Arkema's (ARKAF) Q1 2016 Results - Earnings Call Transcript

| About: Arkema (ARKAF)

Arkema SA (OTC:ARKAF) Q1 2016 Earnings Conference Call May 11, 2016 5:00 AM ET

Executives

Thierry Lemonnier - Chief Financial Officer

Analysts

Thomas Wrigglesworth - Citigroup

Jean-François Meymandi - Morgan Stanley

Emmanuel Matot - Oddo Securities

Patrick Gerard Jean Lambert - Raymond James Financial International, Ltd.

Peter Clark - Société Générale

Martin Roediger - Kepler Cheuvreux

Jean-Francois Meymandi - Morgan Stanley

Laurent Favre - Bank of America Merrill Lynch

Virginie Boucher-Ferte - Deutsche Bank

Operator

Ladies and gentlemen, welcome to the Arkema’s conference call. I now hand over to Mr. Thierry Lemonnier, Chief Financial Officer. Sir, please go ahead.

Thierry Lemonnier

Okay, thank you. So good morning, everyone, and welcome to this conference call. With me today are Sophie Fouillat and François Ruas from Investor Relations. As usual, we have posted on our website, in addition to the press release, a set of slides which details the first quarter performance, which I am pleased to present to you today. After a quite pleasing growth in 2015, Arkema started 2016 very well with an EBITDA for the first quarter of over €300 million, the highest-ever delivered by the group in a first quarter.

Before looking at these results in more detail, I would like to come back on a few key points. First is EBITDA margin which at 16% is close to its historical highs, despite a mechanical dilutive impact of Bostik. The performance achieved in this quarter confirms the step-up in the group’s profile with strong positions in resilient niches and more downstream businesses.

The second point is the continuing production of Bostik with an EBITDA margin increasing at around 13%, demonstrating again that Bostik’s development strategy bears its fruits and is perfectly on track to meet our 2017 target to grow EBITDA by 30% compared to 2014 reference of €158 million and on the longer term to catch up with main peers.

Lastly, the group continued its divestment program, illustrated by the project to divest the activated carbon and filtration business, which represents a little more than €90 million of yearly sales on a valuation basis of 9.5 times EBITDA. So together with the recent divestment of Sunclear, this production underlines the fact that Arkema’s businesses are valued on a standalone basis at multiples significantly above the one on which Arkema currently trades.

So let’s look now in more detail to the very good performance of this first quarter. At €1.9 billion sales are slightly up year on year. The quarter benefited from the full-quarter contribution of Bostik, that is one additional month on last year. Consequently, net of Sunclear divestment, we had in the first quarter a positive perimeter effect of 4.9%.

Volumes are up 2.5%, driven by a good demand for innovative applications in technical polymers; the contribution of our thiochemicals plant in Malaysia, compared to no contribution last year as we were just starting the unit during the first quarter; and growth in adhesives and acrylic downstream. These two effects more than compensated a negative price effect of 5.5%, resulting both from the acrylics cycle and lower raw material prices.

As already mentioned, EBITDA at €302 million reached its highest level for first quarter. That is 27% progression on last year, obviously, benefiting from structural driver such as one additional month for Bostik and further successful development of this business, the contribution from the new thiochemical platform in Malaysia and strong contribution from innovation.

The performance benefited also from the lower input costs in relation to raw material prices, and from our operational excellence initiative. EBITDA margin reached 16%, significantly above the level of last year, driven by excellent margins in industrial specialties and high-performance materials. With G&A of €111 million, recurring operating income stood at €191 million.

Non-recurring expenses amounted to €11 million and are essentially linked to the non-cash amortization charge related to the purchase price allocation of Bostik. Taxes stood at €58 million. It includes €3 million positive deferred tax element relating to Bostik PPA. Excluding this amount, tax rate stands at 32% of the recurring operating income, which reflects the geographical breakdown of our results and specific situations in certain countries.

For the full year, tax rate should be at around 30% of recurring operating income. Net income group’s share amounted to €98 million, strongly up compared to the €42 million of last year. Adjusted net income stands at €106 million that is a €1.42 per share.

Let’s now go through the performance of our three business segments. High Performance Materials delivered a strong performance with sales up 17%, supported by one additional month of Bostik and by a 3.5% volume growth driven by some good development in new materials as well as the development of Bostik. These elements offset slightly lower prices at minus 1.7%, and a minus 1.6% currency effect.

