Arkema: Second-Quarter 2023 Results

Regulatory News:

Arkema (Paris:AKE):

• Sales of €2.4 billion, down by 23% compared with the particularly high level of Q2’22:
  • Volumes down significantly, impacted by overall weak demand in most end markets and continued destocking. The automotive, battery and energy markets nevertheless remained well oriented
  • Price effect positive in most product lines but negative at the Group level given, as in the first quarter, the normalization of PVDF and upstream acrylics
  • Positive momentum in high performance solutions driven by sustainability trends, which are at the heart of the Group’s strategy
• EBITDA of €417 million, down compared with the exceptionally high performance of Q2’22 (€705 million). EBITDA margin reached a very good level at 17.1%, demonstrating the quality of the product portfolio and dynamic price and mix management
• Adjusted net income of €207 million, representing €2.77 per share (€5.99 in Q2’22)
• Recurring cash flow of €145 million, reflecting the robust results and including the seasonality of working capital
• Net debt including hybrid bonds up slightly to €2,645 million, integrating the dividend payment and representing 1.7x last-twelve-months EBITDA
• Strengthening of the Group’s specialty profile with the announcement on 28 June of the proposed acquisition of a controlling stake in PI Advanced Materials ⁽¹⁾, a global leader in ultra-high performance polyimide films based in South Korea
• 2023 guidance confirmed, with Arkema aiming to achieve EBITDA of around €1.5 billion to €1.6 billion

Following Arkema’s Board of Directors’ meeting held on 27 July 2023 to approve the Group’s consolidated financial statements for the first half of 2023, Chairman and CEO Thierry Le Hénaff said:

“In the second quarter, in an environment marked by a low level of activity in the continuity of the first quarter, Arkema’s performance was solid, reflecting the Group’s excellent positioning in high performance niche markets, as well as tight management of our operations. The teams delivered high-quality work, enabling us to confirm our annual targets in a macroeconomic context with low visibility that is showing little signs of improvement.

In addition, with the proposed acquisition of 54% of PI Advanced Materials announced in late June, Arkema has taken another major step towards its ambition of becoming a world leader in Specialty Materials. This unique opportunity, which will offer the Group significant synergies thanks to strong geographical and technological complementarities, will enable us to accelerate our growth in the highly attractive electronics and battery markets.

Our Capital Markets Day, to be held in Paris on 27 September, will provide an opportunity to discuss Arkema’s innovation strategy and medium-term ambition in greater detail.”

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⁽¹⁾ This operation is subject to the approval of Chinese and Korean anti-trust authorities

KEY FIGURES

SECOND-QUARTER 2023 BUSINESS PERFORMANCE

At €2,442 million, sales were down by 23.3% relative to the particularly elevated level of second-quarter 2022. Group volumes declined by 15.2% in an environment marked by continued destocking and overall weak demand, particularly in Europe and the United States. Most end markets were down, although the energy, automotive, medical and battery markets showed positive momentum. The price effect was a negative 6.6%, impacted by the expected normalization of market conditions in PVDF and upstream acrylics, but it was positive in most other product lines, reflecting the strength of Arkema’s positions. The scope effect was limited (+0.4%), with the integrations of Permoseal and Polytec PT in Adhesive Solutions and of Polimeros Especiales in Coating Solutions offset by the divestment of Febex in early January 2023. The currency effect was a negative 1.9%, primarily reflecting a stronger euro against the US dollar.

At €417 million, EBITDA was down relative to the prior year (€705 million in Q2’22), which included exceptional profits in PVDF and upstream acrylics. This figure also reflects the general economic slowdown and the benefits from easing tightness in raw materials. Despite significantly lower volumes, the EBITDA margin held up well at 17.1%, supported in particular by dynamic price management and an improved mix toward higher value-added solutions.

Including virtually stable recurring depreciation and amortization of €132 million (€135 million Q2’22), recurring operating income (REBIT) amounted to €285 million (€570 million in Q2’22), and REBIT margin reached 11.7% (17.9% in Q2’22).

Adjusted net income came to €207 million (€443 million in Q2’22), representing €2.77 per share, based on a tax rate, excluding exceptional items, of 21% of recurring operating income.

CASH FLOW AND NET DEBT AT 30 JUNE 2023

In second-quarter 2023, recurring cash flow came to €145 million (€235 million in Q2’22). This figure reflects the Group’s solid operating performance and includes a limited increase in working capital, in a context of decreasing raw material costs and weak activity. At end-June 2023, working capital represented 16.9% of annualized sales (14.9% at end-June 2022). Recurring cash flow also included recurring capital expenditure of €130 million versus €99 million in the prior-year period.

At €115 million, free cash flow included exceptional capital expenditure of €5 million (€26 million in Q2’22), as well as a non-recurring cash outflow of €25 million linked mainly to start-up costs for the Singapore plant and restructuring costs.

The net cash outflow from portfolio management operations of €69 million in second-quarter 2023 corresponds mainly to the acquisition of Polytec PT in high performance adhesives.

