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Edited Transcript of SOLB.BR earnings conference call or presentation 26-Feb-20 12:00pm GMT

Q4 2019 Solvay SA Earnings Call

Brussels Mar 20, 2020 (Thomson StreetEvents) -- Edited Transcript of Solvay SA earnings conference call or presentation Wednesday, February 26, 2020 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Geoffroy Raskin

Solvay SA - Head of IR

* Ilham Kadri

Solvay SA - Chairman, Chief Executive Officer, Member of the Board of Directors, Member of the Finance Committee

* Jodi Allen

Solvay SA - Investor Relations Contact

* Karim Hajjar

Solvay SA - CFO & Member of the Executive Committee

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Conference Call Participants

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* Andreas Heine

MainFirst Bank AG, Research Division - MD

* Chetan Udeshi

JP Morgan Chase & Co, Research Division - Research Analyst

* Geoffrey Robert Haire

UBS Investment Bank, Research Division - MD and Equity Research Analyst

* James Alexander Stewart

Barclays Bank PLC, Research Division - Chemicals Analyst

* Laurence Alexander

Jefferies LLC, Research Division - VP & Equity Research Analyst

* Laurent Guy Favre

Exane BNP Paribas, Research Division - Research Analyst

* Markus Mayer

Baader-Helvea Equity Research - Lead Analyst of Chemicals

* Martin Roediger

Kepler Cheuvreux, Research Division - Equity Research Analyst

* Matthew John Peter Yates

BofA Merrill Lynch, Research Division - Director in Equity Research, Head of European Chemicals Research & Research Analyst

* Mubasher Ahmed Chaudhry

Citigroup Inc, Research Division - VP

* Mutlu Gundogan

ABN AMRO Bank N.V., Research Division - Analyst

* Sebastian Christian Bray

Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst

* Wim Hoste

KBC Securities NV, Research Division - Executive Director Research

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Presentation

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Operator [1]

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Welcome to the Solvay Full Year 2019 Results Conference Call for analysts and investors. Solvay team, the floor is yours.

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Geoffroy Raskin, Solvay SA - Head of IR [2]

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Good afternoon, and welcome to our fourth quarter and full year 2019 earnings call. I'm Geoff Raskin from Investor Relations, and I'm here with our CEO, Ilham Kadri; and our CFO, Karim Hajjar.

Before handing the call over to them, let me remind you that our results are compared to 2018 pro forma figures, which already includes the IFRS 16 impact. This means that the corresponding 4.5% growth on the full year is excluded from the presented growth figure.

Today's call is being recorded and will be made available for replay on the Investor Relations section of our website. You may also refer to the slides related to today's broadcast in our Investor Relations website.

With that, I'll turn the call over to Ilham.

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Ilham Kadri, Solvay SA - Chairman, Chief Executive Officer, Member of the Board of Directors, Member of the Finance Committee [3]

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Thank you, Geoff, and hello, everyone. Thank you for joining us to discuss Solvay's results for the fourth quarter and full year 2019.

I'd like to begin today's call with a quick overview of our financial and operational performance. I will then shift to our progress against our growth strategy, and we'll also spend some time addressing our new 2030 sustainability program we announced today, Solvay One Planet. I will then turn the call over to Karim, who will give more color on our results, and we'll finally provide our outlook for 2020 before addressing your questions.

I'll start with our results, which are shown on Slide 4. The macro headwinds that we saw in the beginning of 2019 across our key end markets, including automotive, electronics and oil and gas, persisted throughout the full year. Against this challenging backdrop, we focused on our execution and on managing the factors that are within our control, such as cost discipline, pricing and especially cash management. This, in fact, enabled us to deliver operational and financial performance in line with our expectations. As a result, the mitigation actions we took enabled us to deliver on our full year EBITDA forecast with the positive ForEx impact offsetting a 2.8% decrease on an organic basis.

Net sales were down about 2% for the year, with price compensating for almost half of the volume decline. Double-digit volume growth in Composite Materials and higher prices in Performance Chemicals supported business growth, and we continued to deliver on the cost control measures put in place previously. These measures resulted in savings of about EUR 100 million in 2019. This includes approximately EUR 70 million from the accelerated simplification program that began in 2018 and EUR 30 million from austerity measures.

Moving to free cash flow. I am pleased that we generated a record cash flow of EUR 801 million, with EUR 606 million of that coming from continuing operations. The change in bonus systems to include cash delivery, which was implemented in March 2019, has reinforced the focus on cash generation and on better phasing, and indeed, the progress on working capital exceeded our forecast for the year by around EUR 50 million.

Turning now to Slide 5, I would like to highlight a few key strategic initiatives that we have recently completed or have underway. First, we successfully completed the divestment of the Polyamide commodities activities to BASF and DOMO Chemicals. Consistent with our focus on enhancing the group's financial flexibility, we used those proceeds to continue delevering our balance sheet. I'd like to take this opportunity to recognize the entire team. Since my year with them, I have seen firsthand their ability to deliver value for the business.

Next, we began the process of aligning the structure of the organization with our growth strategy to help unleash Solvay's full potential. I'll start with compensation and have changed the bonus structure to reflect the differentiated mandates and align rewards to enterprise value creation. Today, we are announcing additional efficiency measures that will enable us to operate as a leaner, more nimble organization better positioned to support the needs of our customers. These measures impact approximately 500 positions, including a representative number of senior management positions as we delayer and simplify.

Decisions that impact people are never easy, and our employees continue to show resilience and focus in the face of change. However, we believe these actions are necessary to remain competitive and allow us to better invest in higher-return opportunities. Importantly, these measures are in addition to those we announced in our mid-term plan and, therefore, raise our target to generate gross savings of at least EUR 350 million run rate by the end of 2024, up from the prior minimum of EUR 300 million.

While we remain diligent in our cost focus to mitigate some of these short-term headwinds, we also remain focused on our long-term strategy of creating solutions for our customers that deliver sustainable shared value for all. We have been making great progress innovating with several new solutions that meet the needs of our customers.

