Solvay SA (SOLB) Earnings Call Transcript & Summary

Dear analysts and investors, welcome to Solvay Quarter 2, 2023 results. Solvay, the floor is yours.

Hello, everyone, and welcome to Solvay's Second Quarter 2023 Earnings Call. I'm Jodi Allen, Head of Investor Relations; and I'm joined today by our CEO, Ilham Kadri; and our CFO, Karim Hajjar. Today's call is being recorded and will be accessible for replay on the Investor Relations section of our website later today. I would like to remind you that the presentation includes forward-looking statements that are subject to risks and uncertainties. You may refer to the slides related to today's broadcast, which are available on our website. And with that, I'll turn the call over to Ilham.

Thank you, Jodi, and good afternoon, everyone. Our results this quarter and for the first half were aligned with our expectations. In early May, we shared our view that volumes would remain down, and we expressed confidence in our ability to maintain strong margins. Despite the continued challenging macro environment, we continued to deliver on our forecast. Navigating this environment is not easy. And I'm proud of our teams who are staying the course, focusing on all actions that are within our control and staying close to our customers. When you look at the details of our results, you will see the tangible impact of their efforts on our pricing and costs. Sales were down 9% organically versus second quarter 2022, contributing to a 13% decline in volumes, while pricing was 4% higher. We remain confident in the sustainability of our performance, resulting from multiple actions over the past few years as we improve the portfolio mix and provided differentiated, highly valued technologies to our customers and held on to strong margins while we strictly controlled costs. In fact, we have just surpassed EUR 500 million of structural cost savings since we launched the target in November 2019. All of these actions enabled us to consistently deliver best-in-class results. And this quarter translated into EUR 790 million of EBITDA, down only 2.6% versus quarter 2022 versus a 9% fall in revenue. The quality of our earnings continues to improve, thanks to the concerted actions and this is evidenced in the EBITDA margin of 25.6%, which is 0.7 [ percentage ] points higher than quarter 2 last year. Now let me give you some color on the lower volumes. In food flavors and fragrances, which impacts our aroma business, lower demand was driven by customer destocking and strong competition from China. In the agro markets, the speed and size of destocking by our ag customers was notable from what we read and hear, it has been a common experience across the industry. Construction markets remain soft, and this impact was noticed in the technologies we supply to the coating industry and to a lesser extent in soda ash. In Chemical, the most noticeable volume decline was in Coatis as we anticipated as the business returns to its normal cycle from its previous high points. And finally, in batteries, the customer destocking continued in quarter 2, though we believe that this trend has run its course. On the regional level, in our main markets, Europe sales were flat versus quarter 2 last year, while U.S. sales were down 6%. China sales were down 23% year-on-year, and the decline was related to batteries and consumer markets. Moving to cash. This is our 17th consecutive quarter of positive free cash flow. We laid the groundwork for improving our cash generation when I joined the company back in '19. And as a reminder, we put in new incentive structures and enforced disciplined processes across the organization. You may recall that we used the COVID crisis to accelerate our delivery and truly change the culture. And here we are 4 years later, the practices we introduced have become habits and the cash culture we built is now deeply embedded, delivering EUR 556 million in the second quarter. And we have consistently delivered our commitment of a free cash flow conversion ratio around 30%. This is something we are all very proud of, not least because it further reinforces our financial foundations and our credit strength ahead of our power of 2 projects. Before I turn to Karim, as usual, I'd like to share some recent updates as we continue to bring new innovations to the market and strengthen our customer partnerships. While we were busy delivering this performance, the teams were also busy making progress with our innovation. These investments enable us to further reinforce customer intimacy and indeed help us to sustain our profitability and leading market positions. Just to name a few, we launched new bio-based polymers for hair and skin in personal care. We launched a new PEEK compound for electric motors. We announced the plan to produce green hydrogen at our site in Rosignano in Italy with partnership with Sapio. We also announced a strategic collaboration with Spirit focusing on advancing production rates and costs of future aircraft processes. We launched a polymer collaboration with Zotefoams to extend the reach of our polymers into the aero markets. And finally, we are helping to enable the EU energy transition by providing a large-scale clean energy storage solution for compressed air or hydrogen in the form of our salt caverns. So these innovations and partnerships are directly aligned with the respective focus of our 2 new future companies. Now since we last spoke, we had several other important announcements. I'm really pleased we reached a settlement with the New Jersey Department of Environmental Protection on PFAS. This marks an important milestone in derisking our operations and follows the successful innovation of non-fluorosurfactants polymers in New Jersey, which was the first step in our journey to become fluorosurfactants free. In June, we also published important information in relation to the capital structures. From the very outset, we explained that we would be creating 2 leaders, 2 champions. We worked closely with the rating agencies and help them to understand the sustainability of our strong performance. The conclusion of the exercise is that our shareholders will own 2 investment-grade rated companies with capital structures that enable each company to pursue their distinct strategies, delivering superior sustainable growth on one hand and high-margin resilience results on the other. I would like now to pass the floor to Karim to discuss the segment's financial performance. Karim?

