Solvay, a 160-year-old chemical giant, recently spun off its specialty chemicals business, Syensqo, to focus on its core essential chemicals portfolio. While the market fixates on the company's flagship soda ash business, a deeper dive into the Q1 2024 earnings transcript reveals a potentially overlooked narrative: Solvay's deliberate downplaying of its profitability potential, particularly in the soda ash segment.

On the surface, the narrative paints a picture of caution. Solvay projects an organic EBITDA decrease of 10% to 20% for 2024, citing a challenging demand environment and double-digit price decreases in soda ash. They emphasize "re-stocking effects" contributing to volume increases, implying a transient boost. This prudence extends to CapEx, with Solvay prioritizing essential investments and dividend payments over growth initiatives.

However, a closer look suggests this caution may be a calculated strategy. Philippe Kehren, Solvay's CEO, repeatedly emphasizes that their businesses, particularly soda ash, are less cyclical than perceived. He highlights strong mid-term perspectives driven by robust demand linked to GDP growth and a tightening supply-demand dynamic due to limited new capacity additions outside China.

Here's where the intrigue lies. Despite portraying soda ash as being at a trough, the basic chemicals segment, dominated by soda ash, boasts a robust 28% EBITDA margin in Q1 2024. This prompts a crucial question: why would a supposedly struggling business maintain such high profitability?

One hypothesis is that Solvay is leveraging the current market perception to its advantage. By underplaying the profitability potential, they can manage expectations and attract investors seeking value opportunities. This allows them to implement cost-saving measures aggressively without drawing undue attention. The €19 million structural cost savings achieved in Q1 alone, combined with the accelerated digitalization initiatives and a leaner corporate structure, suggest a determined effort to enhance operational efficiency.

"**Philippe Kehren (Solvay CEO):** "Now that we have a more consistent portfolio of activities, we launched a spend review challenge to review and improve external costs such as maintenance. These are all examples of savings in variable and fixed costs. I could share many more examples but we will use our Q2 earnings call to deep dive into our various initiatives and explain how we will reach the €300 million target by 2028.""

Furthermore, consider the strategic implications. The NEOM project in Saudi Arabia, with its carbon-neutral e.Solvay process, positions Solvay as a leader in sustainable soda ash production. This, combined with the coal phase-out at Green River, Wyoming, showcases a commitment to greenifying their operations, a compelling narrative for ESG-focused investors.

The numbers further fuel this hypothesis. While soda ash prices are indeed down double digits, as Kehren clarifies, this decrease reflects both reduced demand and lower energy costs. With energy adjustment clauses incorporated into contracts, the impact of energy price fluctuations is mitigated, creating a stable pricing environment. This stability, coupled with a tightening supply-demand scenario, suggests the potential for future price increases.

Solvay's cautious stance also extends to China's new soda ash capacity. They downplay its impact, highlighting its focus on the domestic market. This narrative, while plausible, overlooks the potential for future export volumes if domestic demand falters or if Chinese producers seek to capitalize on global market opportunities.

EBITDA Margin Comparison: Basic Chemicals vs Performance Chemicals

The following chart compares the EBITDA margins of Solvay's two segments, Basic Chemicals (dominated by soda ash) and Performance Chemicals. Despite being at a supposed trough, Basic Chemicals maintains a significantly higher margin.

Therefore, while acknowledging the short-term challenges, Solvay's strategic moves, combined with the underlying profitability of its soda ash business, suggest a calculated approach. They may be deliberately downplaying their potential to manage expectations and position themselves for a strong rebound when market conditions improve.

Investors who focus solely on the surface narrative of caution may miss the bigger picture. Solvay's soda ash segment, with its high profitability and strategic initiatives, could be a slumbering volcano, poised to erupt with significant profit growth in the coming years.

"**Fun Fact:** Did you know that Solvay's soda ash is used to make the glass for your smartphone screen? It's also used in the production of lithium-ion batteries, making it an essential ingredient in the technology that powers our modern world."