At €149 million EBITDA is up 34%. Bostik achieved this strong performance with an EBITDA margin at 13%, benefiting from organic developments, synergies and lower costs. As you have seen, Bostik continues its geographic expansion, the latest startup being the Philippine startup in April.

In addition, Technical Polymer delivered a strong contribution in the first quarter, supported by innovation and the continued good development of lighter materials and new energies. EBITDA margin stands at 7.2% [ph], more than 200 basis points above last year. Excluding Bostik, it even exceeded 20%, so really a very encouraging performance there.

For Industrial Specialties the first quarter has been the continuity of its strong 2015 performance. The sales dropped as mainly the consequence of the Sunclear divestment. Volumes increased by 1.8% mainly supported by the contribution of Thiochemicals in Malaysia, while prices reflected lower input cost. EBITDA strongly up with a 39% progression at €129 million, with all business lines progressing on last year.

Thiochemicals realized another strong quarter supported by our Malaysian platform. The plant is running at full capacity, so it is really a major achievement for the group. Particularly, this also means that for the remaining nine months of 2016 the performance of Thiochemicals in Malaysia should remain roughly comparable to last year.

In Fluorogases, profitability continues to gradually recover in line with our anticipation. EBITDA margin for this division reached a very high level at 22%, close to historical high.

For Coating Solutions, sales amounted to €432 million, down 13% compared to last year. This is essentially due to a 14% negative price effect, reflecting the acrylics cycle and lower raw material prices. Volumes were up 2%, supported by the good development in downstream activities. Performance as a division continues to register well with a €50 million EBITDA, just slightly below last year’s level and an EBITDA margin at 11.6%, above last year.

The resilience is a consequence of our downstream integration, which limits our exposure to the low cycle and very high margin monomer. Beyond this price effect, the downstream activity has benefited from new development by Coatex and coating resins, and from a very strict cost management.

In Acrylics, the first quarter unit margins were lower than in the first quarter of 2015 but are now stabilized compared other end of last year. This is fully in line with our assumptions.

As regard to Sunke, as you have seen in the press release, we are close to an agreement with our partner to finalize the operating scheme on the basis of a 50-50 joint operation, following our decision not to exercise our option at the beginning of the year. We consider that’s a very reasonable deal which will give us access to 50% of the total capacity of the site instead of one-third for an additional cash-out limited at €40 million.

I shall commence now on cash flow and net debt. Because of the usual seasonality, the first quarter free cash flow is slightly negative, but net debt at €1.4 billion at the end of March is stable compared to the end of December which is an excellent performance for first quarter. In addition, as part of our regular review of our CapEx plan for the year, we have re-estimated our CapEx program to €450 million that is €20 million down on our initial guidance. That illustrates our strong commitment to permanently strictly manage our cash allocation.

To conclude this presentation, I will briefly comment the outlook for the full year.

The first quarter strong performance confirmed the rightness of our recent strategy decisions, namely the acquisition of Bostik and the investment in our new thiochemical platform in Malaysia. It also confirms that we are on track with the roadmap that we have defined in fluorogases and that our new developments, especially in Technical Polymers, meet our expectations. Some elements are specific to the first quarter, such as the additional months of Bostik and supplementary year-on-year contribution of Thiochemicals. So for the coming quarters on reference basis will be mechanically more comparable.

Our priority will remain as always to deliver on the elements that we control and to adapt quickly to the evolution of an environment which remains complex and volatile. But all-in-all, the good performance of this first quarter has definitely further increased our confidence in our ability to grow the full year EBITDA on its last year level.

So I thank you for your attention and I will now take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] And we have the first question from Thomas Wrigglesworth from Citi. Please go ahead, sir.

Thomas Wrigglesworth

Good morning, and thank you very much, Thierry, for taking my questions. Two questions, if I may.

Can you just talk a little bit about the strategic rationale for going back to do the deal with - in Jurong? What we’re seeing in, I mean, not to extrapolate Q1, but it looks like the upstream margins are still pretty tough. And you say, you kind of made more money in the downstream, and yet you want to integrate kind of back upstream. Can you just give us an indication of the vertical integration that this extra capacity would provide?