You may recall that we have formed a team across various businesses to collaborate on innovations for EV batteries. This is an exciting area for us with a sales opportunity of more than EUR 500 million in 10 years. The team is working together to accelerate our development of next-generation battery technologies, and it is already having a positive impact.

For example, our collaboration with a leading European auto OEM manufacturer resulted in our development of a new thermoplastic solution in an emerging electrical mobility application used in battery containers for hybrid vehicles, and we look forward to commercializing this new piece of business very soon. This continued focus on innovation with our customers for long-term growth, combined with our continued focus on self-help measures in the short term, gives me confidence in our ability to deliver on our strategic plan.

On January 9, we unveiled internally the purpose of -- our group purpose, shown on Slide 6. We bond people, ideas and elements to reinvent progress. Our purpose is central to everything we do at Solvay. It's caused us to go beyond who we are, to bond together as one team beyond our legacy companies and invent future forms of progress with the aim of creating sustainable shared value for all through the power of science.

On that note, I'd like to turn now to a topic that is part of our history, and it is increasingly important to become a long-lasting admired brand and preferred employer by millennials. It is also key to attract quality ESG shareholders. I am speaking about sustainability, of course.

We already have in place an ambitious greenhouse gas emissions target and have made good progress on this goal. In fact, over the past 3 years, we have improved on multiple metrics. Our greenhouse gas emissions reduced by 0.7 metric tons or 5%; our safety, where we have reduced accidents by 18%; and our societal actions increased significantly to 47% employee involvement.

While all of this are good achievements, focusing on these KPIs is simply not enough. Earlier today, we announced our new 2030 sustainability plan called Solvay One Planet. The details of this plan are shown on Slide 7. I will not get today into all of the details, but I look forward to discussing it with you in the future.

The plan outlines 10 ambitious goals that are designed to help Solvay reach our full potential and positively shape the group's impact in 3 areas: climate, resources and quality of life through the next decade and beyond. This plan is an integral element of our strategy and purpose and will play a critical role in helping Solvay unleash its full potential. We look forward to keeping you updated on our progress in our next call.

Now I'll turn the call over to Karim to review our financials in more detail. Karim?

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Karim Hajjar, Solvay SA - CFO & Member of the Executive Committee [4]

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Thank you, Ilham. Hello, everybody. I will now provide some comments on each of the 3 business segments, starting with Advanced Materials on Slide #8.

Full year net sales were flat on an organic basis. I'll now focus my comments on Q4 activities, where sales were down 4% on an organic basis. Composite Materials, which delivered double-digit growth for the first 9 months showed some slowdown as anticipated given the planned reduced production rates for the 737 MAX. This was the main sequential change as other key markets, including automotive and electronics, continue to be impacted by lower demand.

As you know, auto is the segment's largest market, representing over 50% of the segment. Vehicle production declined globally by 5%. Solvay sales to the auto segment are down slightly less than that as our technologies for electric vehicle batteries enabled us to outperform the broader sector.

Moving to electronics, which represents about 10% of segment sales, 5% of group sales, the industry data shows fab equipment investments for semiconductors down 7%, smart device sales stagnating, both of which impacted our materials segment. Against that challenging backdrop, our revenues in electronics dropped by double digits in the year.

Overall for the Advanced Materials segment, EBITDA was down 9% for the full year organically, 12% down in Q4. Fixed costs were up because of 2 main elements: one, the production expansion to support growth in Composite Materials; two, the result of the planned reduction of inventories, mainly in Specialty Polymers. Higher prices and cost mitigation efforts only partly offset the higher cost base. As a result, EBITDA margins for the segment were down 2.6 percentage points at 25% for the year.

I will now turn to the Advanced Formulations segment on Slide 9. Sales for the full year were down 10% on an organic basis. In the fourth quarter, sales were down 15% as conditions in the North American shale oil and gas industry continued to deteriorate as customers remained focused on securing the lowest cost product in an already low-demand environment and as competitive pressures have intensified.

Outside of oil and gas, demand was stable in markets, including coatings, agro, personal care, and full year sales there increased by 3%. But this growth could not offset the reduction in oil and gas. The mining market had its own series of challenges in the fourth quarter, with various customer operations reducing production, and that impact demand levels. I'm thinking of a large site -- customer site in New Caledonia which shut down production. There were strikes or disruptions across other -- across a number of other customer sites in Mexico, in Chile and in Indonesia as well.

Overall, full year EBITDA in the Advanced Formulations segment was down 12%. The businesses, especially related to oil and gas, continue to adapt cost structures to the changing environment and have been successful in reducing their costs. But there is more to do, and this will take time. Thanks to these self-help measures, really pleased that the EBITDA margin was maintained at 17%.

Moving to Performance Chemicals on Slide 10. Full year net sales were up 2% organically and down slightly in the fourth quarter. Both soda ash and peroxides again performed well throughout 2019 with higher prices mitigating some of the softer volumes at year-end. Overall EBITDA for the fourth quarter grew 12%, with higher prices and productivity improvements driving the solid performance in that segment. EBITDA margins consequently increased to 29% in the quarter, almost 30% for the full year.

Now I'll turn to cash generation and the balance sheet, which is highlighted on Slide #11. Total free cash flow to shareholders was EUR 801 million, with our continuing businesses delivering EUR 606 million in the year, an increase of EUR 40 million over 2018. As Ilham indicated, we saw a significant improvement in working capital, most notably a reduction in inventory levels of nearly EUR 100 million and a structural extension of payment terms with selected major suppliers, leading to an increase of days payable outstanding, whereas credit management discipline was also preserved. The outcome was a cash inflow in 2019 which exceeded our forecast by around EUR 50 million, cash that we'd previously expected to generate in 2020. This performance results in a cash conversion of 28% compared to 26% in 2018.

Turning to Slide 13 (sic) [Slide 12]. Our strong operational cash flow allowed us to reduce net debt by EUR 414 million over the year after a dividend payout of EUR 387 million. In addition, operational deleveraging, cash deleveraging of provisions amounted to EUR 157 million. The combination of those 2 represents a record for us and helped to reduce both our leverage ratio and reinforced our investment credit rating.

