In the recent Fourth Quarter and Full Year 2023 Earnings Call, Solvay (EBR:SOLB)'s CEO Philippe Kehren and CFO Alexandre Blum discussed the company's performance and strategic outlook. Despite a 13% drop in sales due to decreased demand, Solvay (SOLB.BR) maintained a stable EBITDA margin of 25.5%.
The company unveiled new operating segments and outlined a strategy focused on safety, employee engagement, customer loyalty, and financial performance. For 2024, Solvay anticipates a 10% to 20% dip in underlying EBITDA, primarily in the first half, while aiming to maintain investment grade and provide stable to increasing dividends.
Key Takeaways
- Solvay's sales fell by 13% in 2023, attributed to lower demand, especially in the latter half of the year.
- EBITDA margin remained stable at 25.5% despite the sales decrease.
- The company announced new operating segments: Basic Chemicals (61% of net sales) and Performance Chemicals (39%).
- Solvay expects a 10% to 20% decrease in underlying EBITDA for the first half of 2024, with potential for higher volumes in the second half.
- Strategic actions are in place to transform the company, including cost-saving initiatives and a commitment to carbon neutrality by 2050.
Company Outlook
- Solvay foresees a challenging first half of 2024 with a potential rebound in the second half.
- The company is focused on maintaining an investment grade and plans to pay stable to increasing dividends.
- Mid-term targets for 2028 remain a priority, with a commitment to delivering on strategy despite current challenges.
Bearish Highlights
- A significant decrease in underlying EBITDA is expected in the first half of 2024.
- The current geopolitical and macroeconomic climate is impacting demand negatively.
- Soda ash prices are not anticipated to decrease further, but recovery to previous levels is unlikely due to altered cost bases.
Bullish Highlights
- Solvay's strategy includes consolidating leadership positions and driving cost savings.
- Investments in rare earth manufacturing and a coal phase-out in the US demonstrate commitment to sustainability.
- ESG targets are being actively pursued, including carbon emission reduction and gender parity in management.
Misses
- The company experienced a 13% sales decline in 2023, with a significant impact on financial performance.
- Anticipated decreases in EBITDA for the first half of 2024 reflect ongoing market challenges.
Q&A Highlights
- Solvay clarified that around 30% of soda ash contracts are long-term, providing some stability in revenues.
- Energy hedging policies are in place, though not perfectly correlated with energy costs.
- The Green River expansion's incremental capacity is expected in 2026, with growth CapEx paused for the current year.
- The NEOM project is still in the evaluation stage, with potential significant CapEx if the final investment decision is positive.
- Solvay aims to deliver €260 million in cash flow regardless of market conditions and has improved its hedging policy focusing on energy transition.
Solvay's leadership remains committed to navigating through the evolving market landscape, emphasizing resilience and strategic initiatives aimed at long-term growth and sustainability. The company encourages investors to engage with their Investor Relations team for further details and clarifications.
Full transcript - None (SVYSF) Q4 2023:
Geoffroy d'Oultremont: Good afternoon, everyone, and welcome to Solvay's Fourth Quarter and Full Year 2023 Earnings Call. My name is Geoffroy d'Oultremont, Head of Investor Relations, and I'm joined today on our call by Philippe Kehren, the CEO; and Alexandre Blum, the CFO of the Company. This call is being recorded and will be accessible for replay on the Investor Relations section of Solvay's website later today. I would like to remind you that the presentation includes forward-looking statements that are subject to risk and uncertainties. The slides related to today's broadcast are also available on our website. And with that, I'll turn the call over to Philippe.
Philippe Kehren: Thank you, Geoffroy, and good afternoon, everyone. It's my pleasure to be with you today for my first earnings call as the CEO of Solvay. It is already more than three months now since the spin-off of Syensqo, and I would like to begin the call by sharing with you a few personal observations. As leader of this great business, these first 100 days confirmed a lot of things I already knew, such as the reputation of Solvay with our customers, and they also reinforced my conviction that we are even better positioned as a simplified and focused organization to reach greater heights for our customers, employees, and investors. But first, a word on safety. At Solvay, ensuring Solvay's employees' well-being is a daily priority for me and the executive leadership team. It's at the heart of everything we do. So, while our performance in this area over 2023 was satisfactory, we must remain vigilant and continuously strive for improvement in our safety standards. Although we see less and less near misses with high severity potential, the global number of reported injuries and illnesses have not improved in 2023. So, you can count on me as CEO to keep focusing on safety every day. Since January, I have traveled to many sites along with my colleagues of the executive leadership team. Most of our people work in one of our 45 industrial sites around the world, and we've made it a priority to meet as many of them as possible. Solvay's employees are our main assets. They are essential to our future success. And now, more than ever, we realize how much they are committed and how much they are engaged in their roles. As CEO, it's really wonderful to feel the energy within our Company. I'm not alone in this journey. I have a very strong leadership team around me, completely focused on Solvay's transformation. Our leaders are all seasoned professionals and we have a great balance between people who grew up in Solvay and people bringing new and fresh views from other global organizations. Next, let's discuss our clients and suppliers. During my first 100 days, I had the opportunity to meet with a lot of customers and suppliers, and I'm happy to see that they are all really supportive of our roadmap. They want security of supply, including