Solvay S A (SVYSF) Q2 2026 Earnings Call Transcript

Good afternoon, everyone, and welcome to Solvay's second quarter and first half 2026 earnings conference call. I'm Geoffroy Loutremont, head of investor relations, and I'm joined today by our CEO, Philippe Queren, and our CFO, Alexandre Blum. This call is being recorded and will be accessible for replay on the investor relations section of Solvay's website later today. I would like to remind you that the presentation includes forward-looking statements that are subject to risks and uncertainties. The slides presented in today's call are also available on our website. Let's get started. Philippe, over to you.

Thank you, Geoffroy, and hello, everyone. Let me start with safety, which is at the heart of everything we do. Our transformation delivers tangible results, with the reportable injury rate further improving in the second quarter, as you can see here. This positive development reflects the commitment of our teams. We continue to strengthen our safety culture through targeted initiatives. for example we now have a focus on hand injuries slips trips and falls and contractors safety management so let's move to our performance our performance in the second quarter reflects different realities in an operating environment that is constantly evolving on the one hand bicarbonate and electronic grade peroxides are at record sales levels. On the other hand, soda ash remains under competitive pressure in the export markets, indirectly weighing on the U.S. market. On the conflict in the Middle East, we estimate that it had a negative impact of around 20 million euros on the bda in q2 the main element is the shutdown of the peroxides plant in saudi arabia outside of this the impact is slightly negative with the improvement of the dynamics at coatis not fully covering higher energy raw materials and logistics costs looking ahead we currently anticipate that the peroxides plant in saudi will restart in the second part of q3 our teams on site are working in this direction and we will be ready as soon as the platform restarts i will come back to this when we talk about the outlook Now, two weeks ago, the European Union released its draft proposal for the reform of the emissions trading system. Although it is too early still to fully assess the impact, we believe that this proposal moves in the right direction. Most importantly, it confirms the 2050 carbon neutrality objective, while maintaining the allocation of free allowances. The proposal appears significantly more focused on supporting industrial competitiveness and decarbonization, rather than simply increasing costs for the European industry. We will continue to assess the proposal in the coming weeks. As said, we believe it goes in the right direction, but there is still a lot of work to do before it is final. We will obviously update you on this topic in our next communications. Now, Alex, over to you for the details of the Q2 results.

