Arkema S.A. (AKE) Earnings Call Transcript & Summary

Good morning. This is the conference operator. Welcome, and thank you for joining the Arkema Second Quarter 2026 Results and Outlook Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Thierry Le Hénaff, Chairman and Chief Executive Officer. Please go ahead, sir.

Thank you very much. Good morning, everybody. Welcome to Arkema's Q2 2026 Results Conference Call. Joining me today are Marie-José Donsion, our CFO; as well as the Investor Relations team. To support this conference call, we have posted a set of slides, which are available on our website. I will first comment the highlights of the quarter before letting Marie-José go through the financials. And at the end of the presentation, as usual, we'll be available to answer your questions. The second quarter was, as you know, marked by the challenging context in the Middle East. Oil and raw material prices as well as energy and logistic costs rose sharply as a consequence of the conflicts and global supply chains were partly disrupted. We saw some temporary easing towards the end of the quarter, but following the ceasefire, the conflict resumed and raw material prices have moved back up. The market demand environment remained weak overall, in line with previous quarter with no recovery yet in Europe and the U.S. On the other hand, Asia continued to be well oriented, notably Southeast Asia and India, while China domestic growth was more subdued. In this complex environment, Arkema delivered a good second quarter performance with EBITDA rising 7% year-on-year to EUR 391 million despite a EUR 10 million currency headwind. EBITDA margin reached quite a strong level, 16.1%, up 90 basis points year-on-year. This marks a significant step-up and the first positive year-on-year EBITDA evolution in several quarters. This improvement was driven primarily by the strong performances of our Adhesives and Coatings businesses, while High Performance Polymers were broadly stable. As expected and as previously flagged, the disappointment came from Performance Additives. More fundamentally, these results demonstrate the quality of Arkema's portfolio and reflect the strategic transformation carried out over the years to focus the group on higher value-added application and attractive growth markets. I would like now to underline the hard work and commitment of our teams who remain fully mobilized to mitigate supply chain disruptions, both in terms of raw materials availability and input cost inflation, closely working with our suppliers and with our customers. Now looking briefly at the performance of our Specialty Materials segment. Adhesive Solutions posted a strong quarter with EBITDA up 7% year-on-year. By the way, this was the best quarter ever achieved by Bostik at par with Q2 2022. This performance was mainly driven by the segment's continued product mix shift towards higher value-added solution and pricing actions to pass through the inflation of raw materials. Volumes were indeed broadly stable, with strong growth in durable goods markets, particularly aerospace, consumer electronics and industrial assembly. This was partially offset by volumes a bit below expectation in the construction market, in particular in Europe and by packaging, which remained soft. In a still subdued demand environment, EBITDA margin increased to a good level, 15.1%, highlighting the ongoing efforts of the team to improve the profitability of the segment. Advanced Materials delivered mixed results, as you could see in the quarter. High Performance Polymers gained some momentum, benefiting from our new business development, the ramp-up of our project and the good growth in batteries, 3D printing, and electronics. PIAM delivered another very strong quarter with EBITDA up 30% in local currency. Fluorospecialties were weaker than forecasted but should improve in the second part of the year. All in all, HPP achieved EBITDA on par with last year. On the other hand, Performance Additives were significantly down, impacted by the Middle East crisis with particularly weak demand in some end markets, such as refining and fertilizers and also, as you know, sulfur cost increase, which was significant. The margin of the Advanced Materials segment remained overall at a solid level, around 19%, which leaves nevertheless space for improvement. Coating Solutions delivered a strong recovery in the quarter. The EBITDA was significantly up from the low base of 2025. Our resins and additives business both posted strong results, but I would like to highlight especially the positive dynamic of Sartomer, delivering strong volume growth over the quarter, notably in electronics, 3D printing and industrial coatings. The segment's performance reflects also the ongoing refocusing of the portfolio towards higher value-added application, as well as the agile pricing management. As a result, we were very pleased by the segment margin, which reached a high level at 18.5%. As for Primary Materials, as anticipated, earnings were driven by the tighter spreads in acrylic, partially offset by the fading out of old generation refrigerant. In Asia, acrylic spreads rapidly declined, going back to their previous levels, while in Europe and the U.S., spreads have improved more gradually, which only moderately contributed to the earning growth as the volume environment remains so far subdued. We also continued in Q2 to focus on strict cost discipline and cash allocation. We are, at the end of June, in line with our target to offset fixed cost inflation over the full year, which would be quite a performance, supported by a number of cost-cutting initiatives across the organization. We also tightly control working capital and our CapEx are below the level of last year, on track with our annual target. As a result, the group was able to generate a good level of recurring cash flow in the quarter, close to EUR 80 million, which was not given in the context of rising raw material costs. It is also important to continue to implement our long-term strategy. From this standpoint, one of our priorities remain to ramp up our major projects, including recently our polyamide 11 and Rilsan Clear plant in Singapore, our new PVDF capacity in the U.S., which has recently started up. We also started the new distillation in acrylics in our site of Carling in France, enabling the group to reduce the site's carbon footprint by 20% and its energy consumption by 25%. Altogether, our growth project contributed around EUR 25 million of additional EBITDA in H1 versus last year, fully in line with our full-year target. I will now hand it over to Marie-José for a more in-depth look at the financials before we discuss the outlook at the end of the presentation.