Thank you, Ilham. Good morning -- good afternoon, everybody. As usual, today, I'm going to present to you figures on an organic basis, and that means constant scope and constant currency, unless I state otherwise. We have an example in the second quarter, scope and foreign exchange impact related to the divestment of RusVinyl, which was in the Chemicals segment, and exchange rate changes, which equated to in total EUR 53 million or 6% of EBITDA, just to give you some context. Starting with the materials segment on Slide 5. What do you see? Sales up 7% in the second quarter to EUR 1.1 billion. Once again, 9% high prices were the real driving force behind this growth, more than offsetting a pretty small reduction in volumes for the segment of around 2%. Specialty Polymers delivered sales increase of 4.7%, driven by higher prices, whereas volumes were down 4%. The continued positive pricing momentum in Specialty Polymers demonstrates both the investments in our capability that we've been making, for example, to the value pricing, and more importantly, it demonstrates the fact that our customers appreciate the differentiated technologies that help to make them sustainable at a lower total cost of ownership, and we're sharing that value creation -- value pricing. Specialty Polymers volumes were up in electronics specifically in semiconductors and in industrial applications, but this was offset by continued destocking in EV batteries and that impacted PVDF volumes. Now I invite you to take note of the fact that our PVDF business is diversified as we serve many markets, including EV batteries, of course, but as well as oil and gas, electronics, construction, health care. The fact is that not a single market dominates in terms of sales. Also, PVDF volumes other than EV batteries, of course, have shown resilience in the first half. When you consider the total PVDF view as we look at it, I can also confirm to you that we maintain the contribution margin percentage in batteries whilst we have grown our contribution margin percentage in the non-battery markets. Turning to composite materials. This business continued its gradual recovery from the lows of the COVID crisis, really steady growing. Sales were up by 16% this quarter, driven both by increased volumes and prices. The volume increase is driven by increased by higher build rates in both commercial aircraft and in defense, and this is despite the ongoing supply chain issues faced across the whole industry. As a result of the high pricing in both businesses in that segment and higher volumes in Aero, the Materials segment EBITDA increased by 9.4% in the quarter. Moving to Slide 6 in Chemicals. As I mentioned earlier, you will want to take note of the fact that the comparative 2022 numbers included the contribution from RusVinyl, which was a 10% impact last year on the segment's EBITDA. That's a good example why we speak about organic growth because we want everybody to understand performance on a comparable apples-to-apples basis without distortions, really important. Sales were down 9% in the segments, and all businesses saw lower demand with some markets or regions being more impacted than others. That led to volumes down 14%, and again, pricing was 5% higher. Soda ash demand remains subdued across its markets, including the construction and detergent sectors, and we continue to prioritize pricing over volumes particularly in the seaborne markets. That is what creates value. Now as a result, Soda Ash and Silica posted solid profit growth, supported by those higher prices and by the lower variable costs. Peroxides was resilient. Although was slightly down because of the competitive environment in some markets, especially actually the purple -- pulp and paper markets weighed on the business. And finally, and I alluded to it Coatis, whilst it has improved sequentially, was really comparing itself against its best quarter of 2022. And so year-on-year results were significantly down. All in all, the chemicals segment delivered an EBITDA margin of 30.4%, 2.2 points higher year-on-year, thanks to the pricing, which is offsetting the lower volumes. This is a solid performance. And it really is another good indicator of the resilience as we look forward to the future EssentialCo. Turning to solutions on Slide 7. You will note that our businesses in this segment are operating in markets that are currently more challenged than elsewhere because of exposures to end markets such as agro, consumer, construction and there, as you know, demand is significantly lower and customers continued to destock. Our priority here is to protect our margins. It's to serve a long-term customers really protect those long-term customer relationships. On the one hand, we continue -- on the one hand, we continually look for ways to adapt the fixed cost base as well as we navigate this challenging environment. That's on the one hand. On the other hand, we balance pricing and market share because we're looking to optimize our mix. We want to preserve profitability with real discipline. And that's what you see. Now that balance helps us to ensure that we remained -- remain really poised to benefit from an eventual volume recovery. Leveraging on the foundations that have been built in the last few years in this segment from portfolio and cost optimization as well as, of course, as continuing to upgrade and enhance the valuable technologies that we have. So as a result, the current 17% EBITDA margin is lower than the past, than previous levels, and that reflects the effect of lower volumes on a stable fixed cost base. If you just take a step back, you may remember as well that we were actually at very similar levels of profitability, 17%-ish in much more normal market conditions back in 2019, for example. So 17% in today's challenging market shows you what? It shows you the benefits of the optimization that's been driven over previous years with the divestment of lower margin businesses, the improvement of our product mix towards more specialty solutions and of course, unrelenting structural cost reductions. It also means that you look forward that as volumes recover, this business has the potential to improve EBITDA margins significantly. On Slide 8, we included a bridge as per [ popular ] demand for the quarter to show you much more clearly -- to show you much more clearly the translation of all the elements I've described into the EBITDA for the group, and that's on Slide 8. And the EBITDA, as you amounted to EUR 790 million. And again, that's only 2.6% down versus Q2 last year. Why do I say only? And why do we think this is really quality. It's because our teams have worked really hard to sustain pricing with real discipline, and we benefit from a positive portfolio mix effect. EBITDA is 6% down sequentially versus the first quarter. And frankly, that was a little better than what we said in mid-June, and that reflects that June volumes were better in the latter part of the month than we expected when we spoke in some of our markets. But Ilham will come back to that point when we discuss the outlook. You also see our net pricing of EUR 209 million in Q2. That brings the total for the first half to EUR 0.5 billion. Net pricing peaked in the second half last year, you remember that. And therefore, we are targeting to keep net pricing approximately flat as we look forward to the second half of this year. Slide 9 shows you that we have now support the $500 million cost reduction milestone. Remember, this was a structural cost savings target that was launched in -- that we announced in late and I think it was in November 2019, and we've achieved it. We're surpassing it 18 months ahead of schedule. And this is despite the fact that fixed costs are impacted by inflation this quarter as well. Now it goes without saying that we will not stop here. You can count on us. You can count on us to continue to manage our costs in a very disciplined way, particularly in the macro environment, like the one we are all going through. What we also have, and this is important, we also have around the growth bar so we're absolutely invest in a very selective way to make sure that we are positioned to serve our customers for growth because demand will recover and will be there. Slide 10 shows the free cash flow bridge. As a reminder, we started the year building inventories in Q1. We wanted to invest, and we've been working down those inventories in Q2, and that helped to contribute to the strong cash generation. Now our strong cash flow also enabled us to continue our planned CapEx projects. You know that we have a lot of projects that will increase our capacities to meet future growth expectations and also to continue our energy transition goals. While we are ambitious and we are convinced that this is the right moment to invest, we will continue to monitor demand and adapt, if necessary, are phasing or ambitions to the reality of the market and the needs of our customers. As of today, we still aim to invest around $1.25 billion of CapEx this year. Cash generation has been a major focus area for us since arrival of Ilham, and I know you've all seen it. And the good news is that the met is -- momentum that you become accustomed to is continuing. The bridge on Page 11 shows a reduction in leverage, reflecting the combination of operational cash generation as well as proceeds from the timely divestment of our 50% interest in our Russian JV, RusVinyl in the first quarter and the payment of dividends. Our leverage ratio is now 0.9x. I actually took a quick look this morning and actually can't find a time when it was that low. As Ilham indicated, if you turn to Page 12, that we've also settled with the state of New Jersey in relation to PFAS. And therefore, we've updated our analysis on onetime costs and investments that you will see on Slide 12. You will see there that the investments we are making for attractive returns, and you also notice the fact that our separation costs are benchmarks. And with that, I'll now hand the floor back to Ilham Kadri, who's going to cover the -- review our outlook for the remainder of the year.

