends and designing solutions that are essential to addressing the world challenges is key to our success and we benefited from it in 2022 and you can see in the slide, a number of examples. Our positioning across retail segments is unique and allows Arkema to benefit from strong synergies in terms of technological know-how, market expertise or customer intimacy and to provide a complementary offering.

Products launched less than 5 years ago made up around 15% of our Specialty Materials sales in 2022, solidifying our ambition to generate €1.5 billion of additional sales coming from our 5 innovation platform by 2030 versus the 2019 baseline. The past few years have provided us with a wealth of opportunities in areas like batteries, eco-friendly paint, 3D printing or home efficiency. I met with many of our larger customers last year and they are really excited by the technological solutions that we can provide that are critical to them to innovate and meet the challenges and expectations generated by new environmental regulations and the circular economy.

Sustainability is embedded in the way we work and interact with stakeholders. Our ESG commitment were strengthened in 2022 with a new climate plan on a 1.5-degree trajectory across the whole value chain and our continuous progress in our CSR performance was again highly recognized by external agencies.

For example, we kept our third place in the chemicals category of the DJSI World Index with an improved rating. We also improved our Moody's ESG solutions score and we were confirmed as part of the CAC ESG Index for the second year running. We are also proud to have been certified as top employer in 4 key countries for the group and named as a Forbes best employer in some place within our sector globally.

As a result of our very good financial performance in 2022 and the Board's confidence in Arkema's growth prospects, a dividend of €3.4 per share will be proposed at the next AGM, up by 13% versus last year and in line with our progressive dividend growth strategy. We feel the magnitude of the increase is appropriate and reasonable and it leaves room for the coming years.

I will come back to the outlook at the end of the presentation and we'll now hand it over to Marie-Jose, who will review in more detail our Q4 and full year results.

[Marie-José Donsion, CFO]

Thank you, Thierry. So as already said, 2022 was a record year for Arkema despite the weaker year-end. Analyzing the sales bridge at €11.6 million, sales were up 21% year-on-year with organic growth reaching nearly 14%. The price effect at 21% was the main driver, reflecting our initiatives to transfer to our selling prices, the elevated inflation in raw materials, energy and transportation costs.

Volumes were 8% lower, impacted in the second half by the slowdown and destocking in Europe, especially in the construction market, where we had experienced robust growth since mid-2020. U.S. demand was resilient over the year, also impacted in Q4 by some destocking in construction, while activity in China was weak due to the COVID situation. There is a small 1% perimeter effect attributable to the acquisitions we made in Specialty Materials, Ashland's Performance Adhesives offsetting the divestment of PMMA in May 2021.

Currencies had a positive impact of 6.5% on sales, mainly due to the stronger U.S. dollar and Chinese yuan against the euro. EBITDA grew 22% to €2.1 billion, in line with our guidance. North America actually delivered a strong growth, which reflects our good positioning in the region. Regarding the phasing of the year, first 9 months benefited from some extraordinary profits estimated at around €400 million.

They were linked to a very tight supply chain in Specialty Materials. I would say around 2/3 came from PVDF and 1/3 from acrylic. In this context, the group EBITDA margin reached 18.3%. In Q4, EBITDA amounted to €291 million in the context of a very high comparison base in the prior year. Looking at the profitability of the different segments, I'll start with Baltic. We achieved an EBITDA of €366 million, up by 16% year-on-year, supported by the integration of Ashland's adhesives, which performed well throughout the year.

Our price management as well as a better product mix more than offset the 8% drop in volumes. The EBITDA margin, we resisted well at 12.6%, given the nearly 2 percentage point negative impact linked to the mechanical dilution of price increases. In Q4, destocking accelerated in Europe, but we managed to maintain neutral net pricing and Q4 EBITDA rose to 9% -- rose by 9% to €75 million. Advanced Materials EBITDA is up 40% year-on-year to €941 million, with an EBITDA margin reaching 21.7%. High Performance polymers had an excellent year, of course, benefiting from a better product mix on the back of a solid demand for batteries and other premium solutions.

Q4 EBITDA came in at €148 million, lower than last year's high level due to the drop in volumes and to moderating tightness in PVDF. EBITDA of Coating Solutions grew 13% to €593 million and the EBITDA margin reached 18.2%.