Thank you, Thierry, and good morning, everyone. I'll start with Arkema revenues. At EUR 2.4 billion, Q2 sales were up 3.2% year-on-year organically. Volumes came in slightly down 1.8%, mainly due to an overall weak demand environment in Europe and in North America and to lower volumes in Performance Additives. The price effect was a positive 5.1%, reflecting, on one hand, the pricing actions implemented by the group across all businesses to compensate the inflation of raw materials and on the other hand, the better market conditions in upstream acrylics. Scope effect was a small negative at minus 0.7%, corresponding to the divestment of some small plastic additives businesses on the 1st of July. Lastly, sales were impacted by a still negative 1.2% currency effect, reflecting the weakening of the U.S. dollar against the euro. This effect was more moderate than in the first quarter. Quarter 2 EBITDA came in at EUR 391 million, up 7% year-on-year, mostly driven by strong performances in Adhesive Solutions and in Coating Solutions, while Advanced Materials were down year-on-year, impacted by the weaker performance of Performance Additives, while the High Performance Polymers remained stable. Primary Materials were very much supported by the improved spreads in acrylics. Quarter 2 EBITDA included an unfavorable currency effect of EUR 10 million. Depreciation and amortization stood at EUR 171 million, leading to a recurring EBIT of EUR 220 million, up 11%, and the REBIT margin improved to 9%. Nonrecurring items amounted to EUR 78 million. They included EUR 32 million of PPA depreciation and EUR 46 million of one-off charges, notably linked to the reorganization of our sites of Jarrie and Pierre-Bénite in France initiated last year and to ongoing legal proceedings as well as the divestment of some small plastic additives businesses completed recently. Financial expenses stood at minus EUR 35 million, reflecting mainly the increased cost of our refinanced bonds. Quarter 2 adjusted net income stood at EUR 129 million, which corresponds to EUR 1.70 per share. Moving on to cash flow and net debt. Arkema delivered a solid cash flow generation in quarter 2. Recurring cash flow stood at EUR 78 million, reflecting a well-controlled working capital. The working capital ratio on annualized sales stood at 15.8%, much improved versus the 17% of last year. I take this opportunity to commend the teams who have been able to strictly manage working capital despite rising raw material costs. Overall, the free cash flow delivered by the group in the first half was a solid print, slightly better than last year. Total capital expenditure amounted to EUR 117 million in quarter 2, in line with our guidance of annual CapEx spend of under EUR 600 million for the full year '26. Net debt and hybrid bonds at the end of June amount to EUR 3.6 billion, including the EUR 800 million of hybrid bonds. Our debt remains stable year-on-year, confirming the solidity of our balance sheet in a weak market condition. The net debt to last 12-month EBITDA ratio currently stands at around 2.9x. I thank you for your attention and will now hand it over back to Thierry.

