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Edited Transcript of AKE.PA earnings conference call or presentation 27-Feb-19 11:00am GMT

Full Year 2018 Arkema SA Earnings Call

COLOMBES Cedex Mar 4, 2019 (Thomson StreetEvents) -- Edited Transcript of Arkema SA earnings conference call or presentation Wednesday, February 27, 2019 at 11:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Marie-José Donsion

Arkema S.A. - Group CFO

* Thierry Le Hénaff

Arkema S.A. - Chairman & CEO

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Conference Call Participants

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* Chetan Udeshi

JP Morgan Chase & Co, Research Division - Research Analyst

* Georgina Iwamoto

Goldman Sachs Group Inc., Research Division - Associate

* James Alexander Stewart

Barclays Bank PLC, Research Division - Chemicals Analyst

* Laurent Guy Favre

Exane BNP Paribas, Research Division - Research Analyst

* Martin John Evans

HSBC, Research Division - Analyst of Global Chemicals

* Martin Roediger

Kepler Cheuvreux, Research Division - Equity Research Analyst

* Mubasher Ahmed Chaudhry

Citigroup Inc, Research Division - VP

* Patrick Gerard Jean Lambert

MainFirst Bank AG, Research Division - Research Analyst of Chemicals

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to the Arkema's Full Year 2018 Results Conference Call. I will now hand over to Thierry Le Hénaff, CEO.

Sir, please go ahead.

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Thierry Le Hénaff, Arkema S.A. - Chairman & CEO [2]

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Thank you very much. Good morning, everyone. Welcome to Arkema 2018 Results Conference Call. With me today are Marie-José Donsion, our CFO; and also, as usual, our Investor Relations team.

To support this conference call, we have posted on our website a set of slides, which includes the highlights of the full year performance, the outlook for '19 and detail of the progress we are making to achieve our long-term ambition. Together with Marie-José, we propose us to commence this set of results, and then, as usual, to answer your question.

As you have seen from the figures which we have released this morning, Arkema achieved another excellent year with a record-high EBITDA of EUR 1,474 million, which is up 6% against 2017, which was, as you remember, already an excellent performance. Our adjusted net income for the year increased significantly, up nearly 23%, which is quite high. We further progressed in the macroeconomic environment, which is marked, as you know, by strong volatility of raw material prices but also of currencies in the first part of last year.

Towards the end of last year, as you know, also, this environment became more complex, notably on growing geopolitical tensions, which weighed on customers' confidence. Despite these challenges, we believe we managed to deliver a quite solid end to the year, with Q4 marking yet another quarter of EBITDA growth -- even if modest, EBITDA growth for our company. This achievement clearly demonstrates our resilience in a different economic environment.

2018 result reflects, we think, the quality and the balance of our portfolio of businesses, with a high share of specialty differentiated businesses delivering resilient growth and strong and global positions in more intermediate businesses, which enabled us to fully benefit from tight market conditions in certain of these lines, namely, PMMA and Fluorogases.

In specialties, Advanced Materials continued to deliver a robust and steady growth, with EBITDA up on 2017's excellent base and volume growth exceeding 5% this year. They benefited, in particular, from the ramp-up of new units in PVDF in the U.S. and China; also, in molecular sieves in France, in Honfleur; as well as a strong innovation momentum with standout performances in bio-based polyamides for consumer goods and Kynar PVDF in batteries.

We have paved the way for further exciting opportunities in the innovation field, firstly in composites, where we signed a partnership with Hexcel to develop light-weight, thermoplastic composite solutions for the aerospace sector; and set up a joint venture with Barrday for the oil and gas market.

Another strong area of development and focus for us is 3D printing. We opened, mid-2018, in the U.S. in Exton, close to Philadelphia, a dedicated excellence center. And we launched a dedicated commercial platform to combine our efforts and solution and better support of customers' growing needs in a demanding and innovative market.

In adhesives, higher raw material costs temporarily impacted the overall performance of this very downstream business. They, in fact, overshadowed the benefits from the integration of our recent bolt-on acquisition including XL Brands in the U.S., which delivered a strong performance well in line with our expectation as well as the benefit from the synergy, which are being gradually implemented at Den Braven in line with our plans.

To mitigate the impact of higher raw material costs, our teams have put a strong emphasis on pricing actions, which further accelerated in H2 and which enabled us to offset some of these impact. This weighed, however, on our current volume growth in this area.

If we look forward, and if raw material remains stable, which we think around current levels, we are confident we will further recoup this impact in 2019.

Looking back at what we achieved since we acquired Bostik early in 2015. We managed to grow EBITDA by a leveraged annual growth of 9%, including scope effects. This highlights the progress already made there, but also the scope to further structurally increase margins in line with our 15% EBITDA margin target in the medium term.

Finally, this set of results reflect the strong and competitive position we are in intermediate product lines, which delivered overall this year another outstanding performance. MMA/PMMA continue to benefit from tight market conditions which, however, started, as expected, to normalize in the last few months of the year in line with our expectation.

Fluorogases delivered also excellent performance, including Q4, ahead of our expectation and exceeding the higher reference base of 2017. While we do not expect to repeat such a performance this year in Fluorogases, we expect to continue to deliver strong results, probably between '17 and '18 levels.

Acrylics continue to gradually improve, especially in Asia where demand was sustained. In this environment, the pending acquisition of our partners taking our acrylic production in joint venture, Taixing Sunke Chemicals in China, we really believe is a good opportunity to further increase our presence at a very competitive cost in this high-growth market.

Another point of satisfaction and proven strength of our group was a high-cash generation, with EUR 500 million free cash flow generated this year and a particularly good performance, as you saw in Q4. At 38%, the cash conversion rate was once again above our 35% target.

Overall, net debt declined slightly to around EUR 1 billion, which means that at the end of 2018, our net debt-to-EBITDA ratio was 0.7x. Our financial flexibility, therefore, remains strong, notably to the bolt-on MMA specialities. Testament to the strength of our balance sheet and the pertinence of our long-term strategy, our credit rating and outlook were upgraded by the main agencies last year.