Volumes declined mainly because of the slowdown and destocking in Europe, especially in decorative paints. However, in the context of much higher input costs, our pricing in the downstream as well as the upstream all supportive. In Q4, EBITDA for the segment dropped to €63 million, affected especially by weak volumes. Finally, EBITDA was stable year-on-year in intermediates at €306 million, despite the negative impact from the divestment of PMMA.

This performance was supported by the good momentum of refrigerant gases, especially in the U.S. EBITDA in Q4 was down strongly to €24 million, given much less favorable conditions for acrylics in Asia and in the context of low seasonality in refrigerant gases.With depreciation and amortization of €550 million in '22, recurring EBIT is up 32% versus last year at close to €1.6 billion.

REBIT margin improved by 110 basis points, standing at 13.5%. Financial result stands at €61 million negative, close to last year. Due to higher interest rates, we foresee a slight increase of the cost of debt in 2023 from the debt that is swapped into U.S. dollar in our portfolio. The recurring tax rate came to 21% of recurring EBIT and we expect the 2023 rate to remain at this level.

All in all, adjusted net income increased by 30% year-on-year at close to €1.2 billion, which corresponds to €15.75 per share. Moving on to cash flow now. Recurring cash flow amounted to €933 million in 2022, up a strong 24% from last year. The growth in cash flow is broadly in line with the evolution of our operating results. We had a working capital outflow as you know, in H1, which was partly reversed in H2, thanks to our strict management of inventories and receivables in the context of slowing activity levels.

The working capital ratio on annualized sales is unchanged versus last year at 12.6% and still stands at quite a low level relative to the 14% that we consider more as our normative level. Capital expenditure totaled €707 million during the year, which reflects lower exceptional CapEx of €123 million as we are finalizing the construction of the Polyamide 11 plant in Singapore.

In 2023, recurring capital expenditure should come to around 6% of group sales and we should have a limited €30 million of exceptional capital expenditure to be linked to the Nutrien project in the U.S., which spills over slightly from 2022. Free cash flow amounts to €784 million and the EBITDA to cash conversion rate stands at 44% in line with our 40% long-term target. Net debt at the end of 2022 stands at €2.4 billion, including the €700 million of hybrid bonds and the net debt to last 12 months EBITDA ratio stands at 1.1x.

I thank you for all your attention and we'll now then hand it over to Thierry for the outlook.

[Thierry Le Hénaff, Chairman & CEO]

Thank you, Marie-Jose. The dynamics at the beginning of 2023 are quite similar to what we experienced in Q4 of 2022 with weak demand in Europe and China as well as the continued destocking. So clearly, in this type of environment, we will focus on managing fixed costs and working capital in order to generate strong cash flow once again this year.

We expect 2023 to offer a different profile relative to 2022 with a slower start to the year and a greater weighting for H2 although more of the comparison base is elevated as we benefited last year from -- as you know, from a typical tightness in a number of our product lines as Marie-Jose said. Taking these elements into consideration, we expect EBITDA in H1 2023 to be clearly below last year's very high level as I think already recognized in the current context for Q1. Having said that, we see several positive drivers developing.

We expect volume to improve progressively hopefully during the spring, driven by China's reopening and the stabilization of Europe after many months of significant destocking. In addition, we'll benefit from our new key projects focused on decarbonization and sustainability, mainly our bio-based and recyclable PA11 unit in Singapore, our eco-friendly project with Nutrien in the U.S., expansion of our exceptional Pebax material in France, PVDF expansion in France and China and Sartomer in China also.

We expect an EBITDA contribution of €50 million to €70 million in 2023 from those new projects essentially position in the second half of the year given the wrap-ups. Together with the Board, I visited the Singapore unit in January and really was very surprised by the quality of the construction and also by the teams work. We also expect Adhesive to improve, driven by Ashland's Performance Adhesives and our ongoing synergy program, which confirm the strong growth potential of this combination. All in all, at this stage, we aim to achieve in 2023 an EBITDA of around €1.5 billion to €1.6 billion.

When you look at the last 3 years, we delivered an average EBITDA of around €1.7 billion. So this guidance takes into account the economic slowdown we are seeing and it means that we will be above the pre-COVID levels of around €1.4 billion.

We also aim to keep an elevated cash conversion ratio, which is part of the DNA of the company as you know, over 40% this year. Besides, we are entering 2023 with a robust balance sheet that Marie-Jose underlined with a net debt-to-EBITDA ratio at 1.1, which places us in a good position to carry out our projects, including further targeted M&A should opportunities arise.