Thank you, Marie-José. As you can see, despite the challenging context, we could deliver a solid achievement in the second quarter with EBITDA growth year-on-year. Looking at the first semester, our performance is as we were hoping, but with the first quarter a bit disappointing and the second quarter a bit higher than expected. EBITDA was slightly above last year at constant FX in the first half, keeping in mind that H1 was a better half of last year and that the environment became more demanding in the second half of the year as for all chemical companies. As we enter the third quarter, demand trends remain broadly unchanged. The ongoing conflict in the Middle East continues to limit visibility on raw material cost development and to weigh on the macroeconomic outlook. In this context, the teams remain agile, disciplined with a continuous focus on operational excellence, pricing management in order to navigate the current environment. Cash generation and capital allocation, as you know, remain for Arkema key priorities, supported by strict working capital management and a disciplined approach to CapEx. In parallel, we continue to build Arkema for the future, and this includes the execution of our major project that you know. So we confirm, as I said before, an additional contribution to the group's EBITDA of around EUR 50 million versus last year for these major projects. Based on our H1 achievement and in the current environment, we are confirming our guidance of a slight EBITDA growth at constant exchange rates for 2026. The balance between the 2 semesters would then reflect a traditional level. In H2, our performance should benefit notably from year-on-year growth in Adhesive Solutions and Coating Solutions. Thank you very much for your attention. And together with Marie-José, we are now ready to answer your questions.

[Operator Instructions] The first question is from Katie Richards with Barclays.

Two questions from me, please. Firstly, you highlighted better dynamics in the High Performance Polymers division versus Q1. Could you just elaborate, please, on what is driving this improvement? And whether you have any conviction that the business has returned to growth for the remainder of the year, excluding the new project ramp-ups? And secondly, I would just be interested in your commentary on the regional dynamics. You noted some improvement in North America. Could you elaborate on why you're seeing improvements there, please?

Thank you very much for your question. So with regard to HPP, so drivers are of different nature. Clearly, the ramp-up of the project is participating but we see a good growth now in polyamide. We had, let's say, a big part of the semester where it was still subdued and we started to see during the second quarter the benefit from new business development, particularly on the high-performance polymer for battery. Even auto was a bit better than expected. And I would say, electronics, again, battery, semiconductor, so all these businesses which contribute to this pocket of growth that we have mentioned. Most of the pocket of growth basically are within this HPP. And we should see these dynamics contributing well in the second semester. In HPP, maybe among the different business lines, the one which is currently more stable is specialty -- fluorospecialties. So in fact, the growth is really coming from the pure polymers, so PIAM, PVDF and polyamide. With regard to NA, so I don't know if it was just referring to HPP or for the overall group. I will suppose this is for the overall group. I would say, as I mentioned in the -- at the beginning of the call, in terms of regional dynamic, we still see NA. So there are some exceptions, for example, aeronautics, as everybody knows, is doing pretty well, but it's not a big market for Arkema. But overall, NA is still disappointing in terms of underlying dynamics. So I think we have some business segments which are growing quite strongly. But overall, still in the continuity of the previous quarter, subdued demand. The same for Europe, as we mentioned. So for us, I would say, in terms of volume, after that, we can debate about the pricing story. But in terms of volume, I would say that really the growth for Arkema is still coming from Asia. In China -- China, as you know, is more driven by the export from China of our customers than the domestic demand itself, which is really not so great. And by the Southeast Asia and India, we are not talking too much about it normally, but we are pleased by the momentum we saw in Q2. So basically, the geographical balance remained more or less the same as it was in the previous quarters. And maybe just to finish on NA, and you saw it through the release of the results of the coatings. The dynamics of coating in the U.S. including Sartomer, but even beyond, is better than it was in previous quarters.

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

Thierry, I'd actually like to pick up on your last point about Sartomer and maybe to spend a few minutes elaborating on this business that perhaps has gone under the radar a bit historically. From memory, it serves many different end markets. So the growth that you're seeing, is this a function of now ramping up the capacity investments you've made in recent years? And in particular, am I right in thinking that you use UV resins for printed circuit boards? So is this tying into the strong growth we're seeing in semiconductors, et cetera? And finally, it's quite difficult because of the financial restatements that you've made on the coatings business to track performance over the years. But would you agree that Sartomer is a very -- and I emphasize the word very, a very margin accretive franchise, and that's been really important in explaining that 18% margin that you delivered in the division this quarter?