So all in all, excellent set of results highlighting the quality of portfolio of businesses and benefits of our transformation strategy with -- while identifying investment projects and also a strong innovation drive to capture growth opportunities in higher-growth markets and regions.

Referencing these very good results and also our confidence in Arkema's long-term prospect, the Board of Directors will propose to increase the dividends by close to 9% to EUR 2.50 per share that we can compare to EUR 2.30 per share last year, which would mean that over the last 3 years, the average dividend increase is close to 10% per year coming from a base of EUR 1.90 in 2015.

Looking forward, our momentum of project is stronger, and all the things here at Arkema are very much focused on executing our strategy and delivering our mid- and long-term ambition. As you know, our goal over the coming years is to further increase the share of our more differentiated specialty businesses, which represents today around 70% of our total sales, coming from a number a long time ago of 40%.

To that end, we are actively implementing a number of important, very exciting projects around the world, especially in Asia, both in Advanced Materials and Thiochemicals, which are 2 strong pillars of our future growth of specialty businesses.

In adhesives, our M&A ambition remains intact. We have the flexibility for this. Last year, we continued to be active on that front with the bolt-on acquisition of Afinitica, which represent the first step in our ambition to build a strong position in the highly attractive engineering adhesive segment; and of Nitta Gelatin industrial adhesives to strengthen our position in Japan. We are confident that in a still fragmented sector with many small and mid-sized independent company, we can further grow this business and also improve its profitability, in line with our long-term ambition.

Before concluding this initial remark, I would like to remind you that as a major player in the chemical industry, we want to deliver growth, it's clear, but deliver it responsibly. I am convinced that today's world faces many challenges that the chemical industry could contribute to solve, especially through innovation capability. From this standpoint, Arkema, with its 6 innovation platforms, which are well aligned with United Nations' Sustainable Development Goals, is very well positioned to participate in this development.

Our CSR framework is structured around 3 pillars, and we are really -- and it's not only the top management but all the employees, committed to ambitious long-term social, environmental and safety targets. We made further progress this year towards achieving this target, and I can assure you that at Arkema, all our employees took this commitment very seriously.

So in a nutshell, 2018 has been another excellent year, recording solid growth after an already strong 2017. We delivered solid results in Q4 despite this environment, which was marked by macroeconomic and geopolitical volatility, showing then the resilience of our business. Whilst we benefit this year from the very strong performance of Fluorogases and PMMA on tight market conditions, we are already convinced that our specialty business will take over in the coming years, delivering sustainable growth and further improving our mix of earnings.

Finally, we made further progress in executing our strategy, implementing several major projects, and we are well on track to deliver our long-term ambition, continuing to cross-zone the company, increasing the share of specialty differentiated products and completing the rebalancing of geographic footprint.

I will now hand it over to our CFO, Marie-José, who will detail the 2018 financial performance.

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Marie-José Donsion, Arkema S.A. - Group CFO [3]

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Thank you, Thierry, and good morning, everyone. So I'll start with some comments on the fourth quarter results.

So as you could see, at EUR 2.2 billion, sales were almost 13% up year-on-year, with a 7.7% price effect; positive in all 3 divisions at 3.5% volume growth, driven notably by Coating Solutions. EBITDA was up on last year's high-performance at EUR 287 million. And the EBITDA margin was, however, impacted by the dilutive effect of price increases and by the mix of activities.

Let's start with High Performance Materials. So we achieved there a robust performance, with sales up 5.3% at constant scope and effects. EBITDA was close to last year's, and price increases were strong with a 3.9% growth impact and contributed to partially offset higher raw material costs. In a context where the raw materials environment is now more stable, we should continue to see the selective increase in prices, especially in the adhesives, to recoup the remaining impact in the coming months.

Volumes were slightly up on last year's high comparison base, and on the full year, the performance was solid with EBITDA up year-on-year, supported by innovation in Advanced Materials and an excellent contribution of specialty molecules sieves. This led -- this was led, in particular, by high density of projects in 2018. And keep in mind that for this business, we will have in 2019 a very high base of comparison, especially in Q1.

Moving to Industrial Specialties. We delivered another very strong quarter with EUR 140 million EBITDA, supported by a stronger-than-expected contribution from Fluorogases, as you could see; and a solid performance in Thiochemicals and Hydrogen Peroxide. So all of these elements contributed to more than offset the effects of normalizing market conditions in MMA/PMMA sectors. On the full year, all 4 business lines contributed to the excellent results.

Finally, on Coating Solutions. We posted an EBITDA of EUR 44 million, stable versus last year. Volume momentum was strong this quarter, especially in Asia and North America. However, the division's performance continue to be impacted by higher input costs, especially in downstream businesses, despite the significant price increases they passed on. So EBITDA margin, both in the quarter and full year, reflect the dilutive impacts of higher selling prices.

So moving on now to our full year 2018 numbers. Let's start with the P&L. So at EUR 8.8 billion, sales were up 6% year-on-year, including an adverse currency effect of minus 2.8%, mainly due to the stronger euro versus dollar in the first half of the year; and the positive scope effect corresponding to the integration of recent acquisitions.

Organic growth was circa 8%, led notably by a strong 6.3% price affect positive in all 3 divisions. Volumes were up 1.6%, driven by Advanced Materials and Coating Solutions, which offset, actually, the impact of lower volumes in Fluorogases. If we exclude Fluorogases, Arkema volumes grew 2.7% in '18.

EBITDA grew 6% to a record level of over EUR 1.47 billion. At 16.7%, the margin was stable at a high level, and these margin levels are actually in line with our midterm targets.

With depreciation and amortization stable versus last year, we have a REBIT which reached over EUR 1 billion, up almost 9% on last year. And as a consequence, the REBIT margin was also up 30 basis points to 11.6%.

Nonrecurring charges amounted to EUR 63 million, mainly corresponding to restructuring charges and asset impairments.

On the financial results, we were close to last year, just over EUR 100 million. On the one hand, we benefited from the EUR 13 million savings following the debt refinancing performed in 2017; and on the other hand, we got higher interest rates on our U.S. dollar debt, which represents around 30% of our gross debt.