This financial flexibility is a valuable asset as we continue to deliver our 2024 road map. But we are, of course, thinking beyond 2024 and we will hold a Capital Markets Day on September 27, I think the last one was in March 2020, when we will unveil new financial targets and our vision for the future of Arkema with our unique positioning around our 3 Specialty Materials platforms, Adhesives, Advanced Materials and Coating Solutions, led by innovation, sustainability driven manufacturing and strong social commitment.

I thank you very much for your attention and we are now, together with Marie-Jose, ready to answer your questions.

[Operator]

[Operator Instructions] Our first question comes from the line of Martin Roediger with Kepler Cheuvreux.

[Martin Roediger, Kepler Cheuvreux]

I have actually 3 questions. First is a financial question for Marie-Jose. Can you -- you touched a bit on that the financial result was rather poor in Q4 and you mentioned high interest rates, also swap effects. Can you elaborate on the latter? And the other 2 questions are for Thierry.

Yesterday, Arkema published a press release on its position on the European proposal to restrict PFAS. And you don't do any business in PFAS new portfolio, but there are products linked to it, i.e., fluoropolymers. If the proposal becomes law, what does that mean for Arkema economy-wise? And a follow-up to that question, assuming the same law is established in other regions outside Europe, what will be the financial impact for Arkema?

[Marie-José Donsion, CFO]

So I'll start maybe with the first question, if I may Thierry?

[Thierry Le Hénaff, Chairman & CEO]

Yes. Sure. [Indiscernible].

[Marie-José Donsion, CFO]

So as you know, dollar has been kind of volatile in 2022. So we had a strengthening of the dollar across the year. But in particular, there is an increase in the differential of interest between Europe and U.S. For the acquisition of Ashland, we actually swapped a portion of our debt into dollar. And therefore, we faced some increased interest rates on the dollars part of this debt that generated an additional financial cost, let's say, in the Q4, in particular.

I would foresee basically that we have a slight increase in our financial interest going forward into next year since I don't anticipate right now closing the gap, let's say, between the interest rates in Europe and U.S.

yet.

[Thierry Le Hénaff, Chairman & CEO]

Okay. Thank you, Marie-Jose. With the question on the [ Polycarp ]. So it's really an early process. It's part of the [ rich ] regulation, so with the proposal made by 5 member states.

But it's really the first phase of a long multistep process until 2025. As we say in our risk, so it would be a mistake to try to speculate what it will be at the end or if it could go to other country. We all know that each region of the world are completely different.

I think we met Chinese people recently, they are doing exactly the opposite. So I mean -- so I don't want to speculate. I mean the comment that I can give is that this -- and we were very surprised this law is really embracing 10,000 different substances.

They are all different in profile, in application, in ecotoxicol profile. I think so you're talking about PVDF and Arkema, but I mean it concerns between other suppliers of fluoropolymers as a whole and the floor that as a whole, many, many factors and the same for the customer, which would be -- I mean this mean tomorrow, you cannot make battery if you can imagine. So -- and there are plenty of critical applications.

The only thing that we can say, which was very clear in our press release is that we don't really understand why fluoropolymers result of surfactant and it will be the case, completely 100% for Arkema. It's already mostly the case for Arkema and nearly the full case end of '24.Why these products are not exempted from the proposed restriction. So we'll give the data which are necessary to, let's say, to answer this inquiry.

And fluoropolymers are considered not to pose any risk. So on the human [indiscernible], they have a favorable toxicologic profile. So it was important for us to say that to the politics in Europe to say that to the administration and to the -- lot of customer because we are a long-term committed to our products.

They are wonderful products, polymer, which bring a lot by their performance with their unique properties and we will answer the question. Part of the process, it's a process as we have seen in a lot of products and we will certainly bring our knowledge, which is important in this polymer, but you will see it from other -- plenty of other companies and customers, which are concerned by this very, very large, it was quite surprising, proposal to restrict PFAS. This is what I can say so far.

[Operator]

The next question is from Matthew Yates with Bank of America.

[Matthew Yates, Bank of America]

Couple of questions. Firstly, can we dig into the additives bit of the Materials division in a bit more detail? I think you were calling out that was one of the weaker areas in Q4. Just if you can talk about the different product segments that's impacting and maybe a view on how Q1 has started? And then I wanted to ask a little bit about the dividend, as you say, quite a nice increase of 13% there.