regional supply. They also want low-carbon products and we cannot do that without their support. Also, I could realize how the name of Solvay is on top of their mind when they think about reliability or process innovation. That's very encouraging and very energizing. We will capitalize on this employee engagement, customer loyalty, and Solvay's reputation to continue deploying our strategy and deliver our goals for the benefit of all our stakeholders. Finally, let me make some observations on our financial markets perception. We met many investors during the post-Capital Markets Day roadshows in November, and these interactions were extremely valuable to us. I believe that our story today is simple and straightforward, but we also understand that we are a new Company and that we need to continue explaining who we are, what we stand for, and continue delivering quarter after quarter to be fully understood and trusted. I'm more convinced than ever that we are all set to deliver on our transformation which will benefit shareholders, employees, and customers. Now, let me remind you, sorry, who we are. We are Solvay. We are mastering the elements that are essential to our world. Our products are made with molecules that already existed decades ago, and that will still be needed decades from now. We possess an unmatched and focused portfolio of world-leading assets. We have five global leading technologies, soda ash, peroxide, silica, fluorine, and rare earth. And we have one very strong regional business with Coatis in Latin America. We like this portfolio because of the quality of the assets and the quality of the people operating them. And we also like this business because there is some very interesting potential in it, such as the electronic grade hydrogen peroxide for semiconductors, or the rare earth hub in France for permanent magnets. With these technologies, we serve a wide range of end markets. None of our markets make up more than 22%, so this enables us to be more resilient to market challenges than many of our peers. As a result of our leadership positions and end market exposure, our businesses are very resilient, probably more resilient and less cyclical than many of you might think. Over the last 10 years, we've been able to deliver strong EBITDA performance while keeping our cash conversion ratio between 60% and 70% thanks to the way we actively manage our investments. Our strategy post-separation is both much simplified and clearer, and it is based on four pillars. The first one is about our portfolio and consolidating our leadership positions in every market in which we operate. This is what I explained just before. Secondly, to drive excellence and competitiveness through process leadership and cost savings. This will be an important driver of our EBITDA growth over the next five years. Savings have already been identified and we started to deploy initiatives to deliver them. We are confident we will be able to reach our €300 million per year savings by 2028, and you can count on us to push the teams to accelerate and to deliver as much as possible already in 2024. Our third pillar is our commitment to realize our energy transition and deliver carbon neutrality by 2050. We know what we need to do to achieve it. And let's be clear, this is critical not only for the planet but also for the competitiveness of our sites, especially in Europe. We want to be a lead actor in the transformation of our industry. This is what drives me and this is what drives all of us at Solvay. Last but not least, we are focused on cash generation. We have a very clear cash usage prioritization. Out of the €4 billion of free cash flow before CapEx we expect to generate over the next five years, we will spend on average one-third in what we call essential CapEx, one-third for dividends, and the remaining third, when available, will go in growth investments and other value creation initiatives. This strategy is not just words. Let me be more concrete and give you five recent examples of how we put this strategy into action. You may have seen our announcement from just last week on our future investment in the rare earth value chain in La Rochelle, France. This agreement further confirms our strategy to establish a significant manufacturing footprint for the rare earth permanent magnets value chain in Europe. This will be a clear driver for accelerating growth in our rare earth business. Then you heard us speaking of Star Factory at our Investor Day. This is our ambitious program to transform all our plants and build the plants of the future. Our plants will become the benchmark in the industry. This is key to maintaining our competitiveness and leadership. I have seen how digitalization is already used extensively in our rare earth business in La Rochelle, France, as an advanced control tool and there is clearly a lot more to do. Recently, and I'm particularly proud of this, we announced the complete coal phase-out in the U.S. at our U.S. soda ash plant in Green River, Wyoming. By 2025, overall emissions from Green River will have decreased by 20% compared to 2021, despite a 25% increase in production. And let me also remind you that by the end of 2024, Solvay's Rheinberg site in Germany will become the first soda ash plant in the world to be powered primarily with renewable energy. Then, another example that covers many of our strategic priorities is our projected soda ash plant in Neom, Saudi Arabia. First, it confirms that when demanding people think about these kinds of ambitious projects, they think about Solvay first. Second, that plant will be the first one based on the new e.Solvay process, more cost-effective, and in this case even carbon-neutral. Finally, about our cash usage, I would say that 2024 gives us immediately the opportunity to demonstrate our agility. We will start the year with prudent investments as we are committed to protect the dividend payment in a low-demand environment. With that, it's a great pleasure to turn the call over to Alexandre, who will first comment on some of our ESG progress before moving to financials. As part of his financial review, Alex will also give you some more context on the way we present the numbers and then review the highlights of our '23 performance. Alex, to you.