Taxes stood at EUR 114 million, significantly down on last year. They included a EUR 59 million one-off noncash profit resulting from the recognition of a deferred tax asset in France. So excluding exceptional items, actually, the tax rate came in at 19% of our REBIT, significantly down on last year due to the positive impact of the U.S. tax reform and to the geographical split of our results. For '19, as said, we anticipate a tax rate around 21% of our REBIT. So eventually, 2018 adjusted net income was up 22% on last year at EUR 725 million.

A few comments now on cash flow and net debt. So as mentioned by Thierry, we generated around EUR 500 million of free cash flow, which is a very strong performance despite organic growth investments accelerating this year. This reflects, actually, the higher EBITDA contribution, lower taxes and the tight control over working capital.

Recurring CapEx came in at EUR 500 million, representing 5.7% of our sales. So it's consistent with our guidance. And exceptional CapEx of EUR 61 million reflect the progress of our Thiochemicals expansion in Malaysia as well as the initial steps undertaken for the expansion of our specialty polyamides in Asia.

For 2019, given the expected ramp-up of these investments, the sum of recurring and exceptional CapEx should be around EUR 610 million in total. At 13.4% of sales, actually, working capital was close to a historical low of last year and still well below the 2016 level, which was at 14.5%. So this was another strong achievement of the year for Arkema.

Finally, EBITDA-to-cash conversion rate was 38%, and net debt decreased slightly to around EUR 1 billion, including EUR 213 million spent on acquisition during the year.

So this concludes my presentation, and I now hand it over to Thierry.

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Thierry Le Hénaff, Arkema S.A. - Chairman & CEO [4]

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Thank you, Marie-José. So with regards to the outlook, as you know, current economic environment remains complex, where prices are volatile and the world is still facing some geopolitical tensions. So this continues to weigh on customer demand at the start of the year, as we have seen certain fuel markets such as automotive in Asia or consumer electronics. In this context, we will, as usual, focus on our strategy -- our main action, which means what we control, our internal momentum and the execution of this long-term strategy.

Our priorities for '19 are very clear. We'll continue to roll out our industrial projects. You know that we have several start-ups which are expected this year in Advanced Materials, China, France, U.S.; and also, we have acrylics expansion in the U.S. They will all contribute to our growth, especially in the second part of the year.

In adhesives, we'll continue to implement the synergies and finalize the integration of the recently acquired businesses. We expect to benefit in this business from a more stable environment in raw material. And finally, we'll continue our initiative as part of our operational excellence program as well as our proactive action to raise prices selectively.

So taking into account these different drivers, we aim to demonstrate our resilience in this more complex environment and to consolidate our performance at current high levels.

The seasonal split this year will probably be different from last year. We expect Q1 EBITDA to be slightly below 1Q 2018 high comparison base, taking into account last year's excellent contribution of specialty molecular sieves and MMA/PMMA. And momentum is expected to improve throughout the year, driven by the further development of specialty businesses. And in seeing the group's profile, we aim to achieve in 2019 an EBITDA comparable to 2018 record level. And this would be really another excellent performance.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we have our first question from Martin Roediger.

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Martin Roediger, Kepler Cheuvreux, Research Division - Equity Research Analyst [2]

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This is Martin Roediger from Kepler Cheuvreux. I have 3 questions. First, on Fluorogases. In Q4, you said that the contribution was better than expected, and obviously, very strong volume growth also driven by Fluorogases. Normally, Q4 is an off-season business for Fluorogases. However, I calculated Fluorogases sales in Q4 was even better than the peak season, which is Q2. Can you explain what happened here and what makes you confident that Fluorogases in 2019 will be between the level of 2017 and 2018? The second question is on the tax rate. Thanks very much for the explanation about the underlying tax rate of 19% compared to REBIT in 2018 and your guidance for tax in 2019 to be 21% of REBIT. Can you help me to understand why the tax rate is rising? And eventually, that is because of the Base Erosion and Anti-Abuse Tax in the U.S. And what do you expect -- is there also a further increase in tax rate to expect after 2019 because of that tax in the U.S? And then finally, on the others and corporate line within the segment reporting, it seems that the EBITDA in the corporate line was minus EUR 22 million in Q4, which is a rather low number for Q4 reporting. In the -- can you explain the reasons behind and any hint what you expect for the corporate line contribution in 2019?

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Thierry Le Hénaff, Arkema S.A. - Chairman & CEO [3]

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Okay. I will finish -- I will start with the last one. I will go from the last one to the first one. So I will start with the corporate line, which is quite easy, tax rate and Fluorogas. So on the corporate line, first of all, I think, as you know, every year, we are between EUR 18 million and EUR 19 million divided by 4. EUR 22 million was nothing special. We had, as you know, paid in the Q4 what we call the (foreign language), okay, to employees, which was very special in France, which is part of the slight increase in corporate. But all in all, it's completely under control. And it's nothing special if you split the year by 4. You are close to the level of Q4. But you could argue that there is a specific element of (foreign language), which is a specific bonus which has been given in France by many companies in particularly favorable tax conditions. For the tax rate, Marie-José?

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Marie-José Donsion, Arkema S.A. - Group CFO [4]

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Yes. So in fact, as I explained, the significant decrease in '18 financial year comes really from the decrease in taxations in the U.S. Then basically, you've got a mix of geographies, which contribute to the overall tax rates. So this is basically the only reason for, let's say, the guidance at 21%. No major change, let's say, country by country in itself.