And if I recall correctly, you've talked about a 40% payout ratio in the future as the company matures. But at the same time, you're still saying you're open to acquisitions, the accelerating shift to high-value materials may mean more CapEx opportunities in due course. So the dividend proposal you've given today, is that still consistent with that midterm 40% payout ratio? Is that where we're heading? Or is that one of the things that maybe you're reviewing as part of the financial targets after the summer?

[Thierry Le Hénaff, Chairman & CEO]

Okay. Thank you very much for these 2 questions. Different in nature. With regard to Performance Additives, actually towards -- so Q4, as you understood, was significantly impacted by destocking. But I would say is this a destocking world and low-volume world, I would say Performance Additives was in relative terms compared to the rest of the portfolio was relatively okay.

So it was impacted by the general economy, the destocking at the end of the year, which went beyond construction. As you know, Performance Additive is pretty much representing a pretty far less represented in construction and other segments. And overall, so it's -- I would say, it suffered less than the rest of the portfolio. And I think it will be the same on Q1.So you have the overall picture, and we did not detail every segment in precisely. But I would say that in this relative performance, Performance Additives registered more certainly because they are less impacted by the destocking that we have seen in construction.

With regard to the payout ratio, in fact, your question is valid, but you know that we have this atypical first semester in our performance of '22.So the ratio that you have in mind is the one you calculate on the '22 performance, which is fair. But in fact, if you put it on a more normalized performance of Arkema, you see that you get far closer to the 40% payout ratio. So I would say the 40% payout ratio is still valid and this include what you mentioned on the CapEx, right?

It's true that the payback and you have a slide on it, the organic CapEx is quite good, and we should not be too shy still being careful on being reasonable in terms of CapEx. And you know that we are -- we should not be shy if we are on megatrends, some very good long-term projects like we have, for example, for the Polyamide 11, Singapore.

So -- but this takes that into account and this 40% payout ratio is still our midterm goal.

[Operator]

The next question is from Georgina Fraser with Goldman Sachs.

[Georgina Fraser, Goldman Sachs]

I've got 2 questions today. The first one is on your guidance for 2023, I think that we previously talked about building blocks going into 2023 of about a $400 million normalization from that exceptional first semester you just mentioned, Thierry, and then also a positive $70-ish million from your capacity additions in the second half. So with that said, would you agree that your guidance, €1.5 billion to €1.6 billion assumes a very conservative macro backdrop?

And then my second question is related to your 2024 targets. They imply an EBITDA of about €1.7 billion or higher and I believe that your target also promised that the portfolio would be a 100% pure specialties by 2024. Can you confirm that you're on track to have completed the strategic review of intermediates by 2024 and that your targets for specialty materials alone will generate that €1.7 billion in EBITDA for 2024?

[Thierry Le Hénaff, Chairman & CEO]

Okay. Thank you, Georgina. So with regard to the normalization, the -- so first of all, this concerns some more or 2 segments which are our Advanced Materials and Coating Solutions, okay, in our portfolio. That if you make the math, you don't take into account what we have just been discussing, Marie-Jose and myself today in the presentation, which is the destocking that we are seeing at the beginning of the year and the general economic environment, I don't know what is your current forecast, but the forecast are quite, I would say, overall for the general economy, at least the first semester or up until the spring says that it should be a rather weak environment.

So if you make the math, including this element of environment, which are beyond this capacity addition and the 400, you come to our guidance, which we believe, honestly speaking, is a fair guidance as we always do. There is no specific -- any specific leeway.

This is our guidance, €1.5 billion to €1.6 billion in an uncertain environment. So I think it's a fair guidance and I would not certainly not say it's conservative, we're optimistic. It's a fair guidance. I cannot say more.

With regard to -- I would say, the target of 2024. Yes, we assume what we say at the Capital Market Day.

This is still the intention. So this is why we have launched, as you know, this process on fluorogas, which started a month ago. So we are still at the early stage. So this means that specialties which is, at the end of the company should generate the €1.7 billion EBITDA. I have in mind that if you look back at the Capital Markets Day, we are offsetting more or less what we sell by acquisition.