Alexandre Blum: Thank you, Philippe. Good morning, good afternoon, everyone, on the call. I will start with an update of our ESG roadmap and targets, and highlight the progress we made in 2023. As you know, we are committing to reduce our carbon footprint as far as we can. We've already achieved a 19% reduction in our Scope 1 and Scope 2 emission versus 2021. We recognize this was mainly driven by lower volumes. However, all our sustainability projects that will structurally contribute in 2021 and 2025 will be able to offset any increase of the GHG emission due to the recovery in demand to come. Indeed, we have taken significant steps towards switching to renewable energy, be it through biomass, wind power, solar, to make that happen. And beyond our own emission, we also target to reduce emission along the value chain by minus 20% by 2030. To date, we've already achieved an impressive minus 16% reduction. We also acknowledge the positive trend on safety, but we'll never be satisfied and we'll continue to raise the bar to reach the zero accident target. As you can see, bringing gender parity at mid and senior-level management is a challenging goal. With the Spin-off, the starting point has been reset, but this does not change our parity ambition. While we still have a long way to go, our teams are taking initiative to progressively close the gap. Lastly, we initiated our first pilot program to evaluate our adherence to living wages standards in the U.S., U.K., and China. This is in line with our pledge to provide a living wage to all employees by 2026 as part of the UN Forward Faster initiative. Our findings demonstrate continued alignment which reflects our position as a responsible and ethical employer. We are well advanced in our plant and this further reinforce our commercial competitiveness and our attractivity as an employer. Moving to financial, let me start by stating the obvious. The state of - the set of financial statement we published this morning is complex, especially our balance sheet and cash flow statement. Obviously, an accounting consequence of the recent demerger of Syensqo. As you know, the partial demerger was approved by Solvay's shareholder at the EGM on December 8th, 2023, and became effective on December 9th. As a consequence, the Group present the Specialty businesses as discontinued operation for the period prior to the partial demerger in the consolidated 2023 statement, and the comparable figure for 2022 has been adjusted accordingly. I won't go in too much details around this, but let me mention two points. Our profitability and free cash flow is set out in our press release and presentation material on a like-for-like basis and this allows for easy comparison. Today, our capital structure at the end of 2023 is consistent with what we have announced at the Capital Markets Day. In the appendix of the presentation, you will find more details about the structure of the account, and if you have more questions on this, the Investor Relation team is available to discuss with you in the coming days. We have also announced this morning our new operating segments to better align with the new Group strategy and operating model. We now have three reporting segments. Our Basic Chemical segment hosts chemical intermediate businesses focused on major and resilient markets. Solvay is a world leader in soda ash, bicarbonate, and peroxides. These global businesses serve major markets that include building and construction, depollution, consumer good, and food. Together they represent 61% of our net sales. Performance Chemicals hosts a wider range of products in our Silica, Coatis, and Special Chem business units. For the sake of clarity, the Special Chem business unit comprise of our Rare Earth and Fluorine technologies mentioned earlier by Philippe. These Performance Chemicals are subject to customization based on the unique formulation and application expertise while remaining essential product by nature. These businesses share similar economic characteristic and are also high-quality assets with a strong position on their market. Together they represent 39% of our sales. Finally, the Corporate segment comprising corporate and other business services such as our Global Business Service Centers as well as Procurement and Energy Expertise Centers. With that out of the way, let me now focus on the key highlight from our earnings release. To add comparison, I will comment on the organic evolution meaning at constant scope and currency. Sales were down 13% year-on-year in 2023. This is primarily due to lower volume as a result of softer demand while prices were slightly up in a lower variable cost environment. The softer demand became visible across all businesses in the second half of the year and sales were down 19% in Q4. Underlying EBITDA was €1.2 billion in 2023, essentially flat organically, with lower volumes being offset by increased net pricing and fixed cost discipline. Overall, the EBITDA margin increased by 1 percentage point to a record 25.5%. In our Basic Chemicals segment, demand was still holding up well in the first half of the year, but it started to deteriorate during the summer, in parallel with energy prices going down as well. In our Performance Chemical businesses, demand has been softer throughout the year in our Special Chem and Coatis business, while Silica started to see some improvement around year-end. Moving to cash. The free cash flow to shareholders on continuing operation amounted to €561 million in 2023. This strong performance is driven by two major elements, a solid EBITDA and an exceptional high contribution from working capital variation. The latter is due to the softer demand around year-end and the effect of the simplification of our portfolio. Indeed, the spin-off of the Specialty activities and the phasing out of our Energy and Thermal Insulation businesses allowed us to improve the working capital and consequently our EBITDA. The balance sheet now. We ended the year with an underlying net financial debt of €1.5 billion. This is slightly lower than the previously announced €1.7 billion, mainly due to the cash phasing around year-end from separation costs. As I stated earlier, the capital structure of Solvay after the completion of the partial demerger is in line with the targeted capital structure announced in November 2023. This will clearly provide a very strong platform for us to deploy our strategy while reiterating our commitment to pay stable to increasing dividends. Provisions were €1.6 billion at year-end and that included close to €0.8 billion of provision relating to employee benefits, primarily pensions, and approximately €0.5 billion of environmental provision. Based on these strong financials, the Board of Directors will propose a total gross dividend of €2.43 per share at the General Meeting in May. If this is approved and taking into account the interim gross dividend of €1.62 per share paid in January, the final gross dividend of €0.81 per share will be paid in June. So, as I mentioned during our Capital Markets Day, our financial policy has two red lines: first, maintaining an investment grade; and second, paying a stable to growing dividend. The capital structure and the recommended dividend are well aligned with this. Before I hand the call back to Philippe, you remember that we provided you in Q3 last year with the 2023 base for the 2024 outlook. The details can be found in appendix, but let me quickly re-explain. With simply organic 2024 EBITDA growth implied by our guidance is based on 2023 restated figure of €1,154 million versus reported figure of €1,246 million. There are five reconciling elements that were set out in details in the press release this morning, so I don't want to repeat the details, but briefly, these elements relates to two things: the phase out of our two businesses with approximately €100 million EBITDA impact; and second, over adjustment netting themselves relating to dis-synergies in joint venture. Let me also remind you that the transfer of the electronic grade of peroxide moving from Special Chem to Peroxide as of the 1st of January. The electronic grade of peroxide is now well-established business which benefited from the know-how of Special Chem to develop in electronic markets and will be now more naturally hosted in our Peroxide business unit. Finally, please note that the 2023 quarterly underlying EBITDA sales and EBITDA restated figure will be published in April ahead of our Q1 2024 publication. Now, I'll transition back to Philippe for the full year 2024 outlook and his closing remarks.