You will note also that we made a voluntary contribution -- additional pension contribution of EUR 114 million in Q4. And indeed, following the recent completion of the sale of the Polyamide at the end of January, we made an additional voluntary contribution of EUR 0.4 billion just 3 weeks ago. The combination of both of these contributions will be to reduce our pension cash spend by over EUR 40 million a year, and this would take effect in 2020. And that does represent a yield -- a return of 8% after tax.

And with that, I'll hand you back to Ilham to share the outlook for 2020.

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Ilham Kadri, Solvay SA - Chairman, Chief Executive Officer, Member of the Board of Directors, Member of the Finance Committee [5]

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Yes. Thank you, Karim. You may remember, on our third quarter, in November, I shared that we expect 2020 to be a transition year for Solvay as we align the structure of the company to meet our new vision and strategy. And with that, I would like now to provide you details on our outlook for the first quarter and year.

We estimate underlying full year EBITDA to be flat to modestly down organically compared to EUR 2.3 billion in 2019, and we expect the first part of the year will show a steeper reduction, reflecting both the strength of the start to 2019 and current conditions and developments in certain key markets.

We expect growth to be back ended, with the first quarter down by high single digits as a result -- direct result of 3 events. First, on the Boeing 737 MAX, let me remind you that we produced at a level close to 50 planes per month in 2019. Our forecast assumes 200 aircraft built in 2020 versus close to 600 in 2019. This difference will negatively impact our EBITDA by between EUR 30 million and EUR 40 million.

Second, the challenges in certain key end markets, which together make up 25% of group sales, continue in 2020. Namely, oil and gas, you will have taken note of the challenges in that business. And while we are working hard to mitigate the impact, it will be another tough year. Also, we expect the current headwinds to continue in the first half and anticipate improvements in demand in the second half of the year only. Electronics. Our order books have begun to show some modest improvement earlier in the year. While it's still too early, we are cautiously optimistic that this will be a source of growth again in the second half.

And lastly, on the coronavirus or COVID-19, first and foremost we are focused on ensuring the health and safety of our employees in affected regions. We are taking all necessary precautions and following guidelines from local governmental and health authorities on best practices. As you know, China represents EUR 0.9 billion of our sales, almost 10% of the group sales. We have 10 industrial sites, none of them are located in Wuhan City nor in the Hubei province.

Some of our operations in China extended their holiday shutdown by 1 to 2 weeks. As of today, we have resumed all operations, but clearly, the indirect impact on business extends beyond China today to also Korea and Italy, for example. As we look ahead, we will continue to monitor the situation very closely.

The potential impact on our business from COVID-19 will depend on the severity and the duration of the outbreak and its impact on global supply chains. At this time, we believe it's too early to tell the full extent of the impact for Solvay. For now, we assume that the virus will impact us mostly in quarter 1, and we estimated the EBITDA impact to EUR 25 million in quarter 1, which alone is equivalent to almost 4% of quarter 1 EBITDA. We are, of course, actively monitoring the situation, and we will provide an update next quarter when we have more information.

Turning to free cash flow, I'm very, very pleased with the progress the company made in 2019. We expect to maintain the strong focus and to sustain cash conversion at 28%. At constant scope and ForEx, this is equivalent to around EUR 600 million free cash flow to our shareholders. In this context, we have recommended a stable full year dividend of EUR 3.75 to the general assembly.

Finally, in order to monitor, ensure delivery and execute flawlessly on our growth strategic initiatives, I have established a results delivery office or RDO in the company, reporting directly to me. I am pleased to announce that Geoff Raskin will lead the RDO office from March onwards after 6 years of strong contributions to Solvay's Investor Relations efforts. I am extremely excited to start working with him closely in driving the next chapter of Solvay's transformation, and I invite you all to join me in thanking Geoff for his contributions over the past year.

Jodi Allen, who many of you know already, will lead Solvay's Investor Relations team. Jodi's broad experience comes from her career at Cytec, ranging from commercial leadership roles in sales, marketing, business development, supply chain, communication and, in fact, leading the Investor Relations at Cytec before she joined Solvay. Jodi will engage with you all very soon as we enter this next chapter of delivering on our growth strategy.

We are excited to work with Geoff and Jodi in their new responsibilities.

So thank you all for listening to these prepared remarks. And Karim and I will now address your questions.

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Jodi Allen, Solvay SA - Investor Relations Contact [6]

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Thank you, Ilham and Karim. (Operator Instructions) And now I'll hand it over to the moderator.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We have our first question from Geoff Haire from UBS.

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Geoffrey Robert Haire, UBS Investment Bank, Research Division - MD and Equity Research Analyst [2]

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I was wondering if I could ask some questions around the Solvay Planet One initiative that you announced today. Could you just give us some idea of what you think the net financial benefit of that will be over time and also what the cost would be of achieving those goals? And just as an add-on to that, do you expect to see the senior management compensation schemes will be changed to reflect achieving these goals given, I think, currently only 10% of variable compensation is for achieving sustainability goals?

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Ilham Kadri, Solvay SA - Chairman, Chief Executive Officer, Member of the Board of Directors, Member of the Finance Committee [3]

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Geoff, thank you for the question. Well, definitely on -- I always say that the sustainability programs and definitely Solvay One Planet has to be good for the people, for the planet and for the pocket. So this is not a charity plan. So it's part of our reallocation of resources plan. It represents an estimation of less than 10% of the CapEx, right? So again, this is part of our plan. There will be no increase in CapEx because of Solvay One Planet. And the climate projects will also have a good return on investment, right, anywhere between 8%, 9% to 10%, double digit. All targets are at constant ForEx and scope.

On the 10% bonus, great question. We keep it at 10%, right, for the moment. We changed the incentive and the bonus schemes of our teams, as I say, to align them to the growth strategy. As you may remember, we have now differentiated KPI and strategic mandate for the G, the R and the O, and we aligned the incentives to these strategic mandates at the GBU level. So the times of "one size fits all" is over. However, each leader has a component of the enterprise leadership value creation. So yes, sustainability keeps 10%, differentiated bonuses aligned with the strategic mandate.

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Operator [4]

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We have our next question from Wim Hoste from KBC Securities.