And maybe a second point, just clarify, the 80,000 tons you say as incremental. But I thought the total capacity of the site was three lines of 160,000 tons. So I thought if it’s the 50-50 that maybe that number would be a bit bigger. That’s one question.

And the second question is just on the sustainability of margins. On raw materials, how do you expect the raw material progression to look through the course of the year? And where has that been a greatest benefit on a divisional basis? Thank you.

Thierry Lemonnier

Okay, Thomas, so those are two important questions. For Sunke there are two elements which can explain the decision that we’ve made. The first is that, since we decided not to exercise the option, we were in a situation of uncertainty about - on the way the joint venture capital will be split, because without taking the control our partner could have on its side taken the control of the joint venture.

And we consider on both sides that it will be better to maintain the 50%-50% joint venture in which we will keep the same level of operational involvement, which is a very important element for us.

And the second element is on the longer term. We have always considered that to have access to monomer basis in Asia would be an important level for the development of both our acrylic business and the downstream business. And, as you know, initially, through the option that we had we could have doubled our access to the right capacities, which would have represented the equivalent to two lines; that is two times 160 kilotons.

And it is something that we would have done if the price of the option has not been so high. So it was mostly a question of price more than a question of quantities. And we consider now that having access to the 50-50 - on the 50-50 basis to the existing capacity which is, as you said, three times 160 kilotons. It is a good compromise at a very reasonable price. So we consider that, both in terms of economic conditions and for the longer term it’s something which makes sense for Arkema.

Now, as regard to the present prevailing market conditions, you’re right, that we have not seen any significant changes. Things are not deteriorating any more since the end of last year. They have more or less stabilized. We can expect, but it has not changed, some adjustments in the capacities - existing capacities over the coming months here and progressively to see market conditions improved for acrylic monomer.

What does it mean in terms of integration? Our priority has not changed. And, clearly, for us we are maintaining our targets to continue to increase our integration ratio in the downstream of acrylics with or without the additional 80 kilotons, it doesn’t change.

So clearly for us, the Sunke deal is an important step, which closed certain uncertainty about the way the sites could have been managed; if we would have been diluted and gross part of our operational involvement in this site, which is important for us and also for our partner. So, clearly, it’s something which is positive for both partners of the deal.

Thomas Wrigglesworth

Understood, and on the raw material progression outlook across the businesses for 2016?

Thierry Lemonnier

Okay. So far in the second quarter we have not seen any significant changes in the environment. It remains more or less in line with the first quarter. We have seen some price hike in the oil prices during the beginning of the year, which probably can explain some restocking at the level of certain of our customers, but probably quite limited. And so far, we have not seen any significant changes in the environment. What could it be in the second part of the year and in the coming months is, it’s still very difficult to say.

What you have to keep in mind always there, is that last year we benefitted, on top of the lower price of raw material of a parachute effect, which was a consequence of the drop in the price of raw materials. And, as you know, there is always a delay between the time of the price decrease of the raw materials and the adjustment in the sales price, which means that last year we benefitted from this positive element that we won’t have again this year.

And on the other hand, if prices of raw material were to go up, we will probably have a negative impact due to this delay, which is a pure mechanical element.

Thomas Wrigglesworth

Have you quantified the raw material gain for 2015?

Thierry Lemonnier

No, no, it is very difficult to. It is clearly - I think that if we look at the price of raw material, there are two way to look at it. The first is the impact on the margin in percentage, because obviously when the price goes down, if you keep your unit margin at the same level, you’ll have a positive impact in terms of percentage, which is something obviously which is - what is most important for us is to at least maintain our unit margin. So mechanically in doing that and even improving them through the product mix.

We have an additional positive impact in when we look at the percentage. And this is something which we consider as sustainable. The second element, which is clearly a one-off, is the consequence of the price movement.

Thomas Wrigglesworth

Okay. Thank you very much for taking my questions.

Operator

We have another question from Jean-François Meymandi from Morgan Stanley. Please go ahead, sir.

Jean-François Meymandi

Hi, good morning. Just three quick questions for me, first on the acrylics cycle, you say it’s stabilized. There was some evidence in Asia of spreads going slightly higher. Can you quantify that? And can you give us a quick outlook for the remainder of the year where you would think the spreads in acrylics would go and confirm that we’ve reached the trough?

