7. Outlook 2018
At constant scope and relative to average 2017 forex levels, Solvay expects full year underlying EBITDA to grow 5% to 7% organically.
Advanced Materials to grow by double-digits:
- Volume growth driven by the use of high-performance polymers in the automotive market, use of polymers in EV batteries and other electronic devices, and growing applications in the healthcare market.
- Aerospace programs utilizing Solvay composites, including aircraft powered by the LEAP engine and the F-35 jet used in military will support additional growth in the segment, along with reaching stability in the industrial composites markets after two years of decline.
- Excellence initiatives across all businesses will further support profit growth in the segment.
Advanced Formulations to grow at a high single-digit rate:
- Increased metal prices should stimulate mining production and therefore higher demand for technology solutions.
- Modest improvement in oil and gas against a strong recovery in 2017, complemented by profit growth in home & personal care, and coatings markets, and supported by positive pricing power.
Performance Chemicals profitability to decrease by around €(50) million:
- Additional capacity in the soda ash market has been well anticipated and volumes are largely locked in for the year, albeit at modestly lower prices. Current higher energy costs are expected to compress margins, partly compensated by operational excellence.
- Modest growth in peroxides, throughout businesses.
Corporate & Business Services are expected to remain generally flat, reflecting continued cost discipline.
In the second quarter of 2018 additional one-time synergy benefits of approximately €20 million are expected to be generated on post-retirement obligations in the former Cytec businesses. These compare to the €38 million synergy benefits generated in the second quarter of 2017.
Notwithstanding the above underlying organic EBITDA growth of 5 to 7%, 2018 begins with headwinds from foreign currency. Assuming current exchange rates prevail for the full year, and in particular the US dollar at US$/€1.25, the underlying EBITDA will be materially impacted by conversion effects of around €(125) million.
Small realized divestments in Specialty Polymers and Technology Solutions in June 2017 and February 2018 will account for some €(30) million scope effects.
Other P&L elements
Underlying depreciation & amortization charges are expected to remain in line with the €(704) million in 2017, and exclude PPA amortization charges of approximately €(240) million.
Underlying net financial charges are expected to be about €(350) million:
- Underlying net cost of borrowings of around €(150) million, including Rusvinyl, a €50 million reduction resulting from the gross debt optimization
- Stable coupons on perpetual hybrid bonds of €(112) million
- Non-cash underlying discounting costs of approximately €(80) million, slightly lower due to the decrease in discount rates.
The underlying income tax rate is expected to decline further to around 26% from 27.5% in 2017, reflecting in large part the favorable impact of the tax reform in the US.
Including the above-mentioned scope and forex elements, free cash flow from continuing operations is expected to exceed the 2017 level of €782 million.
Capex from continuing operations is expected to reduce further to depreciation level, i.e. approximately €(700) million.
The total net cash-out for provisions is expected to increase to some €(390) million, and includes:
- Higher pensions and related payments of €(235)million
- Environmental provision payments stable at €(80) million
- Higher restructuring payments account for approximately €(80) million. Opportunities to accelerate restructurings and create additional value may impact annual spend levels but are not likely to impact the overall cash generation profile.
Net cash financing payments will reduce by more than €100 million to approximately €(250) million. The reduction is due to the gross debt optimization and the 2017 comparison base, which included one-time costs, such as €(25) million on the repurchase of senior bonds and the unwinding of currency swaps on intercompany financing.
With sustained free cash flow generation and proceeds of approximately €1.1 billion to be received on the completion of the Polyamide divestment to BASF, underlying net debt is expected to further reduce from €(5.3) billion to €(4.1) billion, bringing the underlying leverage ratio down from 2.2x to 1.9x.
Solvay is exposed predominantly to the US dollar, with the main sensitivities per US$/€0.10 change:
- EBITDA sensitivity of about €(120) million based on the average rate in 2017 of US$/€1.13, with some 2/3 on conversion and 1/3 on transaction, the latter being mostly hedged.
- Net debt sensitivity of about €140 m based on the rate at the end of 2017 of US$/€1.20.