Yes. Matthew, yes, these questions are very valid. And so yes, it's true that Sartomer, in fact, has gone, and it was disappointing in the past 2 years, particularly last year, through a more difficult time. And we were, at the same time, surprised because we -- as you know, it's an acquisition that we made a long time ago, and we strongly believe in these products, which are really accretive and high value. And so we started from a base last year, which was disappointing. And this year, we have a strong recovery for different reasons. First, the Asian part, thanks to electronics, to semiconductor, medical also applications, 3D, is doing quite well. Because of the Middle East, but also, supply chain disruption, the U.S. part, which was more, I would say, under -- was more challenging, surprisingly enough because we are a leader there, is coming back to far more decent level of profitability. And Europe, we have very strong teams there, and we have been able to manage stability even in difficult markets. So Sartomer as a whole was a bright point, as you wisely mentioned, but it was not the only one. The rheology additive through Coatex and the coating -- more traditional coating resins, are behaving well. So the 18.5%, we are very pleased about it in the second quarter. It's not the new norm. It's better to take the H1 average with a bit weak first quarter and a very strong second quarter. But this means that we have the ingredients inside coatings really to reach when some conditions are aligned, quite a good level of result. And I think it's a good message for you and for the market because maybe you had a few questions in the past, which were valid because we saw some unexpected weaknesses. But in fact, we see that, as soon as the conditions are a little bit more favorable, we see a strong leverage on the profitability of this business, and we are very pleased about it. And the fact that we separate acrylics, which was the upstream, more volatile, back to Primary Materials and the Coating Solutions itself, which is more the downstream, give a better understanding and transparency of the profitability. So clearly, it worked on this second quarter.

The next question is from Chetan Udeshi with JPMorgan.

I had like -- it's a good -- very good Q2, but I was a bit surprised at the composition of that EBITDA growth, because it seems a lot of this is -- in fact, all of it is driven by pricing because your volumes are down. I'm looking at even adhesives, volumes are flat, EBITDA is up. So it seems like there's probably some phasing benefit of lower raw materials and higher prices. I don't know. But I think the crux of my question is, how should one get comfort that this pricing-driven earnings uplift will not wither away once the Middle East conflict driven maybe tightness or panic buying, et cetera, starts to sort of unwind later this year. And the second question is, in your presentation, you've talked about start of Q3 in the same trend as what you've seen in the recent months. With that context, how are you thinking about third quarter, whether versus Q2 or whether versus last year?

Okay. No, the questions are valid. But I think the answers are very clear. First of all, if you look, it's also about the Middle East impact. But I think if you take adhesives, clearly, adhesives -- Middle East has no impact on adhesives. On the contrary, I would say the more you go downstream, the more the Middle East topic is a challenge because you have a strong raw material increase, your business is very fragmented by nature of the adhesives. And we reached our best Q2 ever in adhesives. So this means that internally, we have a very strong momentum. The teams are working like crazy in order to restore profitability after last year, which had been disappointing. And I think they are doing a good job, particularly because you mentioned pricing, but you missed something, which is a mix. For example, our durable goods business, which is quite accretive in adhesives is really growing very strongly, thanks to new business development and some pocket of growth that we have there, again, in electronics, in battery, in automotive, and it's very -- it was very pleasing. So adhesive, I would say, is part of the answer to your question because adhesive is not at all the matter of net pricing or -- I mean, they have been able to compensate the increase of raw material. But they are at par in terms of -- they have been -- it was not easy to have a sort of neutral impact of raw material cost, but not positive. So it's one element of answer. After that, with regard to the pricing on Specialty Materials more broadly, I would say we have -- and it's come from coatings, a slight net positive pricing, but most of the positive pricing is coming from acrylics as expected. Even if you take Asia, already in June, it was back to the norm of the first quarter. And so in Q2 overall, I would say, for us, and we thought about it, the impact of Middle East was positive on acrylics, was a little bit positive on the coating, but it was negative on the Performance Additives. So the HPP development was more than offset by the challenge which was creating on the Performance Additives, the Middle East situation. So to make the story short, we think that a big part of the profitability of the Q2, the large majority is really coming from our positioning, our mix, the work of the team in an environment which has some positive and some negative, as you could see. And it really depends on the business. Now on the Q3, I would say that we have -- so we don't guide quarter-by-quarter. We never do that. So -- but you have a guidance for the full year, which is rather precise. After that, you can see how you want to weight Q3, Q4. But in fact, we say that with new quarter is looking exactly like the same. We have seen that on the first semester. It will be the same on the second semester. There will be seasonality, but we have guided. So confirmed the guidance, saying that we guide, in fact, to have a second semester, which reflects back to traditional seasonality between the two semesters, which a certain level of growth of EBITDA in the second semester, mostly supported by adhesives again and coatings. And inside I would say, high performance -- between High Performance Polymers and Performance Additives, a sort of offset one by the other. So this is what we have in mind.

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