At €2,645 million, net debt including hybrid bonds was slightly higher than at end-March 2023 (€2,389 million) and included the dividend payment of €3.40 per share for a total of €253 million. Arkema’s balance sheet remains solid, with net debt (including hybrid bonds) to last-twelve-months EBITDA ratio standing at 1.7x. In this context, on 6 July 2023, credit rating agency Standard & Poor’s raised the outlook associated to the Group’s rating from ‘stable’ to ‘positive’ while confirming its rating of BBB+/A-2.

Moreover, on 5 July 2023, the Group extended its €1.1 billion syndicated line of credit by one year, with maturity now on 28 July 2028.

SECOND-QUARTER 2023 PERFORMANCE BY SEGMENT

ADHESIVE SOLUTIONS (28.5% OF TOTAL GROUP SALES)

Sales in the Adhesive Solutions segment totaled €692 million, down by 11.2% compared to second-quarter 2022. In the continuity of the first quarter, sales were impacted by a 12.7% volume decrease, reflecting continued destocking and overall weaker demand in most end markets, with the exception of the automotive market which was better oriented. The price effect was a positive 2.3% and reflects the price increases implemented last year in response to cost inflation. The scope effect, which added 1.9% to sales, corresponds to the integration of Permoseal and, to a lesser extent, Polytec PT. The currency effect was a negative 2.7%.

EBITDA for the segment came in at €95 million (€111 million in Q2’22), impacted mainly by the decline in volumes, but benefiting nevertheless from the shift in the product mix towards higher value-added solutions and the raw material costs decrease at the end of the quarter. In this context, the EBITDA margin held up well at 13.7% (14.2% in Q2’22).

ADVANCED MATERIALS (37.5% OF TOTAL GROUP SALES)

Sales in the Advanced Materials segment were down by 18.1% compared to second-quarter 2022 to €912 million. Segment volumes fell by 8.1%, essentially in Performance Additives, impacted by destocking and lower demand. Volumes of High Performance Polymers rose, driven in particular by demand in the automotive and energy markets, as well as by improved momentum in batteries in China following the destocking observed at the start of the year. The price effect of negative 7.1% reflects the expected normalization of PVDF in batteries, which overshadowed a positive trend in the segment’s other activities linked to the pricing policy implemented since last year in the face of inflation, as well as a positive product mix supported by new developments. The scope effect was a negative 1.1%, linked to the divestment of Febex, and the currency effect was a negative 1.8%.

At €185 million, EBITDA for the segment was down compared with the prior year’s very high comparison base (€282 million in Q2’22, €184 million in Q2’21), which was linked to exceptionally favorable conditions in PVDF for batteries. Although impacted by sharply lower volumes, Performance Additives’ EBITDA was stable, reflecting the quality and resilience of the portfolio. In this context, the segment’s EBITDA margin reached a good level of 20.3%, supported by the positive momentum in high performance solutions.

COATING SOLUTIONS (25% OF TOTAL GROUP SALES)

Sales in the Coating Solutions segment were down by a sharp 35.7% compared with the very high comparison base of second-quarter 2022 and amounted to €617 million. In a context of falling overall demand in Europe and the United States, volumes were down by 22.9%, also penalized by the effects of destocking in decorative paints and industrial markets. The 12.7% negative price effect mainly reflects markedly less favorable conditions in upstream acrylics. The scope effect was a positive 0.9%, corresponding to the integration of Polimeros Especiales, and the currency effect was a negative 1.0%.

In this context, segment EBITDA fell sharply and amounted to €88 million (€207 million in Q2’22), impacted above all by the normalization of market conditions in upstream acrylics and by sharply lower volumes, while downstream activities proved far more resilient. The EBITDA margin held up well given the economic context, coming in at 14.3%.

INTERMEDIATES (9% OF TOTAL GROUP SALES)

Sales in Intermediates fell by 34.2% to €212 million. Volumes were down by 23.3%, impacted in particular by weak demand for acrylics in China. The 8.4% negative price effect reflects markedly less favorable market conditions in acrylics in Asia, offset in part by positive price dynamics in refrigerant gases. The currency effect was a negative 2.5%.

In this context, segment EBITDA amounted to €69 million (€129 million in Q2’22) and the EBITDA margin reached 32.5% (40.1% in Q2’22).

SECOND-QUARTER 2023 HIGHLIGHTS

On 1 June 2023, Arkema finalized the acquisition of Polytec PT, a German company specialized in adhesives for batteries and electronics applications, which will strengthen Bostik’s product offering to serve these fast-growing markets.

Moreover, on 28 June 2023, Arkema announced the proposed acquisition of Glenwood Private Equity’s 54% stake in the listed South Korean company PI Advanced Materials (PIAM), for an enterprise value of €728 million, marking a new significant milestone in the Group’s transformation into a pure Specialty Materials player. With sales of over €200 million, an EBITDA margin of around 30% and best-in-class manufacturing, PIAM is the global leader in polyimide films, delivering superior growth in the attractive consumer electronics and electric vehicles markets. This transaction will broaden Arkema’s polymer range with ultra-high performance and cutting-edge technology, strengthening the Advanced Materials segment’s portfolio and performance. The deal, which is subject to the approval of Chinese and Korean anti-trust authorities, should be finalized end-2023.