Thank you, Philippe, and good morning, good afternoon, everyone. So let's move to the detail of the financial performance, which is mainly impacted by the continued weakness of the soda-ash prices in export market, the conflict in the Middle East, and the more general geopolitical environment. Moving to slide 9, and as usual, I will comment on the organic evolution, meaning at constant scope and currency, unless otherwise stated. Underlying net sales in Q2 reached slightly over €1 billion, down 7% compared to the second quarter of 2025, but up sequentially in all business units. The decline was mainly volume-driven, reflecting the temporary shutdown of our peroxide plant in Jubal and the $20 million one-off gain recorded in Q2 last year for the contract termination in the fluorine business line. Pricing was slightly lower overall, broadly stable across all of our businesses, except for some pressure largely concentrated in the soda-ashibon market. Forex provided a small tailwind this quarter thanks to the strengthening of the Brazilian Real against the euro. Now moving to EBITDA. We delivered an underlying EBITDA of 187 million euros in the second quarter, down 20%, representing an EBITDA margin of 18.1%. There are two main factors behind the year-on-year EBITDA decline, both explaining the significant volume drop of this quarter. Around half relates to the consequence of the conflict in the Middle East, mainly due to the temporary shutdown of our peroxide plant in Saudi. The other half reflects the one-off in Special Chem in Q2 2025. Net pricing was broadly stable. The improvement in Qatis was offset by higher costs in other businesses and continued pricing pressure in the Saudi Asia export market. Fixed costs contributed positively as our structural cost-saving initiatives more than offset inflation. We delivered a third of 26 million euros of cost-saving in the quarter, mainly through operational excellence initiative in our manufacturing sites. Moving now to the segment review, starting with basic chemicals on slide 10. Cells in sodage and derivatives declined by 8% organically. Sodash volumes were slightly lower year-on-year, partly because of some delayed shipment into July. Pricing was marginally lower in the domestic market, and declined more significantly in the sebum market. On the other hand, our bicarbonate business remains steady, with both volumes and pricing broadly stable year-on-year. Pyroxide sales were down 5%. This mainly reflects the temporary shutdown of our HPPO plant in Saudi, which was partly offset by the continued strong growth in electronic grade supported by semiconductor demand. Performance in other applications was broadly stable. The segment of TBDA decreased by 6%, lower pyroxide volumes, and continued sodash pricing pressure were partly mitigated by improved operational performance and cost discipline. Moving to performance chemicals on slide 12. Overall, performance chemical LBDA declined by 26%, mainly due to the absence of the 20 million one-off benefit in Q2 2025 and a lag in price indexation in silica. This was partly offset by a stronger performance in Coatis. looking at each business now silica sales were slightly down overall performance remained solid after the quarter was affected by an unfavorable regional mix and a lag in price indexation in our coatis business sales increased by one percent with improved pricing in both phenol and solvent product lines the difference between the year-on-year and organic performance mainly reflects the impact from the stronger Brazilian REIs against the euro and the U.S. dollar. This marks a clear sequential improvement for the gratis business following the significant pressure experience since the middle of the second quarter of last year. In special camps, sales declined by 18%. The overall performance was stable in most business lines with a pickup of volume in electronic rare earth application at quarter rare. As highlighted before, the year-on-year comparison is primarily impacted by the contract termination benefit recorded in the second quarter of last year in our fluorine business line. Finally, a quick word on the corporate segment EVDA, which was minus 25 million euros in Q2. As expected, stranded costs were still high during this quarter, reflecting the full impact of the exit of the TAC with Science Co. Based on this, I can confirm that our full-year expectation remained between 70 and 80 million euros. Turning to slide 13, free cash flow to Solvay shareholder reached 15 million euros in the first half of the year. The second quarter was negative at minus 11 million euro due to the seasonality combined with some concentration of cash out, which I can explain as follows. CapEx for the first half of the year represented approximately 140 million euro. Spending remained disciplined and focused primarily on essential HSE and maintenance investment as well as ongoing energy transition project. Working capital represented a cash-out flow of minus 79 million euros in the first half, reflecting the usual seasonality during the first six months of the year, including variable remuneration payment in Q2. Cash-out flow from provision amounted to 106 million euros in the first half of the year. As already explained, they are still above the normalized level and many relate to the transformation and restructuring initiatives. This includes the exit from the TSA, the optimization of the fluorine business footprint, and the remaining spending on the Donbal Energy Transition Project. The free cash flow in the third quarter will remain under pressure from the above element, but we are firmly focused on delivering our full-year free cash flow guidance. On slide 14, let me remind you that our free cash flow in 2025, 6 and 7 is and will be impacted by temporary transformation expenses, which include the stranded cost linked to the exit of the TSA, the restructuring of the fluorine business line, and the development and implementation of a new ERP. So looking at 2026, these expenses represent approximately 90 million euros of cash outflow. We could improve cash generation by slowing or postponing our transformation, but as already explained, we are convinced that continuing is the right direction, especially in this market condition. Moving on to net debt on slide 15. Underlying net debt stood at 1.8 billion euro at the end of June, temporarily higher than a year at year end, reflecting the full dividend payment the first part of the year for 254 million euro. Similarly, the leverage ratio temporarily increased above two times at the end of the quarter and should be back around two times at the end of the year. this is consistent with the confirmation in june by snp of our triple b minus investment grade rating so overall our q2 result reflect the challenges brought by the conflict in the middle east which we need to manage while continuing the transformation of the group and maintaining a solid balance sheet philip back to you for an update on the latest rare earth development and the 2026 outlook.