So so far, compared to the '24 target, we are still a part to deliver on the selling side, but also on the acquisition side. So let's say we sell fluorogas, the EBITDA has to be compensated by the same amount of -- in terms of EBITDA coming more or less by acquisition, which means that when you look at the debt of Arkema so far, it's a lower band than what we had in the plan for '24. The reason being that we have spent less also in acquisition. So '24 is not today, so we have still actions initiatives to deliver.

We have done a lot already, fortunately, but we are still in terms of M&A, which is your question, still to deliver on the disposal. We made the PMMA, but we have still this fluorogas and part of the acidic in Asia.

And on the other side, we have done less so far than what we say in terms of acquisition. Hopefully, did that answer your question, Georgina?

[Georgina Fraser, Goldman Sachs]

Yes. That was very clear.

[Operator]

The next question is from Charlie Webb with Morgan Stanley.

[Charlie Webb, Morgan Stanley]

Just a couple more for me. Just only on the demand side, you talked about destocking kind of continuing into Q1. Just can you provide a little bit more color on what end markets and what regions you're seeing there? And maybe are you seeing any incremental signs of are things improving perhaps in China post Chinese New Year? Are you seeing some green shoots in terms of a restock or a recovery in demand?

So that's kind of the first question. And just second question on the Ashland's adhesives business. Given the environment you see in some of the destocking you see across construction markets, Europe and the U.S., does it change at all in terms of the time line for your kind of revenue synergy delivery, positive or negative? Just wondering, does the environment we find ourselves in today make that more difficult, less difficult, the same when you think about the synergies from that acquisition?

[Thierry Le Hénaff, Chairman & CEO]

Okay. I will start with the second one, and then I will go back to the previous one. On national, before answering more difficult, less difficult, I would say, certainly more relevant because Ashland's adhesive is really an additive rather resilient. And on top of that, Ashland's adhesive is really as a very minority part in construction. So as you know it's pressure sensitive adhesives for most of it is steps labels, packaging.

So it's less impacted by -- and it's mostly a U.S. sales base, okay? So for these 2 reasons, I would say Ashland is more resilient than -- by far than the rest of the group. One said that it shows that the general economy is weaker than it was last year or the year before, everybody recognizes that whatever your business is. And Ashland will suffer a little bit from that, but less than the rest of the group. So in terms of ramp-up of the sale of Ashland because of this general climate from what we see in the first part of '23 will be a bit later in terms of development, but we will catch up as soon as the economy is recovering.

I have absolutely no doubt that Ashland is a great acquisition and will deliver now or semester-by-semester or by year, you can have some -- you can be a little bit in advance or a bit later. But overall, on the 3, 5 years, we'll deliver what we promised on Ashland, no doubt about that. But that now on your first question, which to a certain extent was answered when I answered for Ashland, is partially at least, U.S. is the most resilient part in the world. Europe is suffering. China is suffering -- when I discuss with the teams, so -- and in terms of end market, but you mentioned it yourself, it's mostly constructive -- it's more construction than the rest of the market.

You have some markets like automotive, which is quite okay. You have also what is related to oil and gas is quite okay everything, but we're very small for Arkema is certainly grain. So you have some niches which are going okay. But I would say, overall, it's -- the environment is weaker at the beginning of the year. And -- but it's mostly construction in Europe, I would say, is the largest weakness. Now when we discuss with the team and this is why we mentioned that we expect recovery starting from the spring, progressive recovery to accelerate more into civil life.

When we discussed with the teams, they share this feeling. Now do we see it in the orders from the customer yet? The answer is, for most of it, no, but it's still early and we are still end of Feb, so we'll see. So we maintain this statement, starting from the spring, but you don't see too much so far in the order book from the customer, but we don't have long order books and so [indiscernible].

[Operator]

The next question is from Laurent Favre with BNP.

[Laurent Favre, BNP]

I've got, I guess, one question, but it's a 3-part question on Adhesives. The number one, can you talk about pricing in areas of the business where you would expect pricing to be resilient even if raw material and prices are, I guess, collapsing, maybe that's the right word. The second question, Thierry, you mentioned opportunities on the M&A side. I was wondering if you could say anything about the pipeline? And then the third question, when you announced the Ashland's acquisition, you mentioned the, I think, 17% margin targets for Adhesives.

What does it translate into now given the new environmental cost? What kind of margin do you think that 2024 target actually is achievable for Adhesives?