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Thierry Le Hénaff, Arkema S.A. - Chairman & CEO [5]

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With regard to Fluorogases, we got, as usual, quite every quarter, many questions. And what is already good is that depending on the -- which analyst, we have different opinion on Fluorogases, so we try to answer all questions. But overall, what I would like to state is that we have confirmed, as we said many times, that 2018 will be quite a good year for Arkema. We recognized that in Q4, but for the year, above expectation. And you remember that we said that '17 was really, for us, a high reference point but it would be a reference point for the coming years. We did better in '18. So first, we delivered '17 as planned, and I think it was really a good news for everyone. Then '18 was even better. And as you know, we are completely transparent to you. And we say don't count on this high level forever. '17 is more a reference point. And we believe that for '19, we should be between '17 and '18, which, I think, would be quite a good level. So why is Q4 so good? First, because, as you know, Fluorogases is made of different products on different regions with legislation. So you have never the same pattern every year, never the same pattern every quarter. I think our team are very active. They have done a very good job in Q4. But we believe and we recognize that some of these actions may be not repeatable in 2019, which is why we thought this fair assumption to say that on Fluorogases, we'll be between '17 and '18, which would be an excellent level. And I think that's quite good. And this shows a relatively good resilience of Fluorogases at high level, which is what you'd expect as shareholders. Thank you, Martin.

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Martin Roediger, Kepler Cheuvreux, Research Division - Equity Research Analyst [6]

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Can you explain the actions you have done?

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Thierry Le Hénaff, Arkema S.A. - Chairman & CEO [7]

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I will not develop openly to share with the competitors all the actions we do on the market. I think you got a clear answer. The figures are speaking for ourselves. There have been many questions with regard to Fluorogas already in '16 and '17 in our ability to maintain this kind of level. We did better in '18. So I think the figures are speaking. But as we do in other business lines, we don't disclose openly to everyone what the exchange we are doing on the market. You can understand why.

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Operator [8]

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So we have another question from Alex Stewart from Barclays.

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James Alexander Stewart, Barclays Bank PLC, Research Division - Chemicals Analyst [9]

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Firstly, on the Coating Solutions business. I calculate the volumes in your upstream business must have been up very, very strongly. Why did you have positive volume growth in acrylics monomers and esters in Q4 particularly given that they're slightly shakier at the moment? Perhaps there was a contribution from the Sunke joint venture, for example. And secondly, in Fluorogases, did you have any either revenue and/or EBITDA contributions, active working distribution agreement with Chemours? And was there any prebuying of Fluorogases, particularly R22, into the tariff increases in the (inaudible) project? And then finally -- sorry, there's quite a few questions, finally, what euro/dollar rate do you assume in your guidance for 2019?

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Thierry Le Hénaff, Arkema S.A. - Chairman & CEO [10]

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So the last question is EUR 1.15. On the acrylic monomers, it's true that we have good volume. I think China has been better than maybe we would have thought, especially after all the questions people were asking about China. But overall, we have good volume. We have done a very good job into global key account management and with some very good results, for example, in fracking; with also, development of what is -- growth to [diapers] or water treatment. It's going fine. So it has been quite a good Q4 compared to usual overall Q4. But from every quarter, it's difficult to have exactly the same pattern. The seasonality can vary from year-to-year. But it was quite good. What has happened is that we had also a significant increase in propylene, which has weighed on the downstream margin. This is why the margin percentage is a little bit disappointing when you saw the growth. But this is, really, is a problem effect. We have also de-stocked because -- since we see such a volatility in the raw material pattern, we prefer to be cautious in stock, and it had some impact in EBITDA that you see in the margin. And on the volume, again, don't forget that in December, in 2017, we had a big turnaround. This is why we are a little bit cautious in our guidance while creating the first part in the first quarter. We had turnaround in December, so it was 2017. So when you compare December to, say -- or Q4 2018 versus '17, you have also a gap there -- or an increase there. But all in all, there were nonspecific elements. It's in addition of different elements. And it's better to have good volumes than bad volumes, so we're therefore happy about the volumes. With regard to Fluorogases, I'm not sure to understand your element below the language Chemours. But there was no element below the language Chemours, whatever, but I'm not sure to understand exactly the question. And no prebuy of R22 in the U.S.

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James Alexander Stewart, Barclays Bank PLC, Research Division - Chemicals Analyst [11]

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Pardon me. Sorry, but my question about (inaudible) is the distribution agreement with them, which you announced at the end of last year. I wondered whether that agreement has come into effect already.

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Thierry Le Hénaff, Arkema S.A. - Chairman & CEO [12]

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Yes. Okay, now that -- because you mentioned below EBITDA or whatever, so I was not sure to... if the contribution of the agreements is shown on EBITDA. The color...

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Marie-José Donsion, Arkema S.A. - Group CFO [13]

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Contribution of the agreement to the EBITDA.

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Thierry Le Hénaff, Arkema S.A. - Chairman & CEO [14]

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Okay. No, it was not -- if your question was, so for this agreement is significant in Q4, which would explain why Fluorogases are good, the answer is no. Okay?

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James Alexander Stewart, Barclays Bank PLC, Research Division - Chemicals Analyst [15]

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Okay.

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Operator [16]

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So we have another question from Patrick Lambert from MainFirst.

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Patrick Gerard Jean Lambert, MainFirst Bank AG, Research Division - Research Analyst of Chemicals [17]

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If your...

(technical difficulty)

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Thierry Le Hénaff, Arkema S.A. - Chairman & CEO [18]

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Hello, Patrick, you are there? We don't hear you anymore.

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Operator [19]

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So we have Georgina Iwamoto from Goldman Sachs now.

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Georgina Iwamoto, Goldman Sachs Group Inc., Research Division - Associate [20]

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I think one more on Fluorogases, if that's okay, which is can you give us an update on any developments in 1234yf? And as 2020 is fast approaching, do you that think you will have any kind of route to participate in the automotive market refrigeration of the regulation changes? And then just a bit more generally, thinking about 2019 versus '18, I know there were headwinds from raw materials and FX in '18, but I think it is somewhat surprising to see such good pricing not dropping through to the margin across the group. So as you look to 2019, where it's probably a more limited volume growth environment and probably difficult to do better than you did in 2018 on pricing, how do you think about the margin development for the group going into next year?