R Thank you, Karim. First, let me start by confirming our full year guidance. As a reminder, following our strong start to the year, you may remember, we raised our EBITDA guidance last quarter to be in the range of plus 2%, which would reflect the recovery in volumes to minus 5%, which would reflect volumes remaining stable. We had, in fact, a strong end to June, yet July sales were soft and demand remains volatile. So our order books for the remainder of quarter 3 indicate that demand will not recover in the quarter. If volume recovery doesn't materialize, then the second half will likely be consistent with the current full year official consensus. The same focus and discipline that sustained our performance in the first half will persist in the second half. Staying close to our customers, ensuring we drive the right pricing for our offerings and maintaining cost and cash discipline internally. We may not be able to control demand, but you have seen what our teams can achieve even in challenging markets. These are the factors that give us confidence to reconfirm our full year guidance. On cash, our disciplined management of cash will continue. And we expect to deliver at least EUR 900 million of free cash flow for the full year, and this is despite the current growth investment cycle. Remember, we are investing now to support the future growth plans in SpecialtyCo and EssentialCo. Preparations for the launch of the 2 new companies continues as planned. In fact, on July 1, our IT cutover took place, which was basically an operational split for our IT system. And this occurred without any major incidents. We must highlight the exemplary mobilization of more than 300 employees, mainly from the IT, [ SDS ], finance, human resource departments who contributed to the completion of this successful cutover. We are now about 4 months away from starting these new chapters which we are confident will unlock significant value for our customers, our shareholders and our employees. And with that, Karim and I are happy to take your questions.

