Evonik Industries AG

XETRA:EVK

Earnings Call Transcript 2019-Q1

[Operator]

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to today's first quarter 2019 earnings conference call. [Operator Instructions] I must advise you that this conference is being recorded today, on the 7th of May 2019. I would now like to hand the conference over to our first speaker today, Tim Lange. Please go ahead, sir.

[Tim Lange, Head of Investor Relations]

Thank you very much, and welcome. Today's second call of course, so we will keep it short. With me, as usual, are Christian and Ute. And I will hand over directly to Christian for the short presentation.

[Christian Kullmann, CEO & Chairman of the Executive Board]

Highly appreciated. Thank you, Tim. And also warm welcome from me. Thanks for taking the time to be with us today. I'm aware that this is a busy day for you with 3 of our peers also reporting. We'll, therefore, not waste any time, start our presentation and keep it as short and crisp as possible. That is why on Chart 3, we condensed our consistent strategy execution over the last years in one slide. Step-by-step, we deliver on our strategy by actively shaping our portfolio towards more resilience and less cyclicality. I think it is fair to say that we have achieved quite some progress over the last 2 years. The next puzzle piece is the start of our Veramaris plant for omega-3 fatty acids. Ute and I, we're looking forward to opening the production facility in Blair, Nebraska, in July. To this joint venture with DSM, we are bringing in 2 important elements, our rededicated production facility in the U.S. and as well as our long-standing experience in large volume fermentations.Another major block of progress is our SG&A program. From the targeted 1,000 head count, 350 have already left the company, very visible also in the reported number of employees on group level. By the end of this year, 550 head counts will have left the company. Corresponding agreement with the employees have already been signed. That means, we are already more than halfway to our goal, and we're confident to deliver the rest as well by the end of 2021. Now into the numbers for quarter 1. With a solid start into the year, all 3 segments performed fully in line with our expectations. In our growth segments, we still have the organic growth of combined 3%, it shows that despite macroeconomic headwinds and the slowdown in some end markets, we can grow even when times are tougher. Our adjusted EBITDA on group level was down slightly to EUR 539 million. The decrease is mainly due to [ well reflect ] one-offs like the ramp-up costs for our new methionine plant, our limited raw materials' availability in our C4 business. Despite lower earnings, we increased from -- we increased free cash flow by more than EUR 100 million compared to 2018. That brings me to our guidance. The sale of the rather cyclical MMA business enabled us to increase our outlook to an at least stable adjusted EBITDA. Free cash flow -- for free cash flow, the good Q1 shows that we're well on track to deliver significantly higher free cash flow on a full year basis. In quarter 1, in our cash-out for net working capital as well as the start of our CTA reimbursements supported the free cash flow. And also pre-IFRS effects and after interest payments, our cash generation was really strong in quarter 1, visible also in net debt level. This will be true also for the full year. We will cover our dividend also excluding IFRS effects and including interest payments. Let me now hand over to Ute. She can much better than I could give you some more details on the individual segments.

[Ute Wolf, CFO & Member of Executive Board]

Thank you, Christian, and welcome also from me. Starting with Resource Efficiency. The pure specialty chemicals portfolio again demonstrated its resilience with higher year-on-year earnings driven by strong pricing power despite an overall weaker macro environment. Although raw material prices were rather stable year-on-year, virtually all business lines were able to increase selling prices. This is definitely a strong achievement on the back of our superior product offering and close customer relationships. In a lasting period of high-capacity utilizations for most of our products, the uprising effect overcompensated slightly lower volumes. Softer volumes mainly stem from a subdued demand in the automotive and coating industries. However, demand elsewhere, for example, for PA12, for our broad exposure in silica remains on high levels across Q1. Also we are very pleased with the good start of our crosslinkers business. This was driven by a particularly strong demand for composite applications in the wind energy market. The other growth segments, Nutrition & Care, is continuing its resilient performance in most businesses and end markets, especially, volumes rose significantly. This is just another proof of our excellent and consistent market cultivations, both strategically and operationally. Adjusted EBITDA was down year-on-year mainly due to ramp-up costs and the expected low earnings contribution of Health Care at the start of the year. Further taking into account a negative price effect from methionine of around EUR 40 million, it is clearly visible that Nutrition & Care is growing in its resilient end markets like Nutrition or Personal Care. Efficiency measures are further supporting earnings. The start in Performance Materials was impacted by raw material constraints in our C4 business, impacting segment EBITDA by around EUR 10 million. Operationally, lower MTBE prices as a result of the weaker European gasoline market mitigated higher butadiene prices. By contrast, functional solutions accounting for one quarter of segment sales benefited from an increased demand for alkoxides and cost advantages from the merger of the 2 respective business lines. Let's take a closer look at our outlook for 2019 on Chart 11. Now excluding the most cyclical MMA business, we expect our adjusted EBITDA to be at least stable in 2019 compared to our guidance of slightly lower to stable before. Looking ahead into Q2, we are looking forward to a clear sequential step-up in earnings. The good news here is that the step-up should be driven by all 3 segments. For both growth segments, we expect slightly higher earnings in Q2, sequentially. For Performance Materials, earnings should be clearly up sequentially as the raw material constraints are already solved at the end of Q1. Free cash flow guidance remains unchanged and so do the major moving parts for 2019. We will cover our dividend in 2019 regardless of what level you are looking at, so also excluding the IRF -- IFRS accounting effects and including interest payments. That closes our brief presentation. Thank you for your attention so far. We are now happy to discuss your questions.

[Operator]

[Operator Instructions] The first question comes from line of Michael Schäfer from Commerzbank.