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Thierry Le Hénaff, Arkema S.A. - Chairman & CEO [21]

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So on (inaudible) question, yes, so 1234yf, no news. Otherwise we would have communicated. So we are still -- this file is still being discussed at the level of the European Commission. But we have 2 more (inaudible), otherwise it would've been, by definition, official, for this process is completely transparent. With regard to the pricing, in fact, yes, we had good pricing power, but the level of raw material increase was a downstream. And you know on the supply shed, how long it takes to go from the upstream down to the downstream. So we suffered up until the end of last year even if raw materials -- when raw materials started to decrease. This is what you see yourself. In fact, up until the end of last year, when you go from import to delivery, we have still some negative effect from raw material. So we had good pricing but it was impossible to offset. And we are not -- you have seen that in other kind of specialty or formulation chemical line, you see exactly the same. So we are not different. We have done a good job, but raw material increase over a period of 18 months has been spectacular. We did a part of the job and we still have some to do in '19. We know that. We believe the context would be more easy because sales and comp will be more favorable. And secondly, we believe that now we see stability in raw material, if not some decrease. So we should, step-by-step, recoup the margin we have lost in the past 2 years, for example, in the adhesives and the acrylic downstream. So this is one of the element, which is factored when we say that in '19 compared to '18, yes, we should have some normalization in the more intermediate product line. But with regard to specialties, we should have, especially in the second part of the year, a growing momentum.

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Georgina Iwamoto, Goldman Sachs Group Inc., Research Division - Associate [22]

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And so the kind of net impact is kind of neutral to the margin? Or do you think you can actually improve because the specialties is where the improvement is coming from this year?

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Thierry Le Hénaff, Arkema S.A. - Chairman & CEO [23]

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No, as I mentioned, we believe in that specialty, so I mean on Bostik and on acrylic downstream, we should be able to increase percentage of margin on the acrylic downstream and in Bostik because of this momentum, continuing pricing increase and more stability, even a slight decrease of raw material, this is what we believe.

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Georgina Iwamoto, Goldman Sachs Group Inc., Research Division - Associate [24]

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Okay. And then just final clarification on Fluorogases. So with 12 months to go, Arkema can't serve the automotive refrigeration market at this point, is that right?

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Thierry Le Hénaff, Arkema S.A. - Chairman & CEO [25]

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Sorry?

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Marie-José Donsion, Arkema S.A. - Group CFO [26]

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It's about the refrigeration -- automotive refrigeration market.

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Thierry Le Hénaff, Arkema S.A. - Chairman & CEO [27]

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The new model?

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Georgina Iwamoto, Goldman Sachs Group Inc., Research Division - Associate [28]

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Yes.

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Thierry Le Hénaff, Arkema S.A. - Chairman & CEO [29]

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Yes, on the new model, yes. But it has already happened. It's nothing new and it is in Europe. It's not in the world. In the world, the situation is different and it's not in our 2020 target, as you know. So I'm not seeing a difference from what they tell you when you go to your grocery. I mean, your question is fair, but you know the answer since now more or less a point of view. It's completely factored. And as we mentioned many times, our strategy in Fluorogas is completely diversified, and we had already this impact in 2018. And you got to observe in our figures of Fluorogas in 2018, which has been excellent. So I hope you appreciated that. Thank you.

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Operator [30]

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So we have a question from Patrick Lambert from MainFirst.

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Patrick Gerard Jean Lambert, MainFirst Bank AG, Research Division - Research Analyst of Chemicals [31]

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Can you hear me this time?

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Thierry Le Hénaff, Arkema S.A. - Chairman & CEO [32]

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I can hear you.

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Patrick Gerard Jean Lambert, MainFirst Bank AG, Research Division - Research Analyst of Chemicals [33]

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A few questions. The first one is -- and thanks for bridging Industrial Specialties EBITDA, at least in terms of Fluorogases quantification. Could you do the same with PMMA, your outlook on the impact of normalization for the full 2019; and also on the Coating side, the Sunke contribution -- expected contribution, the increase of capacity there? That's for the bridge of EBITDA. The second question is regards to margins of HPM in Q4. I think you mentioned a voluntary inventory management. Could you help us a bit on what you did exactly, in which product lines and the impact you think it had on margins in Q4, and also, the -- again, a bit of granularity on adhesives margin versus the rest, if you can?

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Thierry Le Hénaff, Arkema S.A. - Chairman & CEO [34]

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So with regard on -- and quickly on the first question, as you know, we don't give a line by line, especially with regards to the guidance and nobody does it in detail. But clearly, what we believe is that you are in fact -- in intermediate, and I'd like to spend not only on the intermediate in the call, but we'll answer your question, because it represents only 30% of the company. But if I look what -- the way we see it in 2019, which is completely consistent with our guidance, is that we have a great momentum, which will continue to increase gradually growth of profitability. And then on the other side, you have MMA/PMMA with normalization on 3 quarters because we had already 1 quarter of that normalization, and you have Fluorogas. So I would say, that acrylics will offset, let's say -- to say something, MMA/PMMA, okay? And then you have the Fluorogas, which explains that we believe in 2019, on the intermediates, we'll gain some level of normalization; but on the other side, you will get slight increase, on some bigger sense, level achieved in specialties. Okay? From a (inaudible) point, that is some of the -- this is what I can tell you. With regard to the margin of -- I think we did quite a good job for the year in terms of margin management for Advanced Materials. Bostik has more suffered because it's more downstream. But you can also see exactly the same phenomena for the paint manufacturers because it's increased, as I mentioned, (inaudible) was so big that you cannot offset just in the year. So margin has been impacted. Basically, Bostik has lost a bit more -- 1 point of margin year-on-year. And if we take also the year 2017, you could add a little bit, so we have more or less 1.5 points to recoup in margins from Bostik. And this is -- certainly, we will try do as much as -- we'll try to offset as much out of this gap already in 2019, which is clear priority for Bostik. Again, it has been quite a solid business, also, with the input from acquisition. But we recognize that we have lost similar to what we have seen for paint manufacturers, like 1 point of margin, a little bit more, including the year before. But we plan to recoup most of it this year. So for us, it's an applied for '19.

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Operator [35]

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We have another question from Mubasher Chaudhry.