Thank you, Ilham. Moderator, can we please start the Q&A session?

[Operator Instructions] So we'll take our first question from Jaideep Pandya from On Field Research.

The first question is just on net pricing. You guys have done an excellent -- great job through even in difficult volume to achieve net pricing results well above 200 million. So as now volumes sort of drop and go in a negative zone, could you give us some color about how your pricing contracts work -- and what is the outlook for net pricing for H2 '23 -- H2 2024? How much of the pricing, will you be able to maintain and the raw material benefit that you've got this year, will you be able to keep? That's my first question. The second question is for you, Ilham. I mean, you've done a phenomenal job with Solvay since arrived, and you're also splitting the company into 2. So I just wanted to know your thoughts about whether you will go to SpecialtyCo? And whether you will be committed on a longer-term basis to this journey? Or is being a CEO of a smaller company, then lesser of a challenge for you. And therefore, you will look for a bigger challenge after the first year of putting SpecialtyCo to bed.

Yes. Thank you very much, Jaideep, for your questions. Well, on pricing, yes, I mean the net pricing, and I told you back, if you remember, in the fall 2021 that we will be training the [ muscle ] core pricing in the company as part of the big growth transformation. And at that time, I told you as well, if you look back at the record that we have been reopening thousands of contracts inside the company. So if you look at what happened like last year net pricing, and to us, it means pricing net of variable cost, obviously. All 3 business segments delivered positive net pricing across the group. If you look at pure selling prices in the first half, obviously, Material, Chemicals did a great job. Solution as well delivered positive pricing, although Solutions was slightly down in quarter 2. At the business level, most businesses sustained higher selling prices in quarter 2, a few exceptions that we told you as well, and this is not a surprise as Coatis where we anticipated the business to normalize this year. And this is exactly what happened, and it was based in our forecast. And we had some modest reduction in Aroma, some in Novecare less differentiated product and some in oil and gas. As you know, the variable cost as well. I'm talking about pricing, but you look at the variable cost as well, are down all over the place, right? I mean quarter 2 was the first quarter in memory since 2 years, and I'm looking at my financial teams in the eyes, probably not in 9 quarters where we have a positive variable cost, slightly positive one, right impacting our P&L. So with the exception, by the way of Composites and Aroma they still had a reddish red variable cost. Yes. So I mean that's what's happening. I remain confident in our ability to to sustain net pricing. I told you as well as in our portfolio, half of the portfolio is supply-demand driven. Some of the businesses have contracts and contracts are linked very often to formula prices, which is linked -- which are linked either to raw material [ rolls ], and when the [ rolls ] they decrease, the price decreases or we baked in energy since fall 2021, like in the case of soda ash. And the other part of the portfolio is obviously value pricing. And I kept telling you right since now a few years, that the best is yet to come specifically in areas like specialty polymer, where I truly believe that we need to share better the value we create to our customers. So customer needs performance, lower total cost of ownership, but not automatically a lower price if they get performance, security of supply, and you have differentiated with IP, et cetera, like in [indiscernible] automotive and other applications in electronics. So yes, I mean, we are starting to really train better and better in this value pricing. Yes, the second question, interesting. I would like you to be a bit patient. But I'm humbled to lead this company since 4.5 years, and thanks for the comments on the performance. I'm so proud of our team and probably this is the fastest and the deepest transformation I've ever run in my career. But I'm also an investor. I have skin in the game in this company, right? And I'll tell you, it doesn't happen often in a life to really deliver to good cause, right, which are leaders in their segments in their portfolios leaders in regions, in sectors, in markets in pricing, and they also have a beautiful road maps and paths which we will socialize with you during our Capital Market Day, during the fall, right, with the leadership teams in both companies, and they are very strong, and we will share the names in due time. So please be patient. We will say more in the fall and not before. We are focusing now on standing up the 2 companies. By the way, the 2 companies are up and running, both separated in the IT perspective, but also internally still in minus 1 and being the CEO, right? So it's amazing to think that since July 1, and you can imagine we were managing the quarter. We were doing the capital structure. We were preparing for the rating agencies engagement. At the same time, we were splitting the company internally. So it's just amazing what has happened and so proud to take the opportunity to thank our team.

We'll take our next question from Chetan Udeshi from JPMorgan.