Second one, we’ve seen you fairly active on M&A, small ones. You still have some plans for divestments, especially, through the end of 2017. You’re at half of the value of the sales that you should sell for. But the value you should get, you’re almost there. Can you give us an update on what’s the - on what you’re thinking there or have you overachieved or is that some lower value companies that you need still to sell?

And the third one is on your balance sheet efficiency. When we look at the dividend it is comparably low to peers. And your balance sheet is sitting in a better place. Can you give us also your thoughts about the dividends going forward?

Thierry Lemonnier

Okay, Jean-François. Thank you for the questions. For acrylics cycle it’s very, very difficult to give a general complete answer, because the market conditions are differentiated by geographical area. What I can say globally is that, as I said earlier, we are not seeing any more the situation deteriorating. So it’s stabilized now since several months. We have seen some certain positive signs, mostly coming from the U.S. and from the other part of the world.

Our assumption is that we could see some improvement, but probably not before the end of the year. So you can consider that it’s overcautious. But, as far as we can see right now, and especially in Asia, we consider that it is reasonable. And as long as we have not seen actual improvement in our performance it is difficult to consider that the market conditions could be better and earlier. So, clearly, we have not changed our view.

Jean-François Meymandi

You were saying - if I remember well, with Q4 you were saying that you were expecting some improvement in H2, is that delayed or you’re still of that view?

Thierry Lemonnier

No, probably - it will be more probably at the end of the year than in Q3.

Jean-François Meymandi

Okay, so Q4 really. Okay.

Thierry Lemonnier

For M&A we have not changed our target. So we are, in terms of sales figures, I would say at midway to our target. We’re continuing discussion for divesting certain other activities. What will be the timing of the announcement, would it be before the end of the year? It’s too early to say, but we are on track.

You’re right that, in term of contribution, we have already reached the target that we indicated initially. But we consider that we could continue our initial plan. We have been able to benefit from good market conditions for M&A right now to divest those businesses. And we maintain our initial targets in terms of sales figure for divestment.

Jean-François Meymandi

So there are some businesses for grab for free in your portfolio?

Thierry Lemonnier

No, no, no, they’re certainly not for free. So that means in terms of contribution we will probably exceed as we provided initially.

Jean-François Meymandi

Thank you.

Thierry Lemonnier

As far as the balance sheet is concerned and dividend policy we find we have not changed. And our policy is to positively continue to increase dividend in avoiding as much as possible [in movements] [ph] we will continue. We have increased it - we will propose to increase the dividend during the next - the coming shareholder meetings in June to €1.90 per share, which correspond roughly to 3% yield on the basis of the share at the beginning of the year.

And we will continue to positively increase the dividend according to the sales that Arkema will achieve in the coming year.

Jean-François Meymandi

Okay. Thank you.

Operator

So we have another question from Emmanuel Matot from Oddo Securities. Please go ahead, sir.

Emmanuel Matot

Good morning, Thierry. Several questions for me, please; first, are you planning to expand your thiochemicals plant in Malaysia, because it is already at full capacity? Second, how do you explain that your PMMA business is still doing so high results? If I’m right, you’ve been expecting a slowdown since several quarters now.

Third, corporate costs increased a lot in Q1 to a record level. Can you share with us the level you would expect for the full year? That will be helpful. And my last question, to come back to the previous one from my colleague, which type of businesses are you looking to sell in the future, I mean in terms of profitability?

I was surprised to see you selling the Activated Carbon and Filter Aid business, because it is making good margin, so higher than Arkema in average, if my calculation are right. Thank you very much.

Thierry Lemonnier

Yes, Emmanuel, your calculation was right. So I will comment on that. First, let’s start with the first question in Thiochemicals. You’re right, we are now running already at full capacity. But I’m sure expansion is something which can be considered, but it is not for the short-term. So it depends on several parameters, one of them being the evolution of the methionine market and the decisions that could be made by our partner, CJ, on their side. So it is something which is clearly possible, not decided, and on which we will update you in the coming months here.

PMMA, you’re right. We have been expecting normalization of the market situation now for more than one year. So we will not comment any more on that, since we are still benefiting from very good market conditions, but it’s mostly driven by the good market condition in the automotive industry. So something probably that will happen.