Philippe Kehren: Thank you, Alex. Well, it's no secret that 2024 is likely to present it's share of challenges for our industry. First, on volumes. Generally speaking, the challenging demand environment we observed in Q4 2023 has continued into the first months of 2024. So, as a result, we take a prudent but realistic view of H1 2024. Across our product portfolio, we expect current demand levels to continue over the next few months and as such, we expect H1 '24 volumes to be broadly in line with H2 '23. Although visibility on H2 '24 is low, based on selected customer feedback, our current expectation is for H2 '24 volumes to be at least at H1 '24 levels and potentially a bit higher. Now on prices, starting with soda ash, and I remind you that soda ash alone represents only slightly more than 30% of our sales in '23. You all noticed the publications from industry experts mentioning strong price decreases year-on-year in 2024. While we don't communicate on specific numbers, it is indeed correct to state that soda ash prices are down by double digits in 2024, but that includes both the part relating to the demand and the part relating to the decrease of the energy prices. This will weigh on business margin this year. However, pricing trends across Solvay's other businesses are forecasted to be extremely resilient year-on-year. The lower energy and raw materials prices should positively offset some of the negative pressure on the top-line. We also started, and you know how important it is for us, to implement cost savings initiatives that will start to deliver results already in 2024. So, what does this mean for Solvay's financial in '24? First, we expect for 2024 an organic decrease of the underlying EBITDA by minus 10% to minus 20% versus a high comparison base in 2023, especially in H1. Based on the new perimeter set out by Alex in his presentation, this translates into an absolute range of between €925 million to €1,040 million for our 2024 EBITDA. Secondly, free cash flow to Solvay's shareholders from continuing operations is expected to be at least €260 million and this is in line with our cash usage prioritization and it will be supported by our ability to manage CapEx and working capital according to the market environment. As an absolute priority, we will ensure the essential CapEx and the payment of the dividends while keeping the strength of our balance sheet intact. Finally, a word on our mid-term targets that we presented last November during the Capital Markets Day. We obviously anticipated a softer 2024 when we gave them to you. And the outlook we announced this morning does not change our view and our convictions on our 2028 targets, which we reiterate today. As we move forward in 2024, our two priorities as management are clear. I am hugely excited to look forward to continuing to develop and reestablish the Solvay brand in its new format. We are Solvay. We are 160 years old, but we are entering a new chapter, a reenergized and more agile Solvay. We need to re-explain our activities, our strategy, and our vision to our employees, our clients, and suppliers, and also to you, the financial community, to all of our stakeholders that are on this journey with us. Then, as I set out earlier, even in the short term, since the merger, decisive actions have already been made to continue to transform the Company and deliver on all our objectives. It's about operating model, energy transition, and cost-saving initiatives. You can count on me and on the management team of Solvay to work tirelessly to deliver on our targets, again, for all our stakeholders. So, thank you for listening. And now Alex and I would be delighted to take your questions.
Geoffroy d'Oultremont: Thank you, Philippe and Alexandre. For the Q&A session, we have two recommendations if we may. The first one is to ask one question so that it leaves some time for others. And the second one, we obviously understand that you might have some very technical questions about the structure of these unique sets of financials. Please keep them for us. The Investor Relations team will help you understanding all of this and focus today on strategy and important questions for the management. So, Caroline, now you may open the line for questions.
Operator: [Operator Instructions] We will take the first question from line Frank Claassen from Degroof Petercam. The line is open now. Please go ahead.
Frank Claassen: Yes. Good afternoon. Frank Claassen, Degroof Petercam. My question is on CapEx. I noticed that in '23, you had quite a high CapEx number, €450 million. So, what were the main drivers for this high CapEx number? And what can we expect for '24? And what are the main projects here? Thank you.
Philippe Kehren: Yes. Thank you, Frank, for this question. Indeed, we voluntarily inflated, I would say, our CapEx decisions in 2023. And I will let maybe Alex explain a little bit what was the rationale behind and what we plan to do in '24, where obviously we are starting the year in a very - much more prudent mindset.
Alexandre Blum: Sure, Philippe. Yes. In 2024, as you remember, we started the year with quite high demand. And we had a result which was quite high, almost at the level of our record 2022. So, we decided to sustain not only the investment which are necessary for sustaining our plant, for maintaining our plant and the energy transition, what we call the essential CapEx. But as demand was there, we've continued to invest for growth. Again, each time we invest, we invest on two criteria, affordability and merit. So, 2023, we had a project which met both criteria. So, we've invested. To give you an example, we've continued to invest in our additional capacity in the U.S. for soda ash, which will come online in 2025, and several other type of investment. Obviously, since the middle of 2023, we've seen the demand decreasing. So, that's why we've started to really reduce our discretionary investment to the bare minimum, with only no targeted investment. So, that's the logic. Again, I mean, we've told you many times, we have the ability to manage our investment, means when we can afford, when the cash flow is sufficient to pay for discretionary CapEx, we will invest. When the times are harder, we will reduce.
Philippe Kehren: And by the way - in '23, yes.
Frank Claassen: '24, yes.
Philippe Kehren: '24, okay. Yes. We will go to '24, but I think in '23, it was also coming from the expansion that we are making in the U.S. on our soda ash plant. So, now in '24, yes.
Alexandre Blum: Yes. Now '24, we said it in the Capital Markets Day. We found the first bucket of investment, essential CapEx, which are around €260 million. The rest, we will invest if we can. So, this investment that for the moment we plan to do are really sustenance CapEx and the energy transition. This is how we start the year. Let's see in the second part of the year. I mean, if the demand is there, if demand is picking up, there will be a need for capacity increase to follow the growth. This is when we will restart. So, we don't want to give you an exact number of CapEx because this is what we're going to decide and manage during the year.
Philippe Kehren: This is exactly the flexibility we have. And that's what we explained and this allows us to guarantee, in fact, the dividend payment. Does that make sense, Frank?
Frank Claassen: Yes, it does. Absolutely. Thank you. Thank you very much.
Philippe Kehren: Thank you.
Operator: Thank you. We will take the next question from line Matthew Yates from Bank of America (NYSE:BAC). The line is open now. Please go ahead.
Matthew Yates: Hi, good afternoon, everyone. We'd like to follow up broadly around the cash flow guidance. You're saying at least €260 million. You've given us an EBITDA number. Maybe you can help us with a few of the other big moving parts. I guess you're not going to give us an explicit CapEx number, but how about some of the moving items like restructuring charges that may be associated with your efficiency goals or the working capital unwind you've mentioned associated with discontinuing some of those operations? If you can just help us flush out really that free cash flow guidance so we can make sure we understand the big moving parts, that'd be helpful. Thank you.