[Thierry Le Hénaff, Chairman & CEO]

Okay. Thank you, Laurent, for your question. In fact, with regard to Adhesives, the raw material has not really started to go down. So because of that, the pricing is resilient for most of it, I would say. In fact, it's a product of today.

But maybe it's good news, the raw material, maybe with the exception of China, but adhesives market share in China is quite low. So it's not a topic.I would say raw material have not decreased significantly. So I think we have good pricing and there is an overall inflation which are going beyond the raw material with energy, with salaries, et cetera. So it's important to at least maintain our pricing in Adhesives is not increasing in some pockets. So this is what we do because we have done quite a good job last year, but there are still some pockets where we are a bit late and we need to finalize our job in Adhesives.

With regard to M&A, we have a pipeline of which I cannot comment as you can imagine, but which is quite okay.

But as I mentioned a few times, I think with regard to M&A, it's important that the base results are restated and that the multiple are also restricted. So we continue to push, but we are -- we prefer to take our time at least for the first part of the year, but it remained. We are still as committed as we were to continue this fragmented world of adhesive to make acquisition, but I don't expect too much in the first semester.

With regard to the margin target of Bostik, we consider that let's assume that the raw material environment is staying exactly the same as today. I would say the math that we have done in terms of dilution of margin target, which is your question, compared to when we announced the 17% is about 2.5%. This year is about 1.7%, and we had 0.8% from the previous year.

So this is 2.5%, so the 17% correspond to 14.5%. But at a certain point, we'll come back to raw material as they were before. So the 17% is still valid.

But if in '24, we have, let's say, raw material environment, which is between the one we had in 2021 and the one of today, then we will have to adjust the 17%, but it's mechanical. It's nothing to see within interesting performance of additives. And you could see it with all the downstream chemical business, they have been affected the same way. If you look at the competitors or in the industry which are close to the adhesives.

[Operator]

The next question is from Chetan Udeshi with JPMorgan.

[Chetan Udeshi, JPMorgan]

A couple of questions from my side. First one was to clarify, Thierry, you said Q1 will be close to consensus. And I'm just wondering what consensus are you referring to? Because on Bloomberg I see 357. So you think that is the right pace or you have a slightly different

consensus than that?

So I just wanted to confirm. The second question was a bit more technical. I was just looking at the reported EBIT in fourth quarter and it was just €18 million and I think the -- there's always some delta between reported and adjusted EBIT, but it was much higher than usual at almost €128 million in Q4. So I was just curious what was included in those €128 million adjustments in Q4 besides the usual PPA?

[Thierry Le Hénaff, Chairman & CEO]

Okay. So [indiscernible] Chetan. And on the first one, the consensus is 325. This is a Bloomberg one. I check with -- which one. Visible Alpha and internal consensus. Okay. So yes, the one we see is 325 which is a content when we published is the same -- I mean, it's the method exactly, okay? So Marie-Jose, your thoughts?

[Marie-José Donsion, CFO]

So for the nonrecurring and the P&L, we have actually completed the purchase price allocation of the Ashland and the [ Dermophil ] acquisitions in the Q4. So there was actually a substantial catch-up for the amortization of that PPA. So classically, we had €20 million, I think, per quarter type of impact on PPA amortization. And Ashland amortization of PPA is adding something like €50 million per year. So this is basically what's happened in Q4.

It's just a one-off catch-up of the purchase price allocation of Ashland that took place. And obviously, in a cumulative basis, next year, you would have 2 additional months of depreciation of PPA as well falling in this category. Other than that, frankly, on the nonrecurring, it's pretty much a stable thing. We review classically depreciation of assets or our provision levels and we have some start-up costs coming from the Singapore plant and that's about it.

[Chetan Udeshi, JPMorgan]

So can I confirm the start-up costs are actually classified as nonrecurring costs?

[Marie-José Donsion, CFO]

That's correct.

[Chetan Udeshi, JPMorgan]

And how much was -- how much were they costs in 2022? Can I just confirm the number, you have it?

[Marie-José Donsion, CFO]

So basically, we assume roughly at this moment because obviously, the ramp-up of the plant has been very progressive across the year. But let's say, per quarter, I would estimate around €15 million. So this is also probably an estimation you should have for the Q1.