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Wim Hoste, KBC Securities NV, Research Division - Executive Director Research [5]

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I would like to ask you a question around the soda ash business, please. Demand was a bit softer in Q4 than in the previous quarters as it appears. So the question is can you comment on the outlook for soda ash both on demand and also looking at the capacities you have in place, the debottlenecking programs and the pricing? There's a bit of variance amongst the different regions in terms of 2020 contracts. So what is basically the outlook for soda ash in 2020?

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Ilham Kadri, Solvay SA - Chairman, Chief Executive Officer, Member of the Board of Directors, Member of the Finance Committee [6]

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Thank you for your question. Well, soda ash demand, I mean, you've seen 2019 has proven to be resilient in the past and is expected to continue to do so. Moreover, we at Solvay has a strong position in downstream in sodium bicarbonate, as you know, which implies an increased exposure to end markets and related to soda ash. So we like it, and we increased -- this increased the resilience of our business.

As you know, the flat glass represents 28% of the demand of soda ash, out of which 23% is for construction, 3% is automotive, more or less 2% for solar panel. We feel the impact of the slowdown of the automotive industry mainly in countries where it is a strong part of the economy, just like Germany, South Korea, for example. However, it's mitigated by growth in other end uses, construction, container glass in Southeast Asia. We've seen detergents in Southeast Asia, India; lithium in Latin America. So overall, we expect a 2% growth in 2020 in the world excluding China.

We can talk about China and COVID-19, but similar to 2019 we've seen a slowdown, you're right, in quarter 4. For us, we confirm a solid delivery in 2020. You've seen the number from IHS in terms of the annual contracts and the increase in pricing that are published, EUR 5 a tonne in Europe; 1, 2 -- very modest in the U.S. And there were some price decreases in Middle East, here and there.

We as the leader, we continue leading and looking after our margins, so that's our #1 priority. And our European and U.S. footprint allows us to take the best out of the market dynamic not only in the regions -- inside the regions but optimizing our sales in the seaborne market, which is a key market in soda ash. Anything to add, Karim?

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Karim Hajjar, Solvay SA - CFO & Member of the Executive Committee [7]

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Maybe just -- No. For me, I think you gave a very complete answer. The way I would also perhaps say it is it really is resilient in the situation you know today. What we're not speculating is potential consequences of the coronavirus having an impact to global demand. That's clearly the only watchout for a lot of our businesses as you'll appreciate. Otherwise, it's very stable and resilient.

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Operator [8]

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We have our next question from Laurence Alexander from Jefferies.

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Laurence Alexander, Jefferies LLC, Research Division - VP & Equity Research Analyst [9]

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Could you characterize inventory levels in the different chains you're exposed to and how you think about -- or to the degree to which you're hearing from customers about the need to reconfigure the supply chains?

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Ilham Kadri, Solvay SA - Chairman, Chief Executive Officer, Member of the Board of Directors, Member of the Finance Committee [10]

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Which supply chain are you talking about? Is it -- this is in general or do you have something...

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Laurence Alexander, Jefferies LLC, Research Division - VP & Equity Research Analyst [11]

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Sorry, in the industry -- I guess in industrial and automotive, in particular, as you think about where your assets are and your intermediate suppliers that you deal with, are you hearing that they are thinking about reconfiguring supply chains given the degree of disruptions that they're seeing? And would that affect the way you think about CapEx and cost-cutting over the next few years?

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Ilham Kadri, Solvay SA - Chairman, Chief Executive Officer, Member of the Board of Directors, Member of the Finance Committee [12]

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Yes. No, it's good question, Laurence. No, we are not hearing anything like this. If I focus on auto and as you've seen last year, we focused a lot on working capital since I joined the company, and frankly, that has been a challenge but an opportunity. And I'm very pleased with what the team has been doing last year in working capital and emptying the stock.

I mean also, you've seen is -- I mean each month, we say we reached the bottom. Last year, production was minus 5, LMC. I'm following the numbers like you. It's around 0% or flattish in 2020 in terms of auto build, heavily weighted in the second half, minus 6, flattish quarter 2, plus 3, plus 4, making it to minus 5. China is supposed to be minus 8 this year. However, with the coronavirus, we are hearing January is really depressed, minus 18, and we'll see how the quarter will finish. So all in all, in terms of inventory, I think our customers have not indicated a specific change to supply chain so far.

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Operator [13]

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We have our next question from Martin Roediger from Kepler Cheuvreux.

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Martin Roediger, Kepler Cheuvreux, Research Division - Equity Research Analyst [14]

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I have read in your report that you have reversed EUR 48 million provisions in Q4. Was that booked in the underlying EBITDA? And did you -- did that affect just the corporate segment or also other segments? And if so, can you mention the split to the individual segments?

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Ilham Kadri, Solvay SA - Chairman, Chief Executive Officer, Member of the Board of Directors, Member of the Finance Committee [15]

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You can, Karim, take the accounting, and I'll explain the rationale.

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Karim Hajjar, Solvay SA - CFO & Member of the Executive Committee [16]

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Yes. Sure, Martin. So just to clarify and reassure, if need be, that, of course, given that the provision was made as an exceptional item, releasing it also goes an exceptional item to ensure that nothing changes the comparability of our EBITDA over time. The reasons for the release is because, as you will recall when we announced the strategies, we put an end to adapt the architectural project. Well -- but perhaps Ilham can tell you a bit more and remind you of the thinking behind that.

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Ilham Kadri, Solvay SA - Chairman, Chief Executive Officer, Member of the Board of Directors, Member of the Finance Committee [17]

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Yes. So Martin, it's an accounting thing. Obviously, the only value there is to show you that this company doesn't invest in bricks anymore. That provisions were about separating with people in the Paris area and rehiring them in Lyon. So we stopped that architecture project. And now we are doing what we need to do, which is investing in innovation technology and obviously, our -- realigning our structure. So our strategy needs cash, and this is the new EUR 17 million provision we are making going forward. So that's the only merit of that sentence.

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Operator [18]

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We have our next question from Mubasher Chaudhry from Citi.