The first question was more a confirmation because I was a bit confused, Ilham, on your point about the trajectory of volumes, you said June improved or was stronger at the end and then July weekend and then you said you are expecting or you're not expecting a recovery in Q3. When you say you're not expecting a recovery in Q3, are you implying that volumes in Q3 will be similar to Q2? Or are you actually saying because July probably was weaker, you are actually expecting Q3 to be weaker in terms of volumes versus Q2? And I think my core of the question is, today, we see a big step down in in consensus in Q3 versus Q4 -- sorry, Q3 versus Q2. And I guess that just keeps this concern alive, right? which is we are seeing a step-by-step normalization at Solvay in terms of pricing. So I'm just curious how you're thinking about that step down from Q2 into Q3 based on consensus, which clearly seems quite steep. The second question was, I think it was Karim, who mentioned that you expect to keep the net pricing flat in second half. And if I then back out what you -- what that means in terms of volumes for second half, it implies sort of mid- to high single-digit volume decline in the second half to deliver the midpoint of that guidance. Given you already had a sort of more benign volume base last year, especially in Q4, I'm just curious at what point do you start to debate whether pricing needs to be flexible enough to make sure you don't end up losing volumes perennially. And I guess it's a fair concern that people have, right, at what point does this pricing power fade if the volumes don't come back? I mean, clearly, we can see in your specialty polymers business, you are keeping the volumes even with higher pricing, but it's not the case across all the divisions. And last question, if I may, was in the cash flow line, you are now starting to show the CapEx associated with the separation. Can I confirm that CapEx is part of the separation costs that you had already given because it's quite a material number as I see in Q2? Or is there going to be an additional leakage on top of the separation cost number that you had given?

Yes. Thank you, Chetan. Karim, you may take the cash and I would start with probably the guidance. Yes, I mean I didn't want to confuse you. What I was trying to say, I guess, Chetan, is that demand is volatile. June was a very strong month, right? I mean, you remember, I even guided you guys on quarter 2 sequentially versus quarter 1. And I told you at that time, and I'm looking at my team [ as ] minus 5, minus 10, right, somewhere in my road shows, and we ended up minus 6. So -- and the quarter, the June month really finished very well, but then July is probably one of the lowest months we've seen in terms of sales since 2021. And the order book so far remains very soft, right? And that's what our peers, most of our customers, they have been telling you, right? So frankly, I'm extremely comfortable with the guidance we have given you earlier and we confirmed today. I don't have a crystal ball. If the volume starts to recover, right, I mean, we still have a scenario where we can reach the higher end of our range. But if the volumes remain stable, Chetan, I'm talking stable versus as they were in quarter 1 and quarter 2 because we had the same decline year-on-year in the volume. I think it was minus 12% and minus 13%, right? So then we will be at the lower end of minus 5%. So that's was the guidance implies a reduction in the second half versus the first half. And again, demand is still volatile. And I look at it with prudence and cautions but also with great confidence, right? You talked about pricing, yes, it's a great question. I think this company and people would appreciate this in the coming years more than now. When we started working on our pricing, and we still unveiled many things in the first half, understanding better the portfolios, we serve -- how we serve our customers. And obviously, as I said earlier, we have this supply/demand type of price volume elasticity thing, from a contracted through formula pricing. I'm not going to get back to this. And the second one is value pricing. And I told you in the past, it's probably 50-50 or 60-40 to be more precise today. And that 40% of value pricing, we want it to be sticky. It should be sticky because we are sharing the value creation with our customers. And this is what our sales team, the thousands of our colleagues are trying to do and really get sticky. So you will see every quarter will come back. And obviously, as we go to the Capital Markets Day, we'll give you a bit more color on each company, [ ESCO ] and [ ECO ], type of pricing strategies going forward. So you're right, I think you talked about, there is a call between volume and pricing, we call it business management, Chetan. And you're right. I mean the margins have never been a problem in this company and definitely not this quarter. So I think the good news with us -- for us and for our people is that we want them to stay disciplined, not give away pricing and value where they should not, specifically that our customers value it, and they can extract their own value. But at the same time, we can practice some smart pricing strategies, right, on some limited price concession because we can afford it if we need to, right, to get back volumes in selected markets or that's -- we are not pushing back on this if it makes sense, right? Because I will finish with that example because I'm so proud of them. You remember that the solution pillar had a return on capital employed, which was below WACC when I joined the company. And our return on capital employed as a company was WACC when I joined the company. We doubled it in 4.5 years. It's amazing. And solutions started, for example, Novecare to name them to fill their parts with a better product mix, be it products, be it customers, et cetera. So there is an arbitrage we are doing every day, every day, every day. We are doing that, and our people are doing it. And I can count on our strong business leaders, and you will see many of them, by the way, on the road during the Capital Market Day. So we'll be very happy to -- you to meet those invisible heroes.