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Mubasher Ahmed Chaudhry, Citigroup Inc, Research Division - VP [36]

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Just 2, please. On Bostik, just some color around how the conversations are coming along from the bolt-on perspective and how are you seeing the landscape from, say, evaluation and availability of acquisitions. That's one. And the second one is around acrylics overall. When you look at the supply-and-demand dynamics there, what do you see are the utilization rates for the industry in 2019 and maybe even in 2020?

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Thierry Le Hénaff, Arkema S.A. - Chairman & CEO [37]

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Okay, Mubasher, nice to talk to you. So with regards to the acquisition, first of all, the good news is that our financial power is intact to make an acquisition. Maybe it has not been mentioned enough, but our cash generation has been fantastic in 2018. Our level of debt is level 0.7x EBITDA. You know that we target mid/long-term to be below 2x, so -- which means that we have -- while remaining very reasonable. We have financial flexibility not only for acquisition in adhesives, because we target also Advanced Materials and acrylic downstream. But clearly, we want to continue to move. Because we have the financial flexibility, it doesn't mean that -- and you have seen that in 2018. We need to make -- we make moves every year. We tried to be reasonable, cautious enough not to overpay, and to make acquisition which really are value-creative. And this is what we have done in the past. Now with regards to adhesives, clearly, we'll continue our bolt-on acquisition. We have a big pipeline, but it doesn't mean that we will make a significant acquisition, just that we have many contacts all over the world. It's clear that in the landscape of today, it's easier to make small bolt-on acquisition to make big -- a need to bigsize a company. But I think we are scrutinizing the whole market. There is room for acquisition. The landscape evaluation not only for adhesives but for Advanced Materials, as you know, is higher than it was a few years ago because you have a lot of money in the market and also because the rate -- the interest rates are low. But I think we have what we need in order to continue to grow Bostik by acquisition. We have no worry on that and we have enough targets. On acrylic, on the AE utilization rate, I would think the U.S. is good. It's been a good level of tightness. Europe is more balanced, I would say, but is solid. China is still a little bit challenging, as you know. But it's -- with the level of demand increase in China -- and going back to a question before, we saw that even in the last quarter of 2018, we believe that demand will continue to grow. And even if supply grow a little bit, the balance should continue to improve in the coming years. Overall, for the adhesives, altogether, we are roughly on mid-cycle for 2018 and we should continue to improve in 2019.

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Operator [38]

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So we have another question from Laurent Favre from Exane.

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Laurent Guy Favre, Exane BNP Paribas, Research Division - Research Analyst [39]

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Three questions, please. 2 quick ones to start with. On adhesives, on raw materials, could you give us a bit of color of what you're seeing on the raw materials that we cannot track externally? So we have the view on silicones and diamine, urethane. So I'm wondering, what's happening on the rest of the cost pile? Second question, on pricing. Can you remind us how much of Bostik, and generally, adhesives, how much of it works on an annual pricing cycle, i.e. how much of your business you haven't been able to reprice since Q1 last year? That's the second question. And the third one on acquisitions, I guess. You've just mentioned that you're still looking at bolt-ons, and we've seen Parex recently. BASF is going through this round on construction chemicals. And GCP apparently is looking at strategic options with every option on the table. So I'm wondering, are you ruling out those very significant potential acquisitions? Are you really only sticking to bolt-ons?

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Thierry Le Hénaff, Arkema S.A. - Chairman & CEO [40]

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Thank you, Laurent. So with regard to raw material, I think I can see that you have studied it well. Clearly, silicon has, after our significant increase, have decreased. (inaudible) has decreased. We see some resins which decreased. But I would say that most of the other raw material you are not naming are stable, okay? This means that you have named the big decrease. I don't know if you mentioned polyurethane, which is one also. You have also some tackifying resin, which decreased. For the rest, it's more stable. But I would say what we needed is not so much decrease except with silicon. With silicon, which is mostly in sealants, pricing are falling more or less. So it's more -- but for the rest, clearly, I would say that what we were expecting, which is coming now, is more stability in order to benefit from all the work we have done and we continue to do on pricing. Because for 18 months, we have been trying to catch up. And -- but we were late this time because raw material continue to increase. They are not any more in this context, so I think it will be too hard to recoup the margin, and we start to see that in the Q1. On what you call the annual cycle, we are there from (inaudible) as well on Bostik, on which we have not passed price increase. They were up in Q4. I would say that for Q1, we would have closed the loop and we would have passed price increase. There is always some few exceptions, but overall, for the big majority, everywhere in the Bostik portfolio. But we need the Q1 again. I hope it answered your question. On the adhesives, so when we say adhesives: sealants, motors, associated products, it can cover a lot. So in adhesives, you can go in many fields and you have to be selective. I would say that we don't disclose any significant increase, but I would consider the level of Den Braven, which was -- (inaudible) in terms of auto price value (inaudible) would be for us a sort of big -- so below what -- the one you are naming, okay? And the majority of what we would be doing would be more bolt-on acquisition, which means between 20, 30, 40, 100 and above, but we don't disclose more significant. It really doesn't make sense. Once you have said that, we are more a company which is targeting sealants, adhesives group than to be a big motor player, if you see what I mean.

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Operator [41]

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So we have another question from Martin Evans from HSBC.

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Martin John Evans, HSBC, Research Division - Analyst of Global Chemicals [42]

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It's a question on your Slide 5, transformation on track, where you say that 70% of the group's sales by division are now specialties. And I guess, it's a simple question in terms of definition or what you understand by that. Because on the surface, looking down at Coating Solutions and even HPM, 16% EBITDA, those sorts of returns are, by no means, what traditionalists would regard as specialty. So therefore, you've moved, which you're entitled to do for the purposes of this chart, you've moved some of your divisions into the specialty grouping. But could you just maybe clarify what your definition of specialty is, either in terms of an EBITDA margin or return on invested capital, and again, just clarify exactly which divisions within your portfolio within the 70% now you would regard as specialty?