Thank you Alex. Indeed let me give you an update on our strategy regarding rare earth and the progress we're making in La Rochelle. With more than 75 years of experience in rare earth separation Solvay holds a unique position globally. We are the only company outside of China with the technical know-how and industrial capabilities to separate all 17 rare earth elements and that makes us a central player in the discussions around the setting up of rare earth value chains outside of outside of china operationally we continue to accelerate our developments to secure future feedstock supply we recently signed a letter of intent with viridis to source mixed light and heavy rare earth concentrates from brazil with deliveries expected to start in 2028. this agreement strengthens our long-term access to strategic raw materials and its support our growth ambitions the feedstock includes key rare earths for permanent magnets notably neodymium which are called the light rare earth NDPR and dysquosium and terbium called DYTB which are the heavy rare earth and this agreement supports the increasing global demand it also contains an important distribution of additional heavy rare earth that i just mentioned used in critical advanced technology sectors such as automotive electronics medical and aerospace applications you remember we reached an important milestone in april 2025 with the start of production of magnet great light rare earth so namely NDPR. This represented a first significant step in building a more integrated and diversified rare earth ecosystem in Europe. Today, we are taking the next step by investing an additional 15 to 20 million euros in heavy rare earth separation capabilities, creating additional opportunities in high-value applications. This includes the start of industrial-scale production of DYTB in the fall of 2026. Overall, these investments reinforce Solveig's leadership in rare earth. They strengthen European supply chain sovereignty, and they position us to capture attractive growth opportunities in the energy transition and advanced technologies. So now moving to the outlook. So today we confirm our guidance for the year 2026. This guidance anticipates the restart of our peroxides plant in Saudi Arabia before the end of the third quarter. More specifically, We confirm that we expect an underlying EBITDA between 770 and 850 million euros, a free cash flow to Solvay shareholders from continuing operations to exceed 200 million euros, with capex around 300 million euros. So, in conclusion, we remain fully committed to our essential chemistry strategy and to our transformation. This is obviously challenging, given the difficult environment we've been facing over the past few quarters. But, however, we know it is essential to prepare Solvay for the future. In our transformation, we do not forget growth. We remain highly selective and disciplined, investing in areas where we have differentiated capabilities and where we see compelling long-term demand growth. This includes electronic grade of peroxides, for which demand is booming due to AI, and rare earth, where there is a clear need to develop independent value chains, in particular for permanent magnets. finally we continuously evaluate the best possible way to create long-term value one way to do it is to review our portfolio of assets and businesses and assess whether there are opportunities to improve its efficiency or reinforce it this combination of transformation discipline growth an active footprint management is how we are building a stronger and more competitive survey for the future thank you and i think we're now happy to take your questions yes thank you philippe and alexandre so gaia you can now open the line for a question please ladies and gentlemen if you wish to ask a question please dial Pound key 5 on your telephone keypad to enter the queue.

If you wish to withdraw your question, please dial Pound key 6. The first question is coming from Katie Richards from Barclays. Your line is now open. Please go ahead.

Hi, good afternoon. Two questions, please. Firstly, could I ask your conviction on the Sodara peroxides restart and whether your decision today to hold the guidance is just simply a binary call on this restart mid Q3 taking place or not or there are sort of other factors taking place I mean listening to Dow's conference call they were saying the plant's still offline and it had suffered some damage so I'm just wondering whether the communication you'd heard was any different here and secondly you noted that some soda ash shipments were delayed from q2 into july could you quantify the impact for us here hello katie and thank you very much uh what i can say very clearly uh regarding uh sadara so just remember

we are producing uh hydrogen peroxide that we supply by pipe on the platform where we are one of you know 23 units we are currently actively preparing this restart for before the end of the quarter and and this is this is what basically we're getting prepared for i think you know So we're ready to restart, that's what I can say, and this is what we assumed. Regarding Sodash, it's true that there has been a little bit of delay in some of the shipments from Q2 to Q3. I don't know, Alex, you want to?

We cannot comment precisely. It's really a logistic question. As you know, Sodash is exported, as you may know, it's exported by boat, so you quickly get big quantities if you have delayed a few shipments. In terms of top line, it's a single digit number of millions of EBITDA.