Philippe Kehren: Yes, absolutely. I will give Alex the opportunity to give some more color on these different variations. Just to be crystal clear, I mean, this €260 million number is the minimum guaranteed in terms of free cash flow to shareholders. So, obviously - and this means that whatever happens on the market, whatever happens in the range of EBITDA that we are giving our guidance, we will guarantee this free cash flow to shareholders. Now, to come back to your question, maybe some color on the different variations.
Alexandre Blum: Yes. Hi, Matthew. So, what I can give you, because I mean it's what happened in 2023 and will not repeat in 2024, is that, in 2023, we had three buckets which will lead to 2024. The first one, the first bucket is around the phase-out of businesses. We had indicated that about €100 million of EBITDA was linked to the phase-out of energy, third-party business, and Thermal Insulation and Special Chem, so that obviously will not repeat in 2024. In 2023, we had also some one-off on working capital, things we could optimize as we were starting to simplify the role as we were phasing out those businesses. That's also a significant amount, which is good that we could deliver it in 2023. That has helped us to reinvest, but that will not repeat in 2024. Then we have the decrease in activity, which is impacting EBITDA, which we will compensate partially by CapEx.
Matthew Yates: Thank you.
Philippe Kehren: Does that answer your question, Matthew?
Matthew Yates: Yes, I guess in part. Thank you. We can follow up offline. Thank you.
Philippe Kehren: Okay.
Operator: Thank you. We will take the next question from line Chetan Udeshi from JPMorgan (NYSE:JPM). The line is open now. Please go ahead.
Chetan Udeshi: Yes, hi. Thanks for taking my question. I was just wanting to - there is no Q1 guidance, so if you can help us understand how you see Q1, different moving parts, volume, net pricing, et cetera, et cetera. But what I'm trying to get to is, if I look at your Q4 EBITDA, it's €238 million underlying that you reported. We should be - I guess we should be taking out €25 million from that for the run rate, given that you are exiting the businesses that you talked about. So that sort of gives us €215 million as a starting point. And then we know the soda ash prices have come down in Q1 versus Q4. So, I guess the question is, are you expecting Q1 actually to be below €200 million EBITDA? And if that's the case, isn't there an implied sort of a strong recovery through the year when in reality you were actually talking about flat volumes or slightly better volumes only in second half versus first half? So, maybe you can just help us understand how are you phasing the numbers throughout the year from Q1 to the remainder of the year. And the second question was, we understand your point on soda ash. It's also somewhat seen to be a late business, but can you talk about what you see in the other markets? Some of these markets like silica or hydrogen peroxide or Coatis, they tend to have a bit of an early cycle feel to them. And we've seen some of the other early cycle chemical companies talk about a rebound in demand. Is that something you don't see at all in those businesses?
Philippe Kehren: Thank you, Chetan. Very good questions. In terms of phasing, I mean first clearly it's difficult to - I think we're still in a very uncertain environment and so obviously it's difficult to make predictions, provisions, I would say, in that period of time of the year. But still, I mean what we can say is that indeed, if you look at Q1, I think Q4 is a good reference. You have on one side a negative impact coming from the soda ash pricing, that's true. But on the other side, this will be - this might be offset by slightly stronger volumes coming in particular from re-stocking effect. We know that the last month of the year, in particular December, are traditionally quite low and we've seen some additional volumes at the beginning of this year, most probably due to the re-stocking in the supply chain. It's difficult to say more at this point. So, the numbers that you have in mind are probably a bit, I would say, pessimistic. Then, on your question.
Alexandre Blum: If you allow me to address Chetan, because - yes, yes. On your comment you mentioned the €100 million. The €100 million is mostly linked to Q1 to Q3. Okay. So, it seems you've done the calculation to where you were removing €25 million from Q4. We phased out the Thermal Insulation and the Energy third-party of business during Q3. So, I mean, this €100 million are mostly concentrated on Q1 to Q3.
Philippe Kehren: So you don't have to take that into account between Q4 and Q1.
Alexandre Blum: This is roughly a good base or a good starting point.
Philippe Kehren: Yes. Q4 is a good basis to calculate Q1. Is it clear, Chetan, on this point, before I move to the markets?
Chetan Udeshi: I'm a bit confused, but maybe just good to clarify. So are you saying that Q4 €238 million is a good starting point without any adjustment for Energy and the exit of the business? And then what about the impact from soda ash? Are you saying soda ash impact, more or less would be offset by that seasonal volume rebound that you see across the businesses? So it's probably not much different from Q4, maybe plus minus something, but it's not going to be massively different from Q4 in Q1. Is that the message?
Alexandre Blum: Again, we are not going to give --
Philippe Kehren: We are not giving numbers, but directionally, that's the message. Yes.
Alexandre Blum: Yes.
Chetan Udeshi: Okay. Understood.
Alexandre Blum: We will publish the respective, it will be -
Philippe Kehren: Directionally, that's exactly the message. In terms of numbers, we will give you more detailed information. But that's it. Then, in terms of markets, I would say, again, it's a bit earlier. We are seeing, you're right, some positive signals. I mentioned higher volumes in the beginning of the year, but we know that part of it is probably due to a re-stocking effect. So we need to wait a little bit to see how the situation evolves in the coming weeks and months, in terms of volumes, that is. In terms of prices, the other businesses don't see the same price evolution as we see in Soda Ash. They are extremely resilient, and this is in line with what we said also during the Investors - Capital Markets Day. It's also due partly to the fact that we have also longer-term contracts in some of these businesses.
Chetan Udeshi: Thank you.
Philippe Kehren: You're welcome, Chetan.