So when, now, we don’t know. So we’re happy to see that market conditions are still very supportive for PMMA and helps the performance - the good performance of this segment. On top of that we have, as you know, regularly since now more 18 months some production outage at the level of certain of our competitors, mostly MMA producer, but some PMMA too, which explain also little bit why the supply remains so tight at the level which was clearly not expected.

But let’s take it, wait and see. And for the time being, PMMA market conditions remain quite supportive.

For the corporate cost, it’s true that in Q1 the amount was rather high, but don’t forget that corporate expenses include some element which are not linear. So we can have that in one quarter. And when you look at the sequential evolution of our corporate costs over the quarter, it’s relatively different from one quarter to the other. And we don’t expect, even if the first quarter is higher than last year, the full year amount to be much different from last year, which means at around €60 million.

Now, coming to your last point about divestment, I will make two comments. The first is that the business line that we are selling, our business lines - product lines on which we are not communicating, and I don’t think that you have heard about Sunclear and activated filter before the announcement of the sale of this business.

The point is that clearly, we are aiming at divesting non-core product lines with limited integration within our main business lines. You are right that the case of the activated carbon filter is something, which is relatively special, because it is an activity which is part of HPM, and HPM is clearly the segment that we want to develop in the future, so it’s something that may have surprised you.

The point is that, for this specific product line, which you’re right is delivering high performance, the potential of growth within Arkema was extremely limited. And taking advantage of the fact that a potential buyer has some synergies and some important growth potential for this activity, we consider that it was a good opportunity to divest it, even if clearly the priority will continue to make HPM grow in the midterm and long-term.

Emmanuel Matot

Okay. I understand. Thank you, Thierry, for these answers.

Thierry Lemonnier

Thank you.

Operator

We have another question from Patrick Lambert from Raymond James. Please go ahead, sir.

Patrick Gerard Jean Lambert

Hey, good morning, and congratulations for this good Q1. A few questions, the first one, I think you mentioned Bostik organic growth in your presentation, Thierry. Is that fair to say that it was in line with HPM growth reported in terms of volumes? That would be the first question.

Second question, again coming back on the bridge of EBITDA in Industrial Specialties, which about €29 million, could you be put a bit more color on the moving parts, especially in Thiochemicals, we are we back to the margins we used to have, or is there still a differential there in terms of PMMA, the contribution year on year, and Kerteh in particular?

A question on Thiochemicals; the rest out of - outside of Malaysia, how it performed, are we also assuming a pretty decent volume growth in Thiochemicals? I think that’s it for the moment. Thanks.

Thierry Lemonnier

Okay, Patrick. For Bostik, yes, it’s something like we can say that the organic growth for Bostik is close to the average of HPM, which is a significant improvement on last year. And it is as a consequence of the implementation of the strategic plan and the new development that was introduced by Bostik. So clearly, on top of adding the contribution of an additional month in the quarter, we are benefiting clearly during this quarter from the good performance of Bostik on both margin side and volume side. If we look at…

Patrick Gerard Jean Lambert

There was not too much prices pressure in Bostik, were there?

Thierry Lemonnier

There is always price pressure, but it’s true that the more downstream you are, the more resilient the prices and the margins are. It depends on each segment on the supply and demand for the given products, but globally, it’s has been clear positive element coming from lower raw material prices.

For Industrial Specialties, important point is that the four business lines performance have progressed on last year. Fluorogases are progressing according to our expectations that means that progressively, we are recovering the announced €80 million EBITDA that we have made a few months ago, so here we are absolutely on track.

PMMA, as I said we expected this year some normalization, which means that we expected PMMA to perform at a lower level than last year, and during the first quarter the performance of PMMA has been higher than last year, so not much but slightly, which is a [indiscernible] on our initial assumption.

In thiochemical, obviously Malaysia has driven to a large extent the performance but otherwise, for the other part of the world, things are going quite well. Don’t forget, however, that during the first quarter we had no maintenance turnaround, which we had in the first quarter of 2015. So that makes a slight difference, which explains the progression, part of the progression, of Thiochemicals outside of Kerteh.

And H202 is also performing quite well, mostly on the basis of the development of new specialty applications on top of the additional bleaching activity.

Patrick Gerard Jean Lambert

Just follow-up on Kerteh in particular, it seems that CJ is running actually above its nameplate capacities in terms of methionine sales and production. Is that something you accompany with them, or are you really at full capacity?