To the part of the question on cash flow. I really appreciate you asking the question. And I'd like to take the opportunity to go maybe 1 step back and we give a bit more context because I think they've been -- in some eyes, not many, some misconceptions and misunderstanding. So the context is this. We always seek to present our results, our profit and our cash adjusting for distortions. And when it comes to matters that I've got nothing to do with normal operational activities, be it pensions deleveraging you remember. And any effects of portfolio moves, be they divestments, acquisitions or in our case, as you already pointed out, this demerger. Now you'll also be relieved to see that I'm -- really happy spot today is that we always make sure that we give you very clear reconciliations to IFRS figures and everything also is both transparent and audited. Now on to the specifics. Look at this year, what happens on the free cash flow. We've excluded this portfolio, the proceeds of EUR 0.4 billion from divesting RusVinyl. And that's what you'd expect. The flip side of the coin is when we invest for projects associated with the demerger, we also remove an absolutely consistent. Now what are we talking about this CapEx? We're talking here actually of the acquisition of a new headquarters for one of the companies, that's it. The advantage from my standpoint is not only are we acquiring an asset, and it's associated with the demerger, let's be clear. But we're also saying this asset, this new HQ will have a better environmental impact and it reduces operating costs by 2/3 compared to our cost today. So I see value coming through from that on both ends. That is why we're doing it. And finally, what I will say is this is very much within the full cost that we gave. And if you look at Page 12 -- Slide 12, you'll find a more refined and complete analysis of where we're investing our money, and this is completely as we forecast in June. Does that help?

Yes, that's helpful.

[Operator Instructions] We'll take now our next question from Geoff Haire from UBS.

I just have one question. I appreciate the comment Karim made around the fact that your solutions business is at a better margin position than it has been historically. But it's also probably the most -- one of the most volatile parts of the margin story within Solvay. And therefore, is this really outstands a business that you want to take forward to try and boost the rating of the ScienceCo business? Or do you feel like you to slim down or change the structure of the solutions pillar?

Yes. I mean I can take it, Karim. I think, first of all, I remind you that the solution business, starting with Novecare did really a great job improving the portfolio. You may remember that we separated with [ Anfoterix ] and the low-end solution and products we were supplying to the market. We've done, frankly, had [indiscernible] job inside the company, and I -- and I say it because I know many of our business leaders are listening to this call today. And they've done a great job into really pruning the portfolio and even the customers' portfolio. So this quarter and H1, they did a great job maintaining pricing. It's actually very straightforward. And as Karim said, and the 17% margin are actually -- if you compare to the best peers, the formidable peers is actually more than decent, right? Having said that, Karim tried to tell you that we worked on our fixed costs. And as soon as there is -- the volumes are back, you will see this margin getting back efficiently back to up 5%, right level. So that's what we are telling you, right? So the rest -- the question of Chetan as well, we will balance pricing and market share to optimize our mix and preserve profitability, obviously, with discipline and good business management. We are doing a lot in that pillar to bring more value products, which customers are asking us to bring right? So there is value for innovation in the biomaterial, right? That's really happy. I mean, with the history back from rationalization of the asset, the portfolio clean up and the best is yet to come. Now on the portfolio itself, frankly, it's too early to tell you how ScienceCo will evolve the beauty of EssentialCo and ScienceCo, by the way is diversification, look at us compared to other peers, right, I think I hope and I trust that shareholders and you like also diversification, it's derisking your investments, right? So we are serving different industries, different sectors, the regions is balanced, 1/3, 1/3, 1/3. So in my seat, I like such portfolios, right, which can help between EV batteries, if there are destocking, you have composite material, which is just -- the volumes are increasing. So 25% of our business in material is composite. And between civil aviation and defense, it's really doing well. The other side is mainly consumer or resources right, driven. And indeed, if that industry is suffering. You will see it, but it's very different than balanced compared to composite material and specialty polymers. Back to you. .

We'll take now our next question from Wim Hoste from KBC.

A couple of questions from my side as well, please. First, coming back to the volume discussion. Can you maybe shed some light about -- yes, from the minus 13% in volumes you saw in Q2, how much roughly is destocking? And then also, yes, what's your take on destocking going forward? I think you mentioned for the battery, destocking is probably mostly over, but what about maybe other businesses that were impacted by destocking in previous quarters? So that's the first question. And then second one, would be on the market dynamics and supply-demand situation for both Soda Ash and the Aroma business. Can you maybe elaborate a little bit on those businesses as well.