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Mubasher Ahmed Chaudhry, Citigroup Inc, Research Division - VP [19]

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I was just wondering if you could provide some color on the underlying components between you hitting 0% or down 3% year-on-year on EBITDA. And I just wanted to -- if you could go into a little bit more detail around the divisional EBITDA trajectories into 2020.

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Ilham Kadri, Solvay SA - Chairman, Chief Executive Officer, Member of the Board of Directors, Member of the Finance Committee [20]

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Mubasher, well, listen, I mean, 22 -- I mean, first of all, if you ask me, you didn't, but I'm going to say anyway, in 2019 what is -- the word for Solvay is resilience, right? It has been -- it's my first year almost, anniversary in a few days' time, and 2019 has its set of challenges, and we've shown that the portfolio and our teams are resilient. And we delivered on our promise for the bottom line in the EBITDA according to our guidance, and free cash flow obviously came above expectation.

2020 is another year, right, with its share of challenges and unpredictable events. First of all, you've seen the story of 737 MAX, number one. We are following the news, keeping close to our customers. Our assumption is that there will be 200 aircraft built in the second half.

Second, coronavirus. We were probably one of the only -- probably few stocks who are giving you transparency and clarity on our quarter 1. So we did this in all openness. We estimated the impacts on quarter 1. Beyond that, we don't know. What we know is that our plants are up and running. Our people are safe and healthy, and our customers are working on their supply chain. So that's what we know. And obviously, in quarter 1 earnings call, I hope we can give you a bit more views on coronavirus.

Third, in terms of volatility on oil and gas and mining, specifically between H1 and H2 there will be some comps which will be easier in the back half. And the cost reduction impact, specifically due to simplification, as you know, our restructuring plan, we are just starting today to make a consultation outside the discussion with our social partners, and as soon as it will finish, we will start to accelerate and expedite our restructuring plan.

So all in all, we felt we will give you a range between 0% and minus 3%. Obviously, we have demonstrated last year that we can -- we are confident in our self-help efforts. We can put the mitigation plan in place, and we can execute flawlessly against it. Believe me, we are doing the same now. And if it's raining cats and dogs, we would be ready. And that's what exactly we are doing, repeating what we've done in 2019 and preparing for a tougher even 2020.

And this is a microscope. 2020 is the year of transition, remember my word. And we are preparing 2021 and 2024 at the same time, redirecting the investments in the growth area, so research -- the growth pillar will get more investments from 40% to 60%. We're redirecting money, CapEx and competencies to deliver against the growth.

Cash is king when an environment is volatile, unpredictable. I say this 1st of March, I repeat it now. Cash is king. You've seen that. And also, as resilience is the word for 2019, the other word is I am extremely pleased and proud of the teams and our phasing in 2019. When I came into the job, remember, I told you I'm not happy with the phasing of the free cash flow. Look at last year, it was really good. And the cash conversion this year will be at 28%, and thus, we confirm it regardless of the macro.

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Operator [21]

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We have our next question from Chetan Udeshi from JPMorgan.

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Chetan Udeshi, JP Morgan Chase & Co, Research Division - Research Analyst [22]

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I just wanted to touch base on Q1 outlook, where you're talking about high single-digit decline. If I just look at the key moving parts, you talked about coronavirus being a 4% hit. And if I were to assume half of the 737 MAX EBITDA impact to come in first half, essentially, you've got 7.5% to 8% impact from those 2 items alone on a year-on-year basis, which is essentially -- gets us to high single digits. So can you talk about what is sort of holding the rest of the business flattish in Q1? That's first question. Second question I had was -- to achieve your guidance, do you need a material pickup in macro in the second half, is the second question.

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Ilham Kadri, Solvay SA - Chairman, Chief Executive Officer, Member of the Board of Directors, Member of the Finance Committee [23]

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Thank you, Chetan. Karim, you take the first one. I'll take over the second.

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Karim Hajjar, Solvay SA - CFO & Member of the Executive Committee [24]

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Sure. Chetan, I think you started off with a very good insight around some of the key elements, coronavirus, you talked about Boeing 737. Let me add to that list, oil and gas. Q1 last year was strong. We know what happened in Q3 and Q4. Well, we're seeing a continuing of the competitive pressures that we highlighted previously.

Auto. Whilst auto is essentially showing signs of stabilization, if you just look at LMC, this is showing a 6% decline in Q1 2020, compared to 2019. What we haven't factored in on the upside of this, which is all the efforts on mitigation. So we're not just, how can I say, sitting ducks in the face of headwinds. There's a lot of mitigation to deliver the high single digits in the face of the headwinds.

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Ilham Kadri, Solvay SA - Chairman, Chief Executive Officer, Member of the Board of Directors, Member of the Finance Committee [25]

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Yes. And maybe to complete that, Chetan, on your next question, obviously, we have a portfolio of chemicals which are more resilient, right? And we will test others this year, right? So in pricing, I'm putting a lot of effort with the team now on pricing and where we lead with pricing and look at the leakages. The non-oil and gas markets are growing modestly. Other, aeros -- I mean obviously, 737 MAX is the topic of the day, of the quarter, of the coming 6 months. But there are other programs.

In military, we are also growing. In non-military, you have the story of the Airbus A220, where we also -- we are one of the -- we are the major supplier actually, including primary structure. So we are very happy with Airbus plan. And the non-aero -- other non-aero composite material and thermoplastic materials are coming to kick off.

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Operator [26]

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We have our next question from Laurent Favre from Exane BNP Paribas.

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Laurent Guy Favre, Exane BNP Paribas, Research Division - Research Analyst [27]

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Congrats to both Jodi and Geoff. My question is on housekeeping, I'm sorry. Ilham, since you started, I think we've had 3 quarters with corporate costs below EUR 40 million after years of corporate cost above EUR 50 million. So I was wondering if you could tell us what you think is a sustainable run rate?

And I guess the second part to the housekeeping question is on cash conversion. If we have over EUR 40 million of savings on pensions and, I guess, a bit as well on net financial costs, I'm just wondering what are the offsets to keep the cash conversion flat? Is it CapEx? Is it, I guess, cash flow restructuring? Any help on this could be really useful.