What we mean is that on the annual basis, don't expect a decrease or increase in volume, but one quarter to the other, you may have some phasey thank you the next question is coming from martin rodiger from kepler sugar your line is now open please go ahead yes um hello uh philippe alexander and team um i have one questions with let's say three sub questions so you said that basically half of the 40 million year over year every day decrease in Q2 is due to lower peroxide volumes on the back of the Middle East conflict. I understand that roughly 20 million earnings decline over here is caused by the production stop of your HPPO plant in Zadara. So when I know that this plant accounts for 2 to 2.5 percent of group sales and has the highest margin, and do the math, then my questions are the following. A, is it fair to assume that this plant generated around 44.0% EBITDA margin one year ago? B, this plant is now heavily loss-making as you have costs, i.e. salaries, but you do not sell any products? And C, if there are losses right now, can you stop these losses of that plant in case the Middle East conflict last many years.

Okay thank you so basically yeah I mean we confirm that there is more or less a 20 million euro impact of the Middle East crisis for us in Q2 and that the plant in Saudi Arabia represents a big part of it so it's not it's not the whole amount but it's a big portion it's a big portion of it as you say you know the plant has been idle since mid-march and and we lose the sales and we also have some costs to to incur clearly again and i repeat we are today preparing for a restart right and this restart is supposed to take place before the end of this quarter. Now, as you say, if the conflict continues, if there continues to have problems and so on, of course, there are a lot of different possible scenarios. We will explore all of them and get back to you with the outcome of those discussions.

OK, thank you. the next question is coming from chitan udashi from jp morgan your line is now open please go ahead yeah hi thanks for taking my questions my first question was i'm just looking at the uh surash prices the future prices for surash in china it's completely collapsed it's it's now at lowest level levels i think the contract price in europe is 300 dollars so dash prices in china are now 130 140 and i'm just curious are you getting pressure from your customers in europe who are using maybe you know imports from china as a reason to bring your prices down because i understand historically it's not been as uh as economic uh economical to ships or ash from China to Europe, but given where the price differential sits today, I don't know if it starts to become actually economical, and it just feels like this is the only, one of the very few commodity products in chemicals where the Chinese exports into Europe really hasn't gone up that dramatically, and can that be a risk given the price delta are now the second question was on your on your this announcement or this capacity expansion that you're doing for rare separation it still seems pretty tiny to me you know it's like 15 20 million in the context of large expansions happening elsewhere in that space firstly can you confirm how much of that capex has been funded through by customer prepayments or subsidies or both or Or is this a net capex after some of these prepayments? And second, like, what do you still need to invest? I mean, it feels like things are still progressing rather slowly with the rare earths on Solway's And the last question is, you typically have this $15-$20 million license income for HPPO.

You didn't have it last year. did you have any in q2 and if not do you expect that to come through in h2 uh and specifically when either is it in q3 or q4 thank you thank you thank you chetan so uh sodash um i must confess that we're not looking too much about uh at prices in china because we're not selling in china and for us what is more important is the prices in the export market So in Southeast Asia, Middle East Africa, and Latin America. And they're higher, obviously, than the domestic Chinese price. But still, you're right, they are at a very low level, historical low levels. This is not new, and this, of course, has been taken into account in our outlook. Does it put additional pressure in Europe? At this point, no. I mean, because it's still very difficult to ship Chinese sodash to Europe. We don't see any Chinese sodash right now in Europe because the transport cost is extremely high. And so our sites in Europe are still the best with the Turkish ones, obviously. in terms of cost to deliver in their domestic market. And that's really what matters. However, it puts pressure on the volumes that are exported out of Europe and out of the US. This is why our seaborne business is currently not performing as well as it used to perform in the past years. And it puts, by the way, also pressure on the U.S. producers, because the U.S. producers, including us, are exporting 50% of their capacity. And this is why you might have seen also that SVM has shut down its plant in California. That's a direct consequence of what's happening on the seaborn market due to Chinese overcapacity. So it has consequences, but not directly, I would say, at this point on our European or U.S. markets. Capacity expansion in rare earths, it might look small, but in reality it's not. I mean, remember that we are revamping an existing plant. We are repurposing units that already exist. If you would have to do this type of investments outside of La Rochelle, in any location in the world outside of China, it would cost four or five times more, right? So we really need to keep that in mind. And this is why those investments are very interesting, because they are built on an existing plant. And we are gradually building, you know, step-by-step, a new value chain in this region. You might have seen, and I said that we've signed an agreement with Veridis to expand our options in terms of sourcing. and we are indeed signing new contracts with customers for this new NDPR, DYTB, and so on type of rare earth elements. These investments are done because we have the commitment of the customers. This is why it's gradual. And we will move further with an objective to reach 50 to 100 million euros of capex in the end. And they are also supported to some extent by the French government. And they are also, in some cases, pre-financed by our customers. So all this makes those investments possible and very promising. Perrot's license, no, we don't have any revenue in Q2. We might have, I mean, we're pursuing a certain number of opportunities, but today nothing is secured. But this is taken into account in our outlook, whatever happens.