Yes. Thank you, Wim. Yes, it's a great question between destocking and weaker demand, it's actually very difficult to differentiate, to be honest with you. We have a dashboard by business units, by region, but very tough to differentiate because there is limited visibility on inventory levels across the value chain. You know that during COVID time, the best thing which happened to us is because we didn't have -- I didn't have a compass at that time. We started building a central tower, right, just trying to not only manage our own inventories in the region, and you've seen how good we are becoming in inventory management quarter-to-quarter but also across the value chain with our customers, and I really expect the 2 new companies later on to build more ERP to ERP, and with all this AI and what's going on, I really believe that the best is yet to come in understanding and having visibility on inventory. But to give you an idea about destocking, 2 main areas Wim, EV batteries in China was impacted. Obviously, there was a big destocking in China, which impacts the specialty polymer sales. But frankly, you've seen this as well, material did really well, including specialty polymer. sales of polymers and other auto applications were stable, and we grew volumes actually in areas like industrial markets and electronics, for example. In agro, it's well known that the major producers have high -- have had high inventory rights, buildup due to logistics issues and due to delays in the 2023 corn crop season, this impacted Novecare in quarter 2. Specifically, the crop protection volumes were down in the quarter. But again, this is in line with our peers, right? I mean you've seen it, peers, either competitors or our customers. And that's why Solvay did destock aggressively, right? You remember, in January, we started and I told you that in my quarter 1 earnings call that we built stock in inventory because it was an investment, and we had no clue how the year will go. As soon as we had some color right after quarter 1, our whole team start destocking and frankly, they exceeded my own expectation. So that's a good news. Beyond that win, we saw demand softness in other markets. You've seen Aroma low volume. This is synthetic vanillin. We've seen destocking, but also stronger Chinese competition because the China domestic market is very weak. So obviously, they are taking products outside China, but the natural volumes remain resilient. Novecare demand in construction impacted their coating business. So this is depend on coating, the decorative paint given the high interest rates and the slowdown in investments in construction, lower sales in home and personal care as well linked to consumer spend. Special Chem volume decline due to the weak demand in electronics, mainly, but they did do very well overall in oil and gas lower drilling activity in the U.S. as you've seen the strong decrease of the natural gas prices, right? You talked about Soda Ash. The global demand in Soda Ash was soft in [ flat gas ], again, construction and detergent in some aspects and bicar, specifically bicar use in [indiscernible], this is the -- people use in a product for [indiscernible in maritime application in North America and in Asia was down. Coatis, we told you that was weak in Europe, U.S. and you remember, we anticipated that normalization. It was part of our forecast from day 1. Peroxide, we have soft demand across all markets, including emulsions, right? So Karim talked about pulp and paper, silica. I think despite the softened demand, we continue to see good performance. I mean -- and you've seen the tire industry and their forecast most probably, and we benefit there from indexation and base prices increases. So all in all -- and the exception, again, the volumes were positive in composites driven by the continuing recovery in the aerospace market. So aside from the volume decline specific to EV batteries, as I mentioned, there were some bright spots here and there. We have grown polymer in other areas as electronic and so proud of what also, the Specialty Polymers team has been doing outside of letting the destocking. And Karim, I hope explain our PBDS story. We've got many questions online and off-line. So very happy to see the contribution margin of our PBDS technology business, expanding actually expanding in nonbattery application and actually remain stable in the batteries business.

We'll take now our next question from Peter Clark from Societe General.

Yes, I've got 3 little questions, I hope. Talking about the balancing, obviously, of the pricing strategy against the volume side. On the solutions, I know year-on-year, you were down, but when I do the cumulative to 2020, it looks like you were pretty flat on the first quarter, which implies sequentially, you had a lot of pricing where you kept your pricing. And obviously, the volumes were hit very hard. I'm just wondering, was that at some of those businesses where you're losing your little of share? You talk about the Chinese being very aggressive in [indiscernible] performance, of course, and the volumes were hit very hard there. That's the first one. The other one, obviously, we know most of the other charge now with the PFAS agreement. But you did mention that there would be a little bit more restructuring a bit of pension deleveraging. I presume we have to wait for that. But -- any light on that would be great. And then the final one, just to clarify, obviously, you've given us a net pricing number, but you haven't given us the split between the variable costs and the pricing this time. Were the variable costs up or down on the second quarter?

I think on pricing, the margins are holding up very, very well. As you mentioned, I think your maths are really good. So year-on-year, it is what it is. But back if you compare to 2020 and before, obviously, we are holding on pricing and our mix is much better than years before. We look at Novecare, specifically what we did since 2020, when they start restructuring their assets, we have a view on contribution margin per reactor even, right? So this is just amazing because now we have that visibility and granular monitoring of our product mix, of our portfolio management at the product fuel level, which allow us to take the right arbitrage, as you mentioned, right? Because in some areas where we are less differentiated, we have to make that call between price and volume. But yes, the margins holding -- contribution margins are holding up, right? And the fixed cost, we already prune it. And as Karim said, when the volumes are back, you will see the EBITDA margins also back. There was another question...

The other charges, you obviously, you've given us the bulk of the other charges with the demerger, the EUR 300 million to EUR 400 million with the PFAS. You did say when this -- there would be some more restructuring and some more pension deleveraging. I'm just wondering if you can get in light on any of that or do we have to wait for that. .