[Thierry Le Hénaff, Chairman & CEO]

And the plant should -- as Marie-Jose there mentioned, it's start up by -- you have different steps. So now at the end of Q1, the startup will be fully completed. And now we would be in a ramp-up of commercial phase, which we look on gradually. So -- and it has been -- so it's not the financial question, but it's important for you to know that we are very satisfied with what we see in terms of quality of products and quality of construction. So it would be a very interesting asset for the coming years for chemo.

[Operator]

The next question is from Jean-Baptiste Rolland with Credit Suisse.

[Jean-Baptiste Rolland, Credit Suisse]

I noted that you referred in your Materials division to the share of products, which are less than 5 years old. I think you mentioned above 15%. So I was interested if you could comment to what extent you look at this metric or what you infer from it for this division, but also for your other divisions. I'm purely interested in maybe the evolution that you've seen if you have any target for this kind of product? And how generally you see Arkema's position?

[Thierry Le Hénaff, Chairman & CEO]

So the way I look at it, I think it's important to monitor it, especially for our R&D and marketing teams. And this is why we wanted to communicate it with you because sometimes we have questions. At my level, I put more emphasis on the -- and it comes to the €1.5 billion of new sales on this 5 growth platform until 2030 is correlated, but there are different KPIs.

I look more as a new business development of structure or new platforms supported by megatrends, the margin, which is related and how much EBITDA it brings to the bottom line. So I would say it's an internal -- it's more internal KPI, which allow us to make sure that we have a renewal of our portfolio, but this 5 years old remains completely disruptive new products or renewal, ongoing renewal of the resins [indiscernible] -- I think it's a KPI that we follow, but for me it's not the best KPI.

The best KPI is we have defined a certain number of growth platforms, most of them being supported by megatrends because of the 5 one which are communicated externally on which you have €1.5 billion of new business, up until 2030 versus 2019. We have other platform which are complementary, more traditional.

And this, for me, is the largest KPI that we are following internally and which we follow business unit by business unit and market by end market. And part of the Capital Markets Day, by the way, will take the opportunity to communicate with a little bit more granularity on this number because we have some questions, 1.5 where you are on the trajectory, what is behind. We don't want to disclose competitive information, but I think Capital Market Day can be an opportunity to give you a little bit more granularity on this topic.

[Operator]

The next question is from Jaideep Pandya with On Field Investment Research.

[Jaideep Pandya, On Field Investment Research]

The first question I have is on PVDF. It's a 2-part question. So in the short term, we've seen a very sharp drop in R142b prices in China. So do you think that there could be scope for some margin expansion in the short run because of this? And then a more fundamental question is really how do you see the product development in terms of more capacity, more projects, especially in the U.S. or are you going to take a bit of a back-step because there is potentially a risk of overcapacity in China? So that's my first question.

And the second question really is around a few of the projects that are in a ramp-up phase this year where, I guess, the guidance for EBITDA is between €50 million to €70 million. So when we actually see a progressive ramp up of this in 2024, what sort of EBITDA contribution should we expect from these projects?

[Thierry Le Hénaff, Chairman & CEO]

Okay. With regard the very [indiscernible] for 142b, I assume you mean in China. I would say when in fact, you have different factors, which would be influenced '23 with '22, it relates also to your question and your second question. You have the fact that PVDF in '22 was really positively impacted by an exceptional [indiscernible] first semester at least 9 months and we recognize that. I mean, we are very transparent, as you know, as a management. So we say don't take that for granted.

It will remain quite a good product line, but not at a level of '22. So part of what is happening is a combination of pricing normalization, 142b drop, but it's eaten by the pricing normalization. So I would not make a case with it. Certainly it attenuate, unfortunately, the pricing and it's also an engine of this pricing. But this pricing normalization is also coming from capacities, which were late to come, which came and which is part of the full story. And on top of that, we have our capacity, new capacity coming on PVDF.

So I would say, all in all, this is basically what we say on PVDF would still would lie, but will not continue with the kind of profitability we got in '22. It will be more normalized and this include all the parameters that you have been mentioning. Now if you take the full contribution of the new project in '23, taking it to '24, what I can say is that our project brings €50 million to €70 million, as you mentioned, in '23. And then at full maturity, which is, I would say, after 5 years in average, it will be between €180 million and €200 million.

So '22 to '24, you take a straight line between €50 million, €70 million in '23 and €100 million to €200 million, 5 years, so it's '28. You take a straight line and you have the '24 number.