Thierry Lemonnier

Okay - I don’t know, and I will not comment on CJ. CJ certainly is running at full capacity, they are also certainly thinking about possible extension of capacity. But as I said, it’s an early stage so it’s something that may occur in the coming months, but on which I cannot comment at this stage. For the time being, what I can say is that the environment remains very good, even in the price of methionine has been dropped from the high level of last year, it remains a very strong market.

Patrick Gerard Jean Lambert

Thank you. Thanks, Thierry.

Thierry Lemonnier

Okay.

Operator

So we have another question from Peter Clark from Societe Generale. Please go ahead, sir.

Peter Clark

Good morning. Thank you, Thierry. Two questions, I’ve got a similar theme. On the Bostik seasonality, I think, Q1 seasonally is probably a stronger margin than the average through the year, and certainly Q2 would be. But I still see a margin that perhaps was up year on year higher than the divisional average in terms of the EBITDA margin. So the EBITDA margin, I think the division was up 220 basis points, a bit higher obviously in Bostik, but just checking that the seasonality of that margin for Bostik itself.

And then, on the industrial specialty margin, I think you touched on this, but obviously the 22%, if I go back in history the only time you beat that was the seasonally strong Q2, 2012, before Fluorogases collapsed. And obviously, your point about all the businesses being up, I think you are suggesting that you are much more comfortable with your guidance for that division being similar to last year for the full year on margin, and what your target was, I think, in 2017 which was also about the 17% EBITDA margin. Can you just clarify that on the Industrial Specialties margin? Thank you.

Thierry Lemonnier

Okay. So, Peter, for Bostik, I don’t think that - the seasonality for Bostik is relatively limited, you have some, but it’s relatively limited. And the impact on margin itself is even more limited. What is difficult with Bostik is to identify and to quantify what is the impact of the lower price of raw material on the significant improvement of the EBITDA margin, because moving from 10% to 13% in two years is a very good performance. But obviously, it is something on which we cannot guarantee that we will maintain it until the end of the year.

It is more related to external elements, but what is for sure is that Bostik has made significant progresses that the margin step-up year on year will be significant. But once again, it’s difficult to consider that, at this stage of the year, we could consider that we will remain at 13%. Once again, it’s not specifically related to the seasonality, which does exist as you said, but it’s limited for Bostik and has an even more limited impact on margin.

What is important to keep in mind for Bostik, as I said to Patrick, is that we had organic growth, which was significantly higher than last year, and it was supported by a good level of demand for the construction market, but even better for the industrial segment.

We have ahead of us still some important work to deliver the full synergies that we have estimated, and the only thing that I can say is that the first quarter comfort us even more for delivering the progresses that we have announced for 2017.

For Industrial Specialties, the 20% EBITDA margin is high. And, if you refer to what we’ve said, as you mentioned, what we said during our Capital Markets Day, the target for this segment, on the basis of raw material prices, which are quite different from the one that we have right now, because if you remember, our normalized environment in the medium term was defined on the basis of an oil price of $70 per barrel.

And we’ve said that for Industrial Specialties, the range of margin was to be considered between 17% to 19%. So 20% is clearly a high level, which will be difficult to sustain over the long term. Don’t extrapolate that 22% of the first quarter, if it’s to your point.

Peter Clark

Don’t worry. All right, thank you.

Operator

So we have another question from Martin Roediger from Kepler Cheuvreux. Please go ahead, sir.

Martin Roediger

Thank you for taking my questions. And I apologize in advance, if you have already answered my questions, because I dialed in too late. Are there any currency gains in the first quarter from the spillover from last year, based on hedgings you did last year, and therefore, these currency gains were delayed?

Second question is on the restocking by customers, obviously more pronounced in March. Can you quantify the earnings effect from that restocking leading to higher utilization rates?

And thirdly, on depreciation, it appears to me that Q1 was a relatively low figure for depreciation and amortization. Is that just because of some translation effects, or are there any other reasons why D&A are, not only compared to high Q4, but also compared to Q3 last year, on a relatively low level?

Thierry Lemonnier

Okay, Martin. So on the currency impact, globally there has been a slight negative impact on the conversion effect. You’re right, that we had last year some hedging that we don’t have - the results of which were negative that we don’t have any more this year. But the impact is limited, so it’s not a key element of the - maybe not a key element, it’s a very marginal element.