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Ilham Kadri, Solvay SA - Chairman, Chief Executive Officer, Member of the Board of Directors, Member of the Finance Committee [28]

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Good question, Laurent. Karim, can you comment on financials?

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Karim Hajjar, Solvay SA - CFO & Member of the Executive Committee [29]

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Yes, sure. On the corporate costs, you're absolutely right to spot the reduction in the corporate costs. Three things to highlight. One is there is the continuation of the cost discipline measures. The austerity measures had a big impact there. There were positive onetime impacts of lower claims from insurance. And then finally, we didn't anticipate the headwinds of 2019 in our internal projections, and therefore, we didn't deliver against our expectation. Therefore, bonuses were lower. These are the sort of elements that you see there. So going forward, you can expect corporate cost to be slightly north of EUR 200 million a year, if that helps you as well.

On the cash conversion, I think it's a great question. Fundamentally, if you just take what we did in 2019 and replicate it, if it was -- the flat level of earnings, the savings in pension costs, in financing costs will help us essentially to fund a ramp-up in some of the restructuring cash costs to drive the accelerated agenda and the efficiency programs we announced today. So what we're doing is ensuring that we're not diluting, not reducing our cash generation to deliver that value.

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Ilham Kadri, Solvay SA - Chairman, Chief Executive Officer, Member of the Board of Directors, Member of the Finance Committee [30]

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Yes. And to add to that, Laurent, maybe this is what you also have in mind, is how much is structural and how much is one-timer. Obviously, we did some self-help. But I can tell you since I joined the company, we are putting in place a lot of cost transparency dashboards, some would call it zero-based budgeting type of infrastructure. Because what is -- wherever there is something invisible, there is a waste, and for me, there is an opportunity to improve the operational efficiencies. And that's what we are doing.

We started in 2019. We continue in 2020. And the RDO, obviously, office led by Geoff as from now -- or 1st of March is going to really track those things, which will help the company to become more efficient and more effective and turn the one-timers into real structural way of -- new way of doing things, including traveling, including managing better what we spend in consulting, et cetera. So this is a new change in the way we do things inside the company.

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Laurent Guy Favre, Exane BNP Paribas, Research Division - Research Analyst [31]

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So if you look at the net reduction of head count of 950, can you give us an idea on how many of those would be in the corporate line?

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Ilham Kadri, Solvay SA - Chairman, Chief Executive Officer, Member of the Board of Directors, Member of the Finance Committee [32]

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So it's 350, right? Laurent, you are talking about our head count efficiency program?

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Laurent Guy Favre, Exane BNP Paribas, Research Division - Research Analyst [33]

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Well, the 350 on top of the 600 which you announced.

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Karim Hajjar, Solvay SA - CFO & Member of the Executive Committee [34]

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Correct.

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Ilham Kadri, Solvay SA - Chairman, Chief Executive Officer, Member of the Board of Directors, Member of the Finance Committee [35]

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Yes. Okay. Well, I mean, whatever past is the past. So you know that there was a head count efficiency program. When I came to the company, I told you we are going to accelerate that, which we did. It spread across functions and businesses, the former program, right? And I remind you that we delivered EUR 100 million last year, right, of savings, combining the head count efficiency and the self-help measures; EUR 70 million/EUR 30 million split.

This year and on the top of the former program, we started aligning the structure to our new strategy. By the way, Laurent, we would have done this structural realignment regardless of the macro, right? It's strategy -- the structure follows strategy. So this structure realignment is actually a bottom-up exercise. So the global business units have been aligning their structure to the new GBU mandate, strategic mandates around the G, the R and the O and started, you know, giving us their desired structure, leading to 500 positions suppressed gross, with 150 position -- new positions as an investment, mainly in the G.R.O. W., and then with a net of 350 positions suppressed.

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Operator [36]

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We have our next question from Andreas Heine from MainFirst.

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Andreas Heine, MainFirst Bank AG, Research Division - MD [37]

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Could you please give some more insight on the oil and gas, which suffered most? So you said the 737 MAX is kind of special event, but oil and gas seems to be a very difficult market more in a sustainable way. You are thinking about repositioning the business, but what have you experienced in Q4? And what is what we can expect for 2020 for this business (inaudible)?

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Ilham Kadri, Solvay SA - Chairman, Chief Executive Officer, Member of the Board of Directors, Member of the Finance Committee [38]

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It's a great question, Andreas. Oil and gas, so I'll remind you, was 6% of the group sales, right? I came very quickly, early in my mandate and sharing with you how I see this segment. The main decline driver was the weak demand and the underperformance in the oil and gas across the value chain. This is not Solvay-related, right? You can read the news of customers and their customers and the oil and gas producers, so lower demand and further, we saw intensification of the pressure in the industry to reduce costs, which impacted indeed the competitiveness of many players, including us. And I have already indicated in quarter 3 results.

And our focus since then is to recover from that situation. It will take time. There was a pressure on pricing from customers, which put them to look for less costly solutions to maximize their returns. And our portfolio historically, as you may remember, with the acquisition of Chemlogics and merging it with the guar business of ex Rhodia, was historically more geared towards the higher-value solutions. So in recent years, the market has been commoditizing and shifted away from guar.

So all in all, we remain focused, first of all, on quality, innovating with new products, not only that much of eco/bio products but rather a lower total cost of ownership for our customers. This is what they are asking for. It's a lower total cost of ownership. So listen, since then, we are trying to stabilize, gaining some new business, but the recovery process will take time.

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Andreas Heine, MainFirst Bank AG, Research Division - MD [39]

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And do you -- from Q3 to Q4, have you experienced that it is deteriorating further? And do you expect this downward spiral to continue in Q1? Just to get a flavor how you'd be able to look.

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Karim Hajjar, Solvay SA - CFO & Member of the Executive Committee [40]

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Andreas, maybe I can try and help. I think it's fair to say that the challenging environment is not abating. So yes, it's getting even more challenging. Nobody can predict. I don't know anybody who can predict what the future will look like in a market which is so particularly volatile. What is reassuring, and Ilham mentioned it, is this business is on our watch list.