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Thierry Le Hénaff, Arkema S.A. - Chairman & CEO [43]

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Okay. So first of all, if we ask everybody following this call and all our competitors what are the definition of specialty, everybody will come from -- with a different definition. You are mentioning HPM margin. You know that HPM is a mix of Advanced Materials, which is around 20%, which is clearly specialties; and Bostik, which is more in the range of 12%, 13% and that which is also clearly specialties. So the mix -- the average you took is not so relevant. It's really the 2 businesses, Advanced Materials and Bostik. And Bostik would be a paint company. And so you have some European references, even with this kind of margin, typically, specialty priced. So 2 answers to your question clearly, and I think there's been clear for everyone. Out of that, you can have your definition. Everybody can have each definition, but we are completely, I would say, committed to our own definition. Intermediates is MMA/PMMA, Fluorogas and acrylic acid, so the upstream of the Coating Solutions. So this is intermediates. And the rest is specialties. What do we define overall in specialties without looking at everything in detail is, really: resilient, driven by innovation and R&D, steadily growing, pricing power, so basically what we are looking for and I believe that what we define as specialty. And it's -- if we look at 5 years, 6 years, 10 years, what we have built with this business portfolio, it has really a better view of specialty businesses, if you compare to the definition we have from peers. So after that, you could take luxury goods or whatever. But I think we are pretty much consistent. It's not more strict than what we've seen in our industry, okay?

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Martin John Evans, HSBC, Research Division - Analyst of Global Chemicals [44]

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Okay, interesting.

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Operator [45]

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So we have another question from Chetan Udeshi from JP Morgan.

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Chetan Udeshi, JP Morgan Chase & Co, Research Division - Research Analyst [46]

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Just one question on the contribution from new projects and expansions. Can you give me -- can you give us some sort of sense of how much EBITDA contribution do you see from all the new projects that come online primarily in second half in 2019? And the second question is just around the Industrial Specialties piece overall. If I look at the EBITDA in this business grown from EUR 470 million in 2016 to now, in 2018, EUR 675 million. So it's almost a EUR 200 million increase. Now we all debated about the MMA/PMMA normalization for a while. It probably seems to be happening now. Fluorogases, like you said, is already going to decline from high basis. So how should we think about there is a new sort of EBITDA for that business compared to what we've seen in the past 2 years? So are we going back to 2017, 2016 levels? Or do you still think we'd end up closer to what we have in sort of 2018, probably lower but not too much lower than 2018?

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Thierry Le Hénaff, Arkema S.A. - Chairman & CEO [47]

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Okay, good question. So with regards to the new project, we don't give year by year what -- maybe I will answer a different question, but I think it will be useful for everyone who is -- because we had the question in recent times, which was this place where we put all our development projects, including the one for '19 but also the one which are midterm. We have, for all these projects, around EUR 700 million of CapEx for the next 3, 4 years. And typically, in Arkema -- it's Arkema so we give you a lot of information. At Arkema, when we take an organic project to understand the EBITDA generated by the project for organic, so organic CapEx, you divide by -- between 3.5x to 4.5x. This means that, to say something, a project of EUR 100 million of CapEx, to understand which EBITDA it would generate once it has fully ramped up, you divide by 3.5x to 4.5x, okay? So with that, it gives you accrual. And it's nearly every year like this. On -- yes, Industrial Specialties, we have done a good job, which has not been necessarily recognized by the market, because this year we have seen that. We -- and the '17 performance was fantastic from Industrial Specialties. And at the end of the day, we have most questions of concern saying to us, "No, we would prefer specialties to go quicker, and we don't take into account your growth in Industrial Specialties." So if we start to go a little bit better -- a bit lower, everybody should be happy for the same reason. So no, I think that with regard to our intermediates -- I would say business because in Industrial Specialties, you have Thiochemicals, which is specialty business, if I take off intermediate business, again, we think that you have acrylic where, still, for the coming years, potential for increase. So we are more close to the mid-cycle than across cycle. You have MMA/PMMA, no surprise. We were the first one to say, "I started to normalize," and we'll continue to normalize so you have 3 quarters. And Fluorogas should be between '17 and '18. If you take it all together, you'll make your own estimate, you will see that we will be below last year, but reasonably below last year. And looking at our guidance for the full company, including specialties to be comparable to last year, this means that industrial intermediates has to be reasonably below last year. So all in all, we'd stay at quite an excellent level but not as strong as 2019 (sic) [2018] and certainly above '17.

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Operator [48]

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So we have another question from Alex Stewart from Barclays.

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James Alexander Stewart, Barclays Bank PLC, Research Division - Chemicals Analyst [49]

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A very quick question, sorry. Your EUR 700 million hybrid, I think, is first callable in maybe outside of 2020. Have you thought about refinancing that or paying it off all together, say, with the high coupon?

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Thierry Le Hénaff, Arkema S.A. - Chairman & CEO [50]

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The hybrid?

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Marie-José Donsion, Arkema S.A. - Group CFO [51]

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Yes, the hybrid is expected to mature end of 2020. So as we described previously, we consider it as a good instrument to have in the portfolio of financing in the company. So we'll be looking, of course, into the market for the right timing to maintain this instrument into our portfolio financing.

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James Alexander Stewart, Barclays Bank PLC, Research Division - Chemicals Analyst [52]

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So is it possible to refinance early?

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Marie-José Donsion, Arkema S.A. - Group CFO [53]

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Everything is possible, of course.

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Thierry Le Hénaff, Arkema S.A. - Chairman & CEO [54]

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It has to make sense. So I think there is a -- we all plan to -- everything which would be good for the company. But for that, it has to make sense. And certainly to do it early, discussing money or -- I think we are not in -- we don't believe we have to be in a hurry of what -- any decision.

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Operator [55]

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We have another question from Patrick Lambert from MainFirst.

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Patrick Gerard Jean Lambert, MainFirst Bank AG, Research Division - Research Analyst of Chemicals [56]

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A follow-up question for Marie-José, I guess. What's left on the tax assets to be realized over the next few years and the timing of that? That's question number one. And question number two, you've been pretty active in 3D printing the past few years. Could you, I guess, quantify a bit? I know it should be pretty small, but in terms of growth rate applications, where you see that developing pretty well. You're participating in a lot of platforms. A bit of color on the pathway for 3D printing.