For restocking, it’s very difficult to quantify. What - we estimate that there has been probably some limited restocking during the first quarter, mostly as an answer - or as an anticipation from some customers to possible raw material price increases based on the fact that we have seen, at least twice during the quarter, the price of oil going up. So it probably has led some of our customers to build some stock. But once again, we consider it as a relatively limited effect on the first quarter.

For depreciation, no, I think there is nothing special during this quarter. We have a depreciation charge of €111 million. The point is that probably the amount that you have in mind, which is probably related to the fourth quarter, was a little bit above the average of our D&A for different reasons. But there have been some depreciation, some external depreciation, but the €111 million is depending on the exchange rate. But it’s on a normal level, and for the whole year, we should not be very much above, or we should be close to €450 million depreciation.

Martin Roediger

Thank you very much. And again, congratulations for your good results.

Thierry Lemonnier

Thank you, Martin.

Operator

We have another question from Jean-Francois Meymandi from Morgan Stanley. Please go ahead, sir.

Jean-Francois Meymandi

Hi. Just quickly, two follow-ups, one difficult, one easy. Let’s start with the difficult one. If you can help me with, in the quarter, to split the EBITDA gains with raw material gains mix, and yes, mainly those two?

And the other one that’s going to be easy, you just lowered slightly €20 million your CapEx budget for the year, can you let us know what’s behind that please?

Thierry Lemonnier

Okay. So for EBITDA, we don’t give the bridge and it would be very difficult to make the analysis that you are mentioning. What I can say however, at the beginning, we have to make a difference between EBITDA margin and EBITDA and unit margin.

And what we have been able to achieve in the first quarter, which is the result of long-term policy, is to improve significantly our unit margin through a different product mix and through new developments, especially in HPM and Technical Polymers.

The challenge is, obviously, to continue to develop that, but we have sufficient potential for the coming future to maintain this element. Now, as I said, in term of percentage, a large part will depend on the price of raw material and what will happen with the price of oil and related raw material.

For CapEx, when we indicated initially the €470 million, it was based on the fact that the amount of CapEx of last year was significantly below what we indicated. Some CapEx being delayed, some other being reevaluated, and at the end of this exercise, taking into account also the procurement gain that we are able to generate through our excellence program, we consider that now as more reliable than around the €450 million.

Jean-Francois Meymandi

Okay. And the raw material gain in the quarter, was that high or not within your EBITDA progression, just to get a sense?

Thierry Lemonnier

I think it’s relatively limited. Once again, it depends on how you consider the raw material gains. Last year, as I said, we had an exceptional gain, which was a consequence of the parachute effect related to the delay in adjusting the selling price, which is on average one month. So clearly, when the price is going down regularly, you are benefitting from this parachute effect, which was especially strong in the second and third quarter of last year.

Now for the other activities, the main drivers are Fluorogases, the progressive recovery, so it has nothing to do with raw materials. For Bostik, it’s the implementation of their strategic plan, and for Thiochemicals it is the development of our Malaysian platform. So, no, the impact of raw material is positive, but is much more positive in percentage than unit margin.

Jean-Francois Meymandi

Okay. Thank you.

Thierry Lemonnier

Thank you.

Operator

So we have another question from Patrick Lambert from Raymond James. Please go ahead, sir.

Patrick Gerard Jean Lambert

Yes, I have three questions. The first one regarding the Sunke 50-50 development, is that changing the way you’re going to report Sunke at all, or nothing would just add potentially 80 kiloton of acrylic acid in our models? Question number one.

Question number two, can you remind us, your hedging strategy, have you changed it in 2016, or are you still hedging your export driven products, just that part, with similar strategy of using the spot price, the spot exchange rate to hedge? That’s one. And then the wooding [ph] timeframe for that.

And the last one, concerning construction, I think you mentioned a few positive signs on construction at Bostik at Coating Solutions. Is there a case of finally Europe picking up in terms of construction? If you have any sign maybe in the start of Q2, also if you can comment on that? Thanks.

Thierry Lemonnier

Okay, Patrick. For the Sunke reporting, it will not change anything, so we will maintain a 50-50 joint venture reporting as it has been during the transitory period going until a decision not to exercise the option. So it will consolidate its position, so we will now be for, I will not say forever, but we will maintain this reporting, so it will not change anything, as you said, with the potential right to additional capacities, which are already existing within the plant.