We have a very, very close connection with the leaders of that particular business. And what reassures us is they're doing everything that can be done. Fixed costs are being addressed. Quality issues are being addressed. But it's not an overnighter. So everything that can be achieved within our control, I'm confident, is happening. Your question, what does the future look like in oil and gas, is a very difficult one.

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Ilham Kadri, Solvay SA - Chairman, Chief Executive Officer, Member of the Board of Directors, Member of the Finance Committee [41]

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It's baked -- Andreas, it's also baked in our guidance, right? So that's how we see it. I mean the business, since I declared -- we've made the write-off, we put it in intensive care, as I call it. We changed leadership. The team is really at the deck, fixing, winning customers. We have the right leadership and the right team to do it.

We are closely talking, engaging with our customers. We understand their new needs. This is not something out of the blue. It's because our customers and their customers have been suffering, and you can see the oil and gas OEMs have been also making huge write-off. The need for new products which can allow a lower total cost of ownership is key. And we believe with our formulation expertise and competency, we can deliver just that. So I have every confidence in our team, and we will continuously update you on the progress.

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Operator [42]

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We have our next question from Sebastian Bray from Berenberg.

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Sebastian Christian Bray, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [43]

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I just have one. It's the development of the financial charges at Solvay to be expected for 2020. In particular, 2 components. Is working out the cost of borrowing in 2020 simply a matter of taking into account the tweaking and removal of the hybrid structure that has happened over the course of 2019? And the second bit, the cost of discounting provisions in Solvay was fairly high in 2019 at EUR 105 million versus, I think, close to 0 in 2018. Do you have any guidance on this? Is it simply a matter of deducting out EUR 20 million to EUR 25 million on a run rate basis?

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Karim Hajjar, Solvay SA - CFO & Member of the Executive Committee [44]

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That's an interesting question. I don't think I'm in a position to answer expectations on discount rates. I think there are different ways of approaching it, but I'll defer to you and other experts to say what could this run rate look like going forward. What I can do is confirm and give you more clarity on some of the elements that you highlighted.

In May 2019, we retired EUR 700 million of hybrids that was costing us more than 4%, no more. In September, we retired $800 million of U.S. senior debt, replaced it with eurobond of 10 years at 0.5%. We're contrasting 3% coupon with 0.5% coupon. Both of those elements went up to drive the financial charges like-for-like by EUR 20 million a year in cash.

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Operator [45]

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We have our next question from Jean-Baptiste Rolland from Bank of America.

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Matthew John Peter Yates, BofA Merrill Lynch, Research Division - Director in Equity Research, Head of European Chemicals Research & Research Analyst [46]

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It's actually Matt Yates at Bank of America. Can I just ask a question around the dividend, please? And just can you update me on what exactly the policy towards distributions here? You had good cash flow. You are signaling -- I think you said earlier in the call EUR 600 million of free cash expected in 2020. So how do I reconcile that with a flat dividend? Is the focus of management very much on deleveraging at the moment?

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Karim Hajjar, Solvay SA - CFO & Member of the Executive Committee [47]

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Jean-Baptiste (sic) [Matt], it's a great question. Let me -- I'll just take this question. Generally speaking, we have a progressive dividend policy, which means that it's stable to growing. And typically, what you can expect from Solvay is that we will never cut our dividend. We'll take a very robust view. And certainly, when we see earnings growth, of course, we'll share it with our capital providers. That's what you can expect from Solvay.

Now why didn't we increase it this year? Quite simply, look at 2019 results, they're stable to organically declining. Look at 2020, we expect the same thing. To our mind, really reassuring that we're going to generate the cash, the strong dividend cover, be it on an earnings basis or a cash basis, is a priority. And that's what motivates our thinking. It's completely aligned with our policy and prospectus.

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Matthew John Peter Yates, BofA Merrill Lynch, Research Division - Director in Equity Research, Head of European Chemicals Research & Research Analyst [48]

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Understood. And then just as a sort of adjacent follow-up just around the portfolio, I guess it's been 3 months now since the strategy presentation. Has the thinking changed at all around monetizing some of maybe the noncore assets within the portfolio?

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Ilham Kadri, Solvay SA - Chairman, Chief Executive Officer, Member of the Board of Directors, Member of the Finance Committee [49]

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Well, thank you for the question. I mean it's not a 3-month thinking, right? I mean -- I guess we started reviewing our strategy, the growth strategy. And first of all, I hope you all appreciate that we look now at our segmentation of businesses in a different way than in the past, putting the right realistic objectives by cluster and aligning the strategy, the mandate, the compensation, the structure to deliver just that between the G, the R and the O. So that was our #1 thing.

The 2 obviously -- I mean, as I said, there is no sacred cow at Solvay, right? No sacred cow. We always ask ourselves if we are the right owner of any assets we have in the portfolio. I think that's duty of the leadership, of the CEO, the executive committee, and we'll continue to do that.

By the way, I remind you that we just closed the Polyamide divestiture end of January. I can -- I'm happy to claim it. Actually, it started 4.5 years ago before me. It just went a long, long way. And I thank the teams, by the way, who are listening to me because it has been a ride, and we did that.

And by the way, maybe there is another number. In the past 5 years, did you know that we have divested EUR 5 billion of enterprise value worth commodity businesses, right? EUR 5 billion enterprise value between the PVC, the Eco Services, Polyamide.

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Karim Hajjar, Solvay SA - CFO & Member of the Executive Committee [50]

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Acetow.

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Ilham Kadri, Solvay SA - Chairman, Chief Executive Officer, Member of the Board of Directors, Member of the Finance Committee [51]

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Acetow. So we are not shy, we are not shy to address the portfolios, the fit with our strategies. And again, questions I always ask myself with my leadership, "Are we the best owner? Is it the good time, the right time? Is it the optimum time to extract value for the shareholders?"

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Operator [52]

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We have our next question from Alex Stewart from Barclays.