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Thierry Le Hénaff, Arkema S.A. - Chairman & CEO [57]

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So on 3D printing, Patrick, clearly, it's one of the growth platform for Arkema, at the same level as batteries or lightweighting or bio-source. The growth of the market is exponential. So what it is exactly, difficult to know, but it will grow easily 20%, 30% every year. We have a big range for that. I think we are, in the chemical sector, one of the company which is at the forefront of this development. Will it be huge? It's difficult to say today, but I think it potentially can be a blockbuster for Arkema, as composites, as all lightweighting, as bio-source. But it's impossible to give you any clear targets. But clearly, we believe we have something there.

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Patrick Gerard Jean Lambert, MainFirst Bank AG, Research Division - Research Analyst of Chemicals [58]

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Is there any technology that stands out anywhere, I mean, liquid, solid?

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Thierry Le Hénaff, Arkema S.A. - Chairman & CEO [59]

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You have many different technologies. You have, also, filament. You have powder. You have really plenty of different technology, which one liquid, certainly, for UV curing. Which one is going to prevail, I think they will all prevail. It depends, really, what you want to make at the end. What is clear is that we are shifting from a world where it was mostly for prototyping to a world where it could be really part of the manufacturing processes. So really big company will use in their manufacturing process our printers. And it's very, very exciting.

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Marie-José Donsion, Arkema S.A. - Group CFO [60]

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Regarding tax, I can maybe comment. So we are in -- net, these are the tax liabilities. Yet we have recommended this year different tax assets in France. We actually have quite a number of historical losses that we generated in France, which are clearly not today totally activated in the balance sheet. So in reality, frankly, there is no risk of consumption of the asset that we have at this point. There is more, let's say, a potential opportunity to increase further that asset in the future. The amount at stake is basically roughly EUR 1 billion losses accumulated over the past 10 years. So you apply the French tax rate to it and you'll get basically the amount of potential tax savings.

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Thierry Le Hénaff, Arkema S.A. - Chairman & CEO [61]

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Thank you, Marie-José. Before we close -- maybe we can take a last question, but just before this last question, maybe to summary a few points because it's a good summary following your different questions. Firstly, directly following Marie-José's point, we are really very glad to finish -- maybe it has not been emphasized enough, very glad to finish the year with such a strong balance sheet and cash generation. I think we start 2019 with a company which is in a very, very good shape. And we have really, even if we not overuse them, we have really the financial flexibility to execute our long-term strategy. And at the end, the value of Arkema will come mostly from our ability to deliver this long-term strategy. Secondly, dividend. We have not mentioned too much in your questions, so I assume it was in line with what you were expecting. But this dividend policy, which -- at the same time, reasonably growing as a complement, our transformation story, is really an element of visibility and a sign of confidence in what the company will deliver in '19 and in the following years. After that, for '19, clearly, we have had -- and I see your question, we have had momentum in '17, '18, where we have been really very, very strong in more intermediate product line. But we should not underestimate the fact that the specialty business has done quite well, quite robust, quite solid. But beware, it could be masked, this performance, by the fact that intermediate business, we're, maybe from your standpoint, sometimes too good. In '19, our message is to say that this specialty business will continue to play fully the role and continue to grow steadily at quite good level, good margin. You have just to split between what is Bostik kind of profitability and Advanced Materials. But for -- I trust on you for that but really, we'll continue to play fully the role. And intermediate businesses, certainly will be a bit lower but quite reasonably. But we still are quite -- we are confident on that, quite good. And you see our first record on the more intermediate business in the past year, on which we had a few question. I think we have really delivered and will continue to deliver on that. Now if we look at the total, as we say, '19 will be comparable to '18. This means that you will have 2 different dynamics, one on the -- offsetting each other: one in the specialty, a bit lower; and one on the -- sorry, intermediates, a bit lower; and one on specialties, which will continue to grow. I think at the end this is good for the portfolio and the profile of the company. So I think our shareholders best would appreciate that, which is fully in line with the strategy of the company, which is really to continue to reinforce the specialty base of the company to go to the long-term goal which is 80%. Of that, there will be organic growth. But also, we plan to continue to look at potential acquisition, and full year 2019 will be another year of bolt-on acquisition. So this is what I wanted to say. Maybe a last question to close and we'll finish for today.

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Operator [62]

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We have another question from Georgina Iwamoto from Goldman Sachs.

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Georgina Iwamoto, Goldman Sachs Group Inc., Research Division - Associate [63]

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Can you help us with how you think about the word comparable? Is it comparable higher or lower and maybe if you can build the kind of range around it? And -- just from what you've been saying on the call. And so far, it sounds maybe like it's a bit more comparable lower for the guidance for 2019.

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Thierry Le Hénaff, Arkema S.A. - Chairman & CEO [64]

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I think you speak English better than I do, but I think comparable means similar. I think the guidance is quite clear. I think you have everything, which is clear. We are not going to transform at the last question, sorry for that. This is a qualitative guidance which we give at the end of the year, which is -- makes you and us confident about the quality of the year to a quantitative guidance which we have never given so early in the year. That, we give typically, as you know, during the summer. So we'll do this year as we have been doing the past 13 years. And I think it's reasonable to do that. And I don't think you expect more than us. It would not be fair to do that to you. So I think we are confident on the year. We have give you a lot of qualitative elements. I think it's a guidance which should give you confidence. Hopefully, Georgina, you will take it as such. Okay.

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Operator [65]

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So we no have any further questions.

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Thierry Le Hénaff, Arkema S.A. - Chairman & CEO [66]

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Okay. I would like to, really, to thank you for your time and all your very interesting questions. And as you know, we'll see most of you in roadshows. And the team anyway, in the meantime, is ready -- the IR team is ready for your disposal if you have any further questions, you want to have some more details. Thank you, again. Bye-bye.

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Operator [67]

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