Operator: Thank you. We will take the next question from line Laurent Favre from BNP Paribas (OTC:BNPQY). The line is open now. Please go ahead.
Laurent Favre: Good afternoon. I've got, I guess, questions on soda ash. There's three, sorry. The first one, it's, I guess, can you educate us around the structure commercially of your business now that you're expecting for this year between, I guess, quarterly contracts and annual contracts? Should we care about those quarterly announcements, for instance, in Europe? Or is your business still mostly on an annual basis? And can you perhaps also tell us to what extent you are matching energy hedging with the structure of those contracts? In other words, I mean, yes, should we care about those quarterly contracts and what's happening on the energy side? That's the first question. The second one, on your comments on stopping growth CapEx for this year, can you tell us what kind of phasing we should be assuming for Green River between 2025 and 2026, given that you're stopping growth CapEx? Should we assume that most of the incremental capacity is for 2026? And a third question on the NEOM project. I've read up to 1.5 million tonnes of capacity for this project, which I guess would run into the billions for CapEx. Can you maybe tell us, if you do go ahead with the FID, I guess, what kind of CapEx we should have in mind for the next few years? Thank you.
Philippe Kehren: Thank you very much. So, well, on soda ash, I would say the structure of our contracts remain more or less the same. So, I would say we have around 30% of our contracts that are long-term, 50% that are annual contracts. And you are right, this is mainly for Europe and for our bigger accounts. And so the remaining is shorter-term and mainly on the quarterly basis. And that's mainly Seaborne and Asia-Pacific, which traditionally is always a little bit more dynamic. And that could potentially, when the market rebounds, bring some upside as well. In terms of our Green River investment, this is ongoing, and we will be ready to produce those tonnes next year. So, whenever the market - the demand will recover, we will be ready to supply those tonnes. And you might know that those tonnes are for the Seaborne, the export market, right? So those tonnes we land on what we call the export market, and in particular Asia-Pacific and Latin America. Now on NEOM, it's true that we have just announced our intention to develop the first carbon-neutral soda ash plant based on the new e.Solvay process in Saudi Arabia in the framework of this very ambitious NEOM project. The 1.5 million tonnes is a long-term target. The first step will be a 0.5 million tonne tranche. And clearly, we are doing this in partnership with the local product developer, and our intent is to have a low CapEx contribution from Saudi. So, please don't keep in mind the huge numbers relative to those types of investments. We will have a contribution that will be, by construction, in terms of project finance, extremely limited.
Laurent Favre: Okay. And if I can just follow up on the point on contracts for soda ash, so, when you negotiated those annual contracts, TTF was in the high 30s, and it's obviously now a lot lower. Should we assume that there is upside on that energy deflation piece, or have you hedged and have you matched your energy requirements to the duration of those contracts?
Philippe Kehren: Well, you know that we are trying to put energy adjustment clauses as much as we can in our contracts. So, the upside is indeed relatively limited. And the downside, if our energy prices are going up again, is also relatively limited. We don't want to make a win-for-profit, and we don't want to be squeezed neither when we have huge variations on the energy market. Now, that being said, of course, we have a very dynamic way to manage our energy exposure, and we have some upsides that we can generate in the way we manage this energy exposure. But don't expect big swings due to energy market price variations.
Laurent Favre: Excellent. Thank you.
Operator: Thank you. We will take the next question from line Wim Hoste from KBCS. The line is open now. Please go ahead.
Wim Hoste: Yes, good afternoon. Thank you. I have two questions, please. Can you maybe guide us towards the debt service costs in 2024, now that the whole debt portfolio has been reshuffled and some new debt lines are installed? So, that's the first question. And the second one, coming back on soda ash, not only the short-term outlook, but more around the mid-term outlook for this market. In light of what is happening, for example, to the Chinese construction market, I know China is a bit shielded in terms of soda ash from the rest of the world. But still, sometimes there is Chinese capacity that starts to show up in Seaborne markets, etc. So, is what's happening to the current demand trends in China and globally changing your outlook for the medium-term, which was, if I recall well, calling for a gradual tightening of capacity utilization rates for the next three to four years beyond '24?
Philippe Kehren: Thank you very much. So I would probably start with the question on soda ash, and then I will hand over to Alex to address the question on the debt service cost. So, the mid-term perspectives on soda ash I think are very good. Why? Because demand for soda ash is really supported by the big trends. We're serving flat glass, container glass, detergents, production of bicarbonate, so that's feed, food, pharma, depollution. So, all these segments are growing with the GDP and sometimes even much faster than the GDP, as is the case for bicarbonate. So, we reiterate our vision that the demand is sustained in these segments. And except for the big capacities that I just started up in China end of last year, today there is no new capacity being built, at least no significant new capacity being built, except the one that we were mentioning that we are constructing in Green River, the expansion that will be available in 2025. There are big projects announced in the U.S. by our competitors, and also we are working ourselves on this type of project. But today the construction has not started, and it's true that we can, I would say, envisage that the market will become tight at some point in the coming months and years because we lack capacity. So, to come back to your question on China, I would say it's true that today construction is down in China. If you look at the evolution of the consumption of soda ash in China between '22 and '23, you realize that the decrease coming from the construction has been completely offset by the increase of consumption in other segments, such as in particular solar panels. I mean, the soda ash consumed to produce solar panels in China is growing extremely fast. And so all in all, the soda ash consumption in China is not decreasing. On the contrary, it has continued to go up, not as much as in the past because of the situation on construction, but it continues to go up. And we see also, I would say, a pressure on some of the least competitive capacities of soda ash in China today coming from the startup of the new natural capacity. So, we have not seen any change, I would say, in the export of soda ash coming from China. But that being said, it can have, in the short term, some disturbance or some ripple effects that we can observe here and there. So this is what I can say, I would say, about the soda ash market. And now maybe I will turn to Alex for the very serious question of the debt.