Happy to do that. And in fact, you may want to look at Slide 12, which I alluded to, but I didn't go into detail precisely because when we gave you that information on the 16 of June, we hadn't settled with the state of New Jersey. So we were kind of limited what we could say. Now you find there's a lot more information that I think you'll find helpful. And then just go through it with you step by step. First and foremost, there I would say, there are what I would say, a normal typical separation costs. And they're comprising like taxes, IT, professional fees. And here, we're looking at EUR 250 million to EUR 300 million. That is absolutely below benchmarks because typically, these range and obviously we have done our homework, you look at 3% to 5% of sales. Beyond that, we're looking at investments with returns. What does that mean? It means EUR 150 million as to what I would describe as transformational costs. Now these are value accretive in their own right and the research of the project. I mentioned the new asset we bought, the new headquarters, that's part of it. Another one is restructuring costs. There's about 70 million of restructuring costs. Now this is essentially trying to get ahead of the curve, anticipate and reduce future normal dis-synergies. That's why you can see that. If I go further, I'll go back to your point, spot on, we are looking at making more deleveraging of pensions in the U.K. and France. And we're looking at EUR 1 million to EUR 200 million there. Now frankly, we would do that no matter what. But what this means is, it will be on top of the 1 billion of deleveraging of that nature we've done in the last 3 years. Frankly, the extra EUR 1 million to EUR 200 million will bring that particular program to an end were just really motivated to get that done before the split. And that's why you see it there, but it's really attractive. Finally and to bring you back to where you started the question, and that's around the settlement to the state of New Jersey, we're anticipating a payment of $175 million to [indiscernible] to PFAS. Now I think frankly, at the time you thought it might be before year-end, more likely to be early next year. Nevertheless, we'll have the resources available to make that happen. Hope that helps.

And I think you also asked Peter, on the variable costs. And as I said in quarter 2 was lower than quarter 2 last year, right, for the first time since probably COVID times and I didn't do the -- yes, so since 2 years obviously, yes, exactly. .

We'll take now our last question from Andreas Heine from Stifel.

I actually have 3 questions. The first one is on Novecare which had quite a steep decline in the second quarter. Was that continuing [indiscernible] so when you talk about July being weak, is that particularly also true for Novecare? That's the first one. And secondly, in Specialty Polymers, only a clarification. Is it right that sequentially, prices in Specialty Polymers were still up? And then the last one is on the provisions. Provisions were up EUR 450 million in your bridge, Half of that is the PFAS settlement. What is the other half of that?

Yes. So I'll take the first one on -- was it solution on Novecare? .

Novecare. Yes, specifically. Yes. I think as I mentioned, Novecare suffered from a few things. I think the agro and you've seen the agro customers, again, outlook reflecting a weaker-than-expected, rights, demand and destocking, which will continue, in my view, in quarter 3. Coating, I mentioned it. You know that we have 3 pillars, agro, and then coatings material. This is interior decorative paints, water-borne paints, that also suffered from the construction indexes, which have been falling short globally. It's not only here Europe but also in the U.S., et cetera. So we can -- and we expect the same downward trend on the upcoming results right in quarter 3 as well. And then the last one is home and personal care, and you've seen the consumer spending, right? Except the luxury segments some people who have -- we define gravity. I mean the rest has been also in decline. And many of our -- actually, you've seen peers right and customers have even issued profit warning for the quarter 2, right? So nothing here which is different from the market I think the underlying preference is actually keeping our net pricing is really keeping our value for pricing where we can and making the right arbitrage as mentioned in several questions, and I do agree in the arbitrage between price and volume, which we call smart pricing inside the company. So I think we'll continue doing that, ensuring that there is no cost creep, continue innovating and changing the mix and the portfolio to ensure that Novecare not only build on the cleanup of the assets and the portfolio which they have been doing very well and improving their return on capital employed you can see on the company returns, but also will continue now bringing new innovation, which will allow them right to further grow their business profitably.

Andres, you had a question on provisions. You're absolutely right that the PFAS segment is the bulk of that provision increase of EUR 450 million in the first half. But there are a couple of other big ones that I think are significant ones, I guess, that you could worth highlighting. One is there's normal update to provisions, but environmental provisions about EUR 30 million, EUR 40 million, but nothing particularly significant, pretty much normal. But I would say you've got some bigger impact is on the restructuring I talked about. In respect of the cost reductions, we're going to try and accelerate as well. We saw that provision being made predominantly in the first quarter, as you recall, as well as a few legal and other small provisions. There's also a relatively modest noncash impact in relation to small changes in employee benefit charges. So that's really the combination. .

Yes. And there is one more question I didn't answer. The team is just telling me, Andreas, is on specialty polymer pricing. We had strong -- the strong pricing was maintained, Andreas. And sequentially, quarter 2 prices are slightly above quarter 1. So again, I think that's -- I'm more of a lady. I need to see it to believe it, as you guys probably but more internally with the team. So they have been practicing their value pricing. And where they couldn't like in some EV batteries, right, the contribution margin well maintained. That's exactly with the way [ raw mats ] declining. I mean, for those who know the 142 to be a story. So really glad that specialty polymer strong pricing was maintained.

I think that brings us to the end of today's call. So thank you for your participation. And as always, the Investor Relations team is available for any follow-up questions. Thank you very much.

Thank you.

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