Thank you. the next question is coming from sebastian halfway from bernstein your line is now open please go ahead hi good afternoon thank you for taking my questions too please for my side so on coitus the brazilian expected tariff rate was recently increased to the us and chinese exports in other chemicals value chains are up in recent months does this make you less bullish on the prospect of recovery of recovery sorry and on the ets rule changes does that change your need to make the carbonization investments on your european for the ash capacity through the end of the decade

to compete with lower carbon turkish so the ash and could more funding be available available from europe to help you make the investments thank you thank you sebastian so um first question on A big part of the recovery is due to the current geopolitical context and the fact that, and the consequences, I would say, of the conflict in the Middle East, the fact that the whole complex is going up and that pushes margin higher and so on and so forth, and that the logistic uh routes are being disrupted so that being said a part of the recovery was also boosted by uh the end of the tariffs that's true it was not the main part but it's it was a part was coming from that um the previous tariff was 50 plus 10 i think of base of baseline now we move to 25 plus 10. i think it's too early to say if it's going to have uh what type of impact it will have on our customers we monitor this very carefully so far we don't see any change in the order book but of course we monitor this extremely extremely carefully but the new tariff is 50 of the of the previous one so that we need to keep in mind. The new ETS, I mean, first, it doesn't change anything on our ambition. Let's be clear. Our ambition is to be carbon neutral by 2050. And we have a very clear trajectory in order to go there in the next 15 years. So the new proposal is, in fact, in line with our ambition. This is where we're, I would say, comforted in our strategy is that the previous versions were too aggressive and putting us under pressure. The new version is in line, right? So it doesn't mean that we will go slowlier. It means that we will go as planned, okay? That's what matters now will it create more opportunities i think that's the purpose because uh what we're asking for is indeed more support for the energy transition to redirect the revenues from the ets more towards energy transition projects than in the past and i think this is what is also planned in the new draft that has been proposed by the european commission okay thank you so much the The next question is coming from Sebastian Bray from Berenberg.

Your line is now open, please go ahead.

Hello, hello. Good afternoon. Thank you for taking my questions. My first one is on the outlook as we move into 27, because I'm struggling to think about how earnings growth can materialize under certain circumstances. So on the one hand, we've got peroxides coming back. On the other, as I think Chetan alluded to, it's difficult to imagine scenarios where soda-ash pricing is supportive in the year. I imagine co-artists might be down a little bit as well. My point here is how exactly are you thinking about the prospects of achieving earnings growth in 27 and reconciling that with the fact that the dividend won't be covered in 26? And my second question is just on seasonality into Q3. is anything getting sequentially better or worse as we move from Q2 into Q3? Thank you.