Our hedging strategy has not changed. We are - as you said, hedging part of our export sales from Europe. However, the difference between the hedging rate and the spot rate is so small that it has no impact.

On construction, the market that I was referring to was not the European one, but the U.S. one, which is quite well and supported the performance of both Bostik and coating resins.

Patrick Gerard Jean Lambert

So there’s no sign of anything in Europe in terms of - even in France?

Thierry Lemonnier

At our level, not yet. I know that, at the level of other companies, which are more downstream, it’s a little bit better, but for us it’s still extremely flat.

Patrick Gerard Jean Lambert

Thank you.

Thierry Lemonnier

Okay. May be one last question?

Operator

Yes. We have question from Laurent Sandra [ph] from Bank of America Merrill Lynch. Please go ahead, madam.

Laurent Favre

Hi, Thierry. Laurent Favre from BoA. Two questions on specialty plastics or Technical Polymers for Q1, I was a bit surprised by the volume performance. So I guess the first question is, can you talk about what you’re seeing on the oil and gas side? I think you had a few projects to finish, so I’m just wondering where we are there on Kynar and Rilsan.

And then, you’re talking about strengthening alternative energy. I’m just wondering, is that in batteries or is that in photovoltaics or in both? And if it’s in batteries, is that a function of just the underlying volume growth of the industry, or is that you getting on to new platforms? Thank you.

Thierry Lemonnier

Okay, Laurent, good morning. So for oil and gas, obviously, as you can imagine, market conditions continue to remain very challenging, and we don’t expect that to improve in the short future. We have still benefited from the lag time between the time at which we see the price of oil going down and the time at which projects which are underway are achieved and are not replaced by new projects. And now, I think that, for this activity, we will reach probably during the year the lowest point.

The challenge for us has been to develop new market and new application, which is something that we have successfully done in markets such as energy and mostly, but not only, in batteries. Don’t forget also that we have also some development in light plastics developments which come also on top of that, the batteries is going quite well for Kynar.

Thierry Lemonnier

Okay. So…

Laurent Favre

Thank you.

Thierry Lemonnier

Thank you, Laurent. And maybe the last question before ending this conference call.

Operator

Yes. We have another question from Virginie Boucher-Ferte from Deutsche Bank. Please go ahead, madam.

Virginie Boucher-Ferte

Good morning. Thank you for taking my question. Two quick ones. In Fluorogases, do you have any news on the 1234yf situation? Or when do you expect the European Commission to announce its official decision? Should we infer from your decision to build a plant that you are quite confident on the outcome?

And another question on your 2017 €1.3 billion target. A few months ago, you qualified it as feasible, but nonetheless challenging. How would you qualify it today? Thanks.

Thierry Lemonnier

Okay, Virginie. For Fluorogases and 1234yf, nothing really new on this subject since the end of last year, so the case is still under study by the European Commission. It’s a secret process, so very difficult for me to give you any information. We are, as we said, confident the problem that we have is that we have no visibility on the timing, so the point for us was to be ready to produce.

Now we will see what will be the outcome when it will come, and obviously, we will wait for the decision of the European Commission. But I cannot tell you more at this stage, because I have no more visibility on the issue of this case, which as you know, we consider strong. But this has not changed.

Virginie Boucher-Ferte

And can you confirm that, if the 1234yf is included in the €100 million EBITDA improvement you’re targeting for Fluorogases?

Thierry Lemonnier

Well, first, what we have announced is just €80 million out of the €100 million, so for 2017 we are not expecting - we have not included €100 million but €80 million, you will certainly remember. And the impact of the 1234yf will be very limited.

Virginie Boucher-Ferte

Okay. Thank you very much.

Thierry Lemonnier

For 2017, yes, the target is feasible. But don’t forget that if you refer to the presentation that we have made during the Capital Market Day, that it includes some elements of environment, especially in acrylics. And I would say that it is, at this stage, still a question mark, even if we are confident to have a better environment close to mid-cycle conditions in 2017. So yes, it’s still feasible, but challenging.

Virginie Boucher-Ferte

Okay. Thank you very much.

Thierry Lemonnier

Okay. So thank you very much to all of you. And have a good day. Thank you. Bye-bye.

Operator

Ladies and gentlemen, this concludes the conference call. Thank you all for your participation. You may now disconnect.

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