Alexandre Blum: The very simple question.
Philippe Kehren: Very simple.
Alexandre Blum: The annual cost for the debt, for the total net debt, is about €100 million. Okay. €100 million.
Wim Hoste: Okay. That's very clear. Thank you.
Alexandre Blum: Easy to remember.
Wim Hoste: Okay. Thank you.
Operator: Thank you. We will take the next question from line Jaideep Pandya from On Field Research. The line is open now. Please go ahead.
Jaideep Pandya: Thank you so much. The first question is on your cost bucket. I appreciate you will probably disclose this in your Annual Report, but could you just give us some color of what were the energy costs/raw material costs last year? And based on your hedges that you have in place this year, what is the year-on-year delta that you expect in the energy costs/raw material cost bucket? That's my first question. Second question sort of goes back to the CMD where you presented the historical EBITDA progression. If I just average that and remove the €100 million, I get to around €900 million as an average, which for lack of better understanding, I would sort of say mid-cycle, which is what your sort of low-end you're guiding to. But then flipside, you're saying €260 million is sort of the cash flow that you generate from that. SO, God forbid if you enter these low-cycle conditions, what will happen to that €260 million? How much flex do you have to actually reduce your CapEx below €250 million to sustain the €260 million ticket size if EBITDA actually goes down? And then the final question really is, when you look at the capacity increase of the natural soda ash coming in China, and you put that in context with the last time you saw capacity increase from Turkey, what impact do you feel this time is going to happen? Is this going to be a game-changer like the Turkish capacity, or is this not because it's purely geared towards the Chinese market? Thanks a lot.
Philippe Kehren: Thank you very much for your questions. On the cost of energy and raw material, I think you have the number, Alex.
Alexandre Blum: No, we will not comment now. This is quite a technical question. We are not commenting on detail. In the Annual Report that will be available soon, you will have to do. Second question, you want to take it or?
Philippe Kehren: So, the second question, I mean, again, the €260 million is a number that we can deliver whatever happens. So, whatever the situation on the market is, even if we are in a scenario that does not provide any recovery in the economy during the year, we are organized with what we control, which is our costs, our CapEx, and in particular our discretionary CapEx, we are organized to deliver those €260 million. I don't know if you want to compliment, Alex.
Alexandre Blum: Yes, maybe because we see this question coming quite a bit. I have not calculated the last 10 years. We have invested in the past 10 years, so I would say €900 million. The low end of our guidance takes it more out of the trough more than the mid-cycle, at least with the existing Solvay. I think what matters is I mean the - that we want to improve our return on capital employed. We will invest when it creates value. The free cash flow generation give us that ability, so, first, when we have a trough like we will face in the 2024, we have CapEx, but we have other levers also to manage and secure the cash and secure the dividend. And when things come back, we will invest for value. I mean, strategically, our long-term intent is to improve the return on capital employed.
Philippe Kehren: Yes. So, maybe just one point. I think you mentioned at some point that €900 million is the mid-cycle. In reality, what we see, and as Alex said, we are probably at the trough, in particular in some of our businesses like soda ash. We see the low range of our guidance, which is €925 million, as the low point, right, as the low point of the cycle. Again, I don't like the word cycle because - and this is why I think we need to continue to explain what type of business we are operating. Those businesses, they are again less cyclical than I think you might think. So, we are talking about macro cycles, so impacts coming from the macroeconomic situation. It's not really like the cyclicality that you can see in some of the traditional chemical commodities. It's nothing compared to that. Now, to get back to your question on the soda ash capacity in China, so this is nothing compared to I mean what happened in Turkey, because the Turkish capacities were clearly implemented to export volumes everywhere in the world. And the new capacities currently starting up in Inner Mongolia, in the northern part of China, are for the domestic market. So, again, we're not saying that in the short term you cannot have some impact on the balance between import and export, but the intent and the destiny, I would say, of those capacities is really to supply the Chinese market. So, the situation is really, we think, completely different.
Jaideep Pandya: Sorry. If I may just come back to my first question and ask it slightly differently. What is the hedging policy you have for natural gas, power, and coal? Are you hedging still in the traditional old way of Solvay, which was to take yearly hedges to blank out the delta between soda ash price differences, or have you changed your hedging policy meaningfully? Just for our modeling purpose, like how should we think about the delta of change for these cost items?
Philippe Kehren: Yes. We will give you additional, would we Alex?
Alexandre Blum: Yes. I don't think you should take - that should be that precise in your modeling, but I think there are three levers. Again, we have not changed our hedging policy. We have probably improved it. That's part of the simplification that we have with the new Solvay. It's a simpler, more standardized type of hedging. But we are - strategically, we need to reduce our dependency on the fossil fuel, so energy transition is our main hedging policy. Then we have pushed since 2022 towards natural - what I would call natural hedging, which means that our customers are indexed, our customer price are indexed in a way that covers most of the risk we have on the supply because the variability in the fossil fuel prices is not something we can fully protect against. And then on the short-term tactical basis for the remaining exposure, we are doing something very similar to what you would do for FX. It means progressive hedging of the coming exposure, and we are trying to do that as systematically as possible. But so, yes, you will have more details in the Annual Report, but I think that gives you the overview.
Jaideep Pandya: Great. We've waited - we'll wait - for the annual report, then. Thank you. Thank you, and congrats on the first quarter.
Philippe Kehren: Thank you very much.
Alexandre Blum: Thank you very much.
Jaideep Pandya: Thank you. We appreciate it.
Operator: Thank you. We will take the next question from line Sebastian Bray from Berenberg. The line is open now. Please go ahead.