[Jaideep Pandya, On Field Investment Research]

Just if I can ask a follow-up question on PVDF. Would you say that your quality and the grades that you're serving into the LFP or the NMC market is at par with the competition that you have because there's obviously a theory that one of your key competitor is suggesting you're more in LFP and there in NMC. So would you say that your portfolio is like-for-like?

And therefore, there is no reason for us to assume divergence in performance?

[Thierry Le Hénaff, Chairman & CEO]

So you know me, is proof of PVDF for other products are not the one we try to play this game of comparing competitors between each other. I mean everybody is very proud of what they are doing. So I will tell you the contrary. I think it's clear that PVDF is a broad range. You have different applications in the battery between what is the cathode technology, whether is that separator, et cetera, et cetera, and it will continue to even for years.

So our competitors have some advantage. We have other advantage.

All in all, I think we are very well-positioned. I think there is room for everybody. I think the game will continue to evolve. So I don't entail this kind of question for me.

It's minor topic. I think everyone has its strengths and weaknesses, including the one you mentioned and we are -- we know what we want to do. Our strategy has not changed since a few years. We are -- you have the current generation of battery, but then you have the solid in the middle, you have semi-solid. You have the cathode will continue to involve the evolution of the legislation. PVDF is one product, you have other products, which will come into the story.

So -- and I will certainly not disclose all our competitive advantage in this discussion. So no, I don't enter the discussion. I can just tell you that we are confident in where we are, what we know. And also to come back to your question on U.S., yes, sure. I mean we are a leader of PVDF in the U.S., will be a strong player.

And I would say each region, the competition is really region by region for most of it. So I see the Chinese dynamics, which is weighing on the pricing currently is one. Then you have the European dynamics, then you have the U.S. dynamics. I mean in this new world, it's especially for the battery, where -- which is quite strategic for each of the continent. I would say, the local supply is absolutely key.

And so I don't think there are long term too much influence between what is happening in one region versus the other regions. Okay?

[Operator]

The last question is from Emmanuel Matot with ODDO.

[Emmanuel Matot, ODDO]

I still have 2 questions for you. First, how do you intend to develop your fixed cost structure in 2023 in the context of still low visibility and high inflation? And second, where are you in the process of reducing your exposure to acrylics in Asia?

[Thierry Le Hénaff, Chairman & CEO]

So with regard to the first one, you have different elements. Clearly, in this kind of environment, we are strict on our discretionary costs, but we are not a company which will suddenly wake up and say we need to launch a big plant because we work more in continuity.

On the other side, Arkema is a company which has this advantage to work on different horizon, time horizon. So at the same time, we are very strict in our cost spendings, but we invest in certain areas. We continue to increase our cost. For example, for battery.

We mentioned that with [ Phillipe ] will invest a lot. And for example, for Polyamide 11 in terms of R&D and marketing, we invest a lot. So we have -- and we are a little bit schizophrenic. So this means that on one side, we are very strict on cost where we believe the value is limited. On the other side, we spend more money on different areas, which are very promising in terms of growth for Arkema. And beyond that, we have the inflation, which is hitting more than usual this year.

It was also the case last year. And for me, we have a tendency to discuss our pricing versus raw material now versus raw material and energy. It's important that our pricing takes into account the fact that the inflation on fixed cost is higher than it was in the past is part also for -- to overall pricing policy unit to value the amount of cost you put in the process. But if you want to be reassured, I mean, yes, we have strict on cost management. And the second question was?

[Marie-José Donsion, CFO]

Acrylics in Asia.

[Thierry Le Hénaff, Chairman & CEO]

Acrylics in Asia. As you know, we put more emphasis on the -- and it's different nature on fluorogas was really a straight sale on Acrylics on Asia is more partnership on capacity reservation. And I would say, to be frank with you, the COVID period has not been helpful for that because you need to be present in China to discuss this kind of partnership and we have not been -- I mean, it's really now after 3 years that we will be able again to come to China. So give us a little bit of time. Okay.

Any other question?

[Operator]

No other question from the phone, sir.

[Thierry Le Hénaff, Chairman & CEO]

Okay. So thank you very much for your question, already interesting and looking forward to seeing you in presence. And if you have any further questions, don't hesitate to challenge Beatrice and Peter this afternoon. Thank you.