OUTLOOK FOR 2023

In a macroeconomic environment which is in line with that of the first six months of the year, volumes remain sharply lower than last year with reduced visibility at the start of the second half. The price of certain raw materials and energy continues to decrease.

In this context, the Group will strive to continue tightly managing its operations, in particular by controlling fixed costs and optimizing working capital. It will also continue its innovation drive in high-growth areas linked to sustainability, and ramp up recently started growth capital expenditure projects.

In this environment, in light of its first-half results and based on the projected momentum in the second half, Arkema confirms its full-year guidance and aims to achieve in 2023 EBITDA of around €1.5 billion to €1.6 billion. Furthermore, the Group expects a high EBITDA to cash conversion rate over the year, consistent with its medium-term target of at least 40%.

Further details concerning the Group’s second-quarter 2023 results are provided in the “Second-quarter 2023 results and outlook” presentation and the “Factsheet”, both available on Arkema’s website at: www.arkema.com/global/en/investor-relations/

REGULATORY INFORMATION

The half-year financial report for the six months ended 30 June 2023 is available on the Group’s website (www.arkema.com) under Investors/Financials/Financial results.

FINANCIAL CALENDAR

27 September 2023: 2023 Capital Markets Day

9 November 2023: Publication of third-quarter 2023 results

29 February 2024: Publication of full-year 2023 results

DISCLAIMER

The information disclosed in this press release may contain forward-looking statements with respect to the financial position, results of operations, business and strategy of Arkema. In the current context where the consequences of the Russian offensive in Ukraine and the resulting economic sanctions against Russia on geopolitical stability and the global economy remain uncertain, the retained assumptions and forward-looking statements could ultimately prove inaccurate.

Such statements are based on management’s current views and assumptions that could ultimately prove inaccurate and are subject to risk factors such as (but not limited to) changes in raw materials prices, currency fluctuations, the pace at which cost-reduction projects are implemented, developments in the Russian offensive in Ukraine, and changes in general economic and financial conditions. Arkema does not assume any liability to update such forward-looking statements whether as a result of any new information or any unexpected event or otherwise. Further information on factors which could affect Arkema’s financial results is provided in the documents filed with the French Autorité des marchés financiers.

Balance sheet, income statement and cash flow statement data, as well as data relating to the statement of changes in shareholders’ equity and information by segment included in this press release are extracted from the condensed consolidated financial statements at 30 June 2023 as approved by Arkema’s Board of Directors on 27 July 2023. Quarterly financial information is not audited.

Information by segment is presented in accordance with Arkema’s internal reporting system used by management.

Details of the main alternative performance indicators used by the Group are provided in the tables appended to this press release. For the purpose of analyzing its results and defining its targets, the Group also uses EBITDA margin, which corresponds to EBITDA expressed as a percentage of sales, EBITDA equaling recurring operating income (REBIT) plus recurring depreciation and amortization of tangible and intangible assets, as well as REBIT margin, which corresponds to recurring operating income (REBIT) expressed as a percentage of sales.

For the purpose of tracking changes in its results, and particularly its sales figures, the Group analyzes the following effects (unaudited analyses):

• scope effect: the impact of changes in the Group’s scope of consolidation, which arise from acquisitions and divestments of entire businesses or as a result of the first-time consolidation or deconsolidation of entities. Increases or reductions in capacity are not included in the scope effect;
• currency effect: the mechanical impact of consolidating accounts denominated in currencies other than the euro at different exchange rates from one period to another. The currency effect is calculated by applying the foreign exchange rates of the prior period to the figures for the period under review;
• price effect: the impact of changes in average selling prices is estimated by comparing the weighted average net unit selling price of a range of related products in the period under review with their weighted average net unit selling price in the prior period, multiplied, in both cases, by the volumes sold in the period under review;
• volume effect: the impact of changes in volumes is estimated by comparing the quantities delivered in the period under review with the quantities delivered in the prior period, multiplied, in both cases, by the weighted average net unit selling price in the prior period.

Building on its unique set of expertise in materials science, Arkema offers a portfolio of first-class technologies to address ever-growing demand for new and sustainable materials. With the ambition to become in 2024 a pure player in Specialty Materials, the Group is structured into 3 complementary, resilient and highly innovative segments dedicated to Specialty Materials -Adhesive Solutions, Advanced Materials, and Coating Solutions- accounting for some 91% of Group sales in 2022, and a well-positioned and competitive Intermediates segment. Arkema offers cutting-edge technological solutions to meet the challenges of, among other things, new energies, access to water, recycling, urbanization and mobility, and fosters a permanent dialogue with all its stakeholders. The Group reported sales of around €11.5 billion in 2022, and operates in some 55 countries with 21,100 employees worldwide.

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ARKEMA financial statements

Consolidated financial information - At the end of June 2023

Half-year information is subject to a limited review by auditors.

Consolidated financial statements as of December 2022 have been audited.

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