Solvay Earnings: EBITDA Down 18.5% Organically on Lower Volumes; Guidance Confirmed at the Lower End

Belgium-based Solvay SOLB has made significant changes to its business portfolio over the past decade, but we think there is more work to do before its valuation will reflect a specialty chemical company. We don’t see a moat, given that high capital intensity continues to weigh on returns on invested capital, leaving us with limited confidence in the company’s ability to generate maintained returns above the cost of capital.

The company’s sales are broadly diversified geographically and by end markets, although automotive and aerospace tend to take centre stage. Oil and gas is often topical, given Solvay’s exposure to the highly cyclical U.S shale market. Sales are split fairly evenly among Europe, North America, and Asia.

Solvay’s business is segmented into materials (33% of EBIT), chemicals (41% of EBIT), and solutions (26% of EBIT). Materials is the most attractive segment, given that it houses the moatworthy and high-growth specialty polymers and composite materials businesses. Chemicals is the legacy commodity chemical business, but this is by no means a weak link. Solvay is a leading global player in soda ash and peroxides, which generate significant cash for the company. Solutions is a mixed bag of businesses but in total is not earning the cost of capital. The Novecare surfactants business is the biggest component and targets diverse end markets. However, oil and gas appears to be still driving results, given its severe deterioration.

Solvay is targeting mid-single-digit EBITDA growth, on average, between 2020 and 2024. The company also expects free cash flow conversion to exceed 30% and return on capital employed to exceed 11% by 2024. Investments will be focused in the materials segment, while the chemicals segment is run for maximum cash generation. Certain business in the solutions segment, notably oil and gas surfactants, will need to be restructured to improve returns.