Thank you, Sebastian. So, I will give the question on Q3 maybe to Alex. In the meantime, just some elements regarding 2027. Clearly, I think it's very early to say anything about 27 at this point. I mean, we're of course focused on, you know, the delivering the 2026 and we just confirmed our guidance and we are focused on, you know, what we control and what we control is our transformation and we are moving in the right direction. We are delivering the savings that we expect in our transformation both on our sides and at the group level and we are doing what we have to do also in terms of growth we're not investing a lot of money but we invest where we have to invest we mentioned electronic grade h2o2 rare earth those are examples that will help us prepare the future and 27 in particular now on q3 maybe alex i give you i i give you the floor Yeah, and maybe also have to make the transition, and this is why we thought useful to show you the slide again with all our transformation expenses that we've decided to maintain, even if the economic context is challenging.

we said this year it should be around 90 million euro and next year should be in the tune of 50 million euros so just this uh decision will improve the cash almost mechanically whatever the context by uh by 40 million euro and in terms of dividend affordability i think it's an important piece of of the equation uh no on the seasonality uh if we i think you're alluding to the seasonality probably of the cash. If it's the cash, I mean, we expect really the cash to be back-ended in Q4 because we will continue to spend quite a lot of money on this transformation cost, restructuring, ERP in Q3. So the cash will tend to be quite back-ended. I think what I want to make clear is that you see in h1 because the level of activity at the end of june was quite decent compared to a very low level at the end of of december so we've invested in working cap close to 80 million euro and that will progressively reduce in the second part of the year but obviously it's really when activity gets very low at the end of the of around november december that we should see a significant working capital decrease.

That's helpful. Thank you for taking my questions.

Next question is coming from Julia Winkelmann from Bank of America. Your line is now open. Please go ahead.

Hi, good afternoon and thanks for taking my question. First on your full year EBITDA guidance, it's still a relatively broad range. Could you explain a bit more about what need to happen to reach the upper end midpoint and the lower end of the range and then same for the free cash flow guidance what are the moving parts to get to above 200 million is it really mainly the working capital unwind or is there anything else um and then my other question is on the rare earth business um i just wanted to understand the business a bit better so maybe it would be helpful if you could quantify how large the rare earth business is today as percentage of group sales or percentage of specialty chemical sales. And then I also wanted to ask on the customer of takes, what kind of customers are these? Are they from automotive industry, defense industry, or what industry are they from? And also, how are the agreements structured in terms of duration, committed volumes, pricing, and also the flexibility to any of those elements. Thank you.

Thank you, Julia. So maybe I will give you some elements on Rare Earth, and then I will give the floor to Alex on the range of the guidance on the BDA for 2026. So the size of the business at Rare Earth is more or less half of Special Chem, it's 8% of the group sales. Just to give you the order of magnitude of the size of the Rare Earth business. Historically, we've been delivering, serving the markets of the autocatalysis and electronics and medical applications. now these new investments are related to permanent magnets and indeed permanent magnets are for electrification. So you have all these type of customers that you've mentioned, auto manufacturers, wind turbines, aerospace, and so on and so forth that are looking for this type of material. And indeed to invest, we need commitments from the customers because today this market has been is mainly delivered from China and there are enough capacities in China so the type of commitments that we ask for and that we get in order to invest volumes and prices on through multi-year contracts to be simple Alex you want to the question on the ebdf yes it will be quite simple i mean obviously they are the the volatility is the name of the game i mean the same way we the situation change dramatically in one direction

with the middle east crisis can it move back in the other direction maybe i think today what we've said is that the main impact is the is the the HPPO's plant being stopped the rest between qualities the cost of transport the cost of energy is slightly negative but manageable can it turn positive you have effects i mean this one i mean there is not one specific element that needs to happen apart from the fact that okay we need to restart this this HPPO you need and we are actively working on it to result in the coming months. And we're confident.

I see operator that we have no more questions at this time.

So I hand the conference back to the speakers for any closing remarks.

Yes, okay. So thank you everyone for your participation today. If you have any questions, please feel free to reach out to the IR team. might be a little bit less reactive in the coming weeks given the summer break but feel free to send them to the generic investor relation email address and there is always someone taking care of it so there are a few events planned in September as usually you can find them on the financial calendar page on our website and we will announce our Q3 earnings on November the 4th thank you very much have a good afternoon thank you thank you very much thank you thank you bye bye thank you for joining today's call you may now disconnect