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James Alexander Stewart, Barclays Bank PLC, Research Division - Chemicals Analyst [53]

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I wanted to ask a bit on the soda ash contract settlements because the Chinese spot soda ash price is as low as it has been for 3 years. Energy costs are going down. Demand is not good in a lot of the biggest markets for soda ash. So could you just talk us through maybe how you think the contract -- the annual contract prices in Europe and North America settled up in 2020? It'd be very useful and interesting to get your insight.

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Ilham Kadri, Solvay SA - Chairman, Chief Executive Officer, Member of the Board of Directors, Member of the Finance Committee [54]

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Thank you, Alex. Well, I wish I can tell you more, but we can -- I cannot comment on specific customer contracts, right? But frankly, I invite you and -- I recommend IHS, which is a good reference from the industry, right? As I said, according to IHS, and we can share with you the data, I'm sure you have them, the annual contract, so an increase anywhere between around EUR 5, let's say, a tonne in Europe and $1 and $2 in the U.S. while, indeed, you're right, there were prices increase and -- pressure in Middle East, Africa, Latin America and Asia due to increased availability of the product.

Now coronavirus is another thing and will be -- soda ash in China will be clearly impacted by the COVID-19 outbreak, but we have almost no business over there. Our business exposure to China is to the exports of Chinese soda ash to the rest of the world. Is it good news or not? I mean I don't want to enter that debate.

But since mid-2017 and under the combined effect of the increasingly stringent enforcement of the environmental regulations in China, Chinese exports have been decreasing in a way, if you recall. So all in all, we are -- it's a different year, 2020. It's a very different year for soda ash than 2019. But we are confident that we can have a solid delivery, resilience in pricing, volume. And we have a mitigation plan already in place since Jan 1 in soda ash business and outside soda ash business to be able to deliver against our promise.

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Operator [55]

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We have our next question from Mutlu Gundogan from ABN AMRO.

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Mutlu Gundogan, ABN AMRO Bank N.V., Research Division - Analyst [56]

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A question on input costs. It seems that you had a tailwind of EUR 48 million from lower raw material and energy prices. Can you tell us how you see this line developing in the coming quarters? And how important is this driver in your outlook to mitigate the headwinds you are facing?

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Karim Hajjar, Solvay SA - CFO & Member of the Executive Committee [57]

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Essentially, what we've done is taken these factors into our outlook, but I can't comment on any specific assumptions beyond that. And again, if you remember, a lot of our business is specialties, and we're not a cost-plus business, we're value-based pricing. And that's where we really try to raise the bar. Pricing is a key lever we're after.

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Ilham Kadri, Solvay SA - Chairman, Chief Executive Officer, Member of the Board of Directors, Member of the Finance Committee [58]

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Yes. And this is -- I mean in the R -- I mean whatever, in the commodities, semi-commoditized business or less specialties, I would say -- of course, we look always at our input costs, don't get me wrong. But we look at supply/demand. We look at pricing elasticity. And as I told you earlier, I'd like to look at the pricing in any company because it's an opportunity, there are leakages. And it's -- where we are a leader, we should be able to improve our margins.

So last year, you've seen us, we consistently deliver stable margins across the board, across the corporate at 23%. So that's one of -- a key element and key data point showing that we can manage inputs and outputs, and we can continue delivering by focusing on value pricing wherever we can.

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Operator [59]

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We have our next question from Markus Mayer from Baader Bank.

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Markus Mayer, Baader-Helvea Equity Research - Lead Analyst of Chemicals [60]

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One question remaining. It's basically on your order book visibility. And this also linked to how you see basically or how you assess if the economic environment would worsen with this, also your economic assumptions for your guidance would worsen. As you are in the middle of your cost-cutting program, could you also then accelerate this to come to a guidance? And also, how do you see your order book visibility in the different kind of business lines?

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Ilham Kadri, Solvay SA - Chairman, Chief Executive Officer, Member of the Board of Directors, Member of the Finance Committee [61]

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The environment, I mean, I've seen different episodes in my life and my career of 30 years in the industry. Obviously, this is not the worst one at all. And frankly, it's as volatile as it can be. We've been extremely open and transparent. Wherever we have facts and we are building some credibility together with this management team and I, we went to you guys either with profit warning, write-off and also guidance, which I'm very glad and happy that the team delivered against it last year.

This year is another -- it's just another year. And frankly, I feel comfortable and confident that we are ready. As I said, if it's raining cats and dogs, Solvay will be ready, and that's important. And I think Boeing, we talked about that. They talked about a return in service midyear. We took 200. To put it in perspective, it was 600 last year. So we didn't take half of it. We took just 1/3 of it this year, right? Coronavirus, we gave you a very clear indication in quarter 1, right? And beyond that, frankly, nobody knows, right? I mean -- and if someone knows and you know it, just call me. We don't know.

So our operations are up and running. Our employees are safe. And this is extremely important that we do that. And then the end markets -- as Karim said, also you see the numbers in LMC, extremely second-half weighted. We'll see the impacts from China, from the auto -- I think it's going to impact a bit the global auto, but we believe that there will be a recovery. Oil and gas and mining, the comp compared to the second half of last year will be also easier as we go through this 2020, from H1 to H2.

And obviously, your question on cost reduction, yes, and we've done it last year. I mean when I came in, I promised that we are going to accelerate the former program, right, cost-savings program, which we just did that. And now we have a new program. But with respect to consultations, we need to go through our social consultation. We have a good history of good social dialogue and constructive one. And we hope that as soon as we close that, we finish it, we can accelerate it to reach our run rate by end of 2021. Whatever we can accelerate, we will do so.

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Jodi Allen, Solvay SA - Investor Relations Contact [62]

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Thank you. That concludes today's call. But please, I invite you to reach out and contact anyone on the Investor Relations team if you have further questions. And we also look forward to continuing our dialogue as we will be out on the road in the coming weeks, so we might be able to see many of you. Thank you so much for your time.

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Ilham Kadri, Solvay SA - Chairman, Chief Executive Officer, Member of the Board of Directors, Member of the Finance Committee [63]

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Thank you.

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Operator [64]

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Thank you, Mrs. Ilham Kadri and Mr. Karim Hajjar. Ladies and gentlemen, this concludes today's conference call. Thank you all for your participation, you may now disconnect.