Sebastian Bray: Hello, everybody. Good afternoon, and thank you for taking my questions. My first one is on labor cost. Can you just give us an idea of how you would expect the bonus provisions at the Company to vary year-on-year in 2024 if we do see a down cycle as to something that gets flexed? Related to that, the commitment on living wage I haven't heard before. Just out of interest, when exactly was this expected to be hit, and how much is this going to cost in total? Just as a separate question, I appreciate, I'll keep it brief. How much of the Inner Mongolia capacity do you think is currently actually available? There is a problem when assessing the soda ash market in that nominal rates of utilization can differ quite markedly from what we see in price data. It looks as if Chinese prices are heading downwards. Is this capacity now ramped up properly? Thank you.
Philippe Kehren: So, maybe I will start with number two and number three, and I will let Alex comment on how we expect to see the cost of the remuneration evolve. So, first, on the living wage, very clearly, I mean, we - you can expect very, very minimal impact on us as we are already very much at the right level. Okay. So, the impact will be almost non-existent. We will confirm this, obviously. On soda ash in China, again, I mean, there is not a direct link between the Chinese - the domestic Chinese price that you can see in particular on their domestic market and the seaborne price on the export market. So, as I said earlier, there can be some volumes available in a spot basis, but this will not, as we see, I would say impact significantly the soda ash market in the mid to long-term. So, this is why we don't expect those big volumes to disturb the global balance as, anyway, historically and even in the projections that we see, Chinese exports are always, I would say, in the range of, let's say, 1 million to 2 million tonnes per year net, right. So, maybe, Alex, on the labor cost part?
Alexandre Blum: Yes, just to put it on the living wage, because you asked when, in the implementation, so 2026 is our commitment on the full rollout. And again, financially, it's not a huge curve, right, so it's not a big impact, but I think as an employer, this is critical. On the first part, the variable remuneration in 2024 - sorry, 2023 at the end on a full year basis was not extremely material, so don't expect 2023 to 2024 to have a big impact. Okay?
Sebastian Bray: Thank you. That's helpful.
Operator: Thank you. We will take two more questions from the queue. We will take the next question from Alex Stewart from Barclays (LON:BARC). The line is open now. Please go ahead.
Alex Stewart: Hi there. Good afternoon. I wanted to come back to something that Jaideep said, because the rating agencies gave Solvay a BBB- rating based on a level of EBITDA of about €1.1 billion. I think that was closer to reported than adjusted. This year, your guidance is somewhere around €900 million to €1 billion, but in 2022, you took €390 million of net pricing. In 2023, you took €310 million of net pricing. Now, I understand that 2021 wasn't a great year for soda ash, but that's €700 million of net pricing over two years. And the guidance for this year of €900 million to €1 billion, if I take a really brutal assessment and deduct €700 million off that, you're not left with a huge amount. So, can you please explain to us why you think that €950 million, €1 billion, whatever the number is, is the new run rate when you've taken hundreds of millions of euros of net pricing over two years? Thank you.
Philippe Kehren: So, maybe you want to start on the rating, Alex?
Alexandre Blum: Yes. I mean, it's - I don't think - I mean, as we said, I think the MAC-4 are not favorable. There is a consumption of geopolitical and macroeconomic factors, which is creating a decrease in demand in 2023, early 2024, at least. Like, fundamentally, I mean the basics of our businesses, the fundamentals are unchanged. So, I mean the discussion we had with rating agencies, and, okay, this is an ongoing discussion, and you've seen they have confirmed our rating when we had the separation. This was known, this is integrated. I mean the current environment is integrated in our mid-term guidance. So, okay, we'll continue the dialogue, but I don't see a major issue there.
Philippe Kehren: And on soda ash, I mean when we look at even the past numbers, we don't see soda ash going further down. And if that would be the case, I mean it would be - it will mean a different situation compared to what we have seen even in 2021. And if that would materialize, which is really, really, I would say, very unlikely, then we would have to act, right, and to change our cost basis.
Alexandre Blum: Sorry. To add, 2021 was a very low baseline. I mean, this is the pressure on price at the time was just after the COVID, so yes, you're right in the pricing, but some of that was a pricing recovery from a very, very depressed point of view.
Philippe Kehren: If those prices would come back, well, first, the cost basis was not the same, so I don't think it's realistic to see those level of prices coming back. And then, obviously, we also have our cost-saving program, right, that will contribute to also support the business.
Alex Stewart: Thank you.
Philippe Kehren: You're welcome.
Operator: Thank you. We will take the last question from Martin Roediger from Kepler Cheuvreux. The line is open now. Please go ahead.
Martin Roediger: Thank you. Again, on your guidance, can you provide the parameters for the low-end as well as for the high-end of your guidance range?
Philippe Kehren: Yes. I would say, in a nutshell, the low-end corresponds to the situation is not getting better versus Q4 2023. So, we continue on the same trend for the whole year. And frankly speaking, I think if this would materialize, we would probably accelerate our cost savings and cash measures. And so, this is really, I would say, the lowest point that we can ever imagine to reach, right? The midpoint is the situation as we see today. So, with efficient cost measures and at the same time, potentially a situation that would slightly improve in the second part of the year. And the upper limit, I would say the high-end of the range, would be a recovery in the second part of the year that is a little bit more impactful.
Martin Roediger: Thank you.
Philippe Kehren: Does that make sense? Yes. Thank you.
Martin Roediger: Thank you.
Operator: Thank you. And as there are no further questions, I'm handing back over to your host for closing remarks.
Geoffroy d'Oultremont: So, thank you very much for having being with us in the call today. We will be on the road in the next couple of days in London, Paris, Brussels, for example. So, feel free - and feel free obviously to call us and take contact with the Investor Relations team if you have any follow-up questions. Thank you very much.
Alexandre Blum: Thank you.
Philippe Kehren: Thank you. Take care.
Operator: Thank you for joining today's call. You may now disconnect.
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