[Michael Schäfer, Analyst]

I have 2 questions from my side. And on the first one is on Animal Nutrition, primarily on China. One of your peer reported a strong demand on the poultry side as a result of the swine fever we have there and the dropping production on the pork side. I wonder whether you can shed some light on what you have seen in the first quarter as a result of it. And maybe also a sneak preview into the second quarter in Animal Nutrition, primarily in China. What do you see there on the volume side? And the second question is on free cash flow. Strong start into the year, congrats for this one. I wonder whether there are -- or whether they can provide some insights, whether there are some extra effects we should take into consideration throughout the year, whether there are some tax payments -- cash tax payments which may perform differently than in the past apart from those well-known CTA and IFRS effects, anything we should take care of.

[Ute Wolf, CFO & Member of Executive Board]

So Michael, thank you very much for your question. I'll start with free cash flow. So for the full year, it's some of the drivers that you already see in Q1. We will have a better contribution from working capital. You might remember that we had a buildup last year which was partially already turned around in Q4, but this is still true for Q1 and Q2. So overall, working capital contribution should be positive in this year -- in the free cash flow -- overall free cash flow statement but keep in mind, this is somehow a reversal of last year. Then we have the reimbursement for our pensions, we will have some first small contributions from the PeroxyChem acquisition. We have high cost discipline, of course, on all levels. Cash taxes should be somewhat higher than last year so overall, neutral to slightly more challenging. We might have some cash-out for our efficiency programs. SG&A and Oleo 2020, that could also be a double-digit amount. And this is especially true for next quarter, we will have higher bonus payments compared to last year as the bonus for 2018 was very good, as the year was very good. So these are components for the free cash flow for the full year.

[Michael Schäfer, Analyst]

Second question on methionine and the China swine flu.

[Ute Wolf, CFO & Member of Executive Board]

Yes. We had some support from the swine flu as well. You might remember that 80% of our Animal Nutrition products in methionine goes to poultry. So we had some support here, we have the good volume development throughout the whole Animal Nutrition business, the whole methionine business. I think that is something we now are reporting for many, many quarters. We have announced the price increase in April that will more or less then be supporting our earnings in Q3 so as Q2 is already booked. So this is what we see, especially in China, so good volume development and some support, of course, from the switch to poultry caused by the swine flu effect.

[Operator]

The next question comes from the line of Laura Lopez from Baader Bank.

[Laura Lopez Pineda, Analyst]

I have also a question on methionine regarding the ramp-up of the new plant. So I remember that in the past, you have mentioned that you'll be very careful on how you will bring these new volumes into the market, and as there's also other capacities starting up this year. So can you maybe walk us through how will this happen when the plant is ready in mid of the year? Are you going to do a turnaround in some other plants? And then secondly, in your presentation, you highlighted some destocking on MTBE. Do you have a sense somehow the inventory levels is at the moment? And if possible, can you comment not only on MTBE but in general for your other chemical businesses? In Resource Efficiency, how the inventory levels or visibility is at the moment?

[Ute Wolf, CFO & Member of Executive Board]

Okay, Laura. Thank you very much. I'm not sure whether I got your second question right. So I'll start with the first one, and then we'll see if my answer for the second one is sufficient.Methionine ramp-up, we have a long data experience organizing a ramp-up efficiently and smoothly. Our new capacity will start production, middle of the year. We will manage our global capacities accordingly so that has been prepared many quarters in advance. So we have maintenance due in other facilities, and we will manage that accordingly so that from our side, we will have a reasonable and efficient ramp-up in our new capacity.The MTBE inventory levels and pricing levels are expected to normalize again and go up somewhat in Q2.

[Laura Lopez Pineda, Analyst]

Okay. And then the other part of the question was if you also maybe have a visibility on the inventory levels for your other businesses. So in Resource Efficiency or also in Performance Materials, if you have any visibility on how the -- in the supply chain, how the inventory levels at your clients are?

[Ute Wolf, CFO & Member of Executive Board]

We have the normal visibility like 3 months ahead. That has not changed very much in the recent quarters. We see some effects from slowdown in auto and coatings industries in the last quarters already, so I think that will led on the macro side of what we can report on.

[Operator]

The next question comes from the line of Gunther Zechmann from Bernstein.

[Gunther Zechmann, Research Analyst]

Can you just run me through your assumptions for your increased full year guidance, please? To what extent do you factor in that pickup in demand in the second half of the year other than your comments on Health Care, I suppose. Or can you achieve the earnings growth through internal levels and also taking into account easier comps in the second half of the year, Rhine water impact, et cetera. So can you just run us through the sensitivities to that new guidance, please?

[Ute Wolf, CFO & Member of Executive Board]

Yes. I'll go through that segment by segment, Gunther, if I may. So we had a solid start into 2019, fully in line with our expectations. We have already delivered good progress on our initiated self-helping measures at Oleo 2020, adjust 2020 in our Nutrition & Care. And also our SG&A program, I think Christian has very much illustrated on that. What is now not anymore part of our guidance is the more cyclical MMA, I think that's a main driver for that. If you look at the segment Nutrition & Care with slightly lower earnings, that's more or less comparable to full year guidance. Animal Nutrition, we expect an ongoing strong volume growth for this year, again, prices might come down a little bit also in the next quarter plus we have the ramp-up cost. Health Care, a somewhat slower start in the year. We said with the rollover of a big contract, they will be more likely flat year-on-year. Care solutions' on a very good track, so years of the restructuring and repositioning is really bearing good fruit. And we see also some pickup in our Comfort & Insulation, which also had a somewhat slower start. So that is more or less the picture with Nutrition & Care. For Resource Efficiency, the underlying growth trends are fully intact. High-performance polymers is expected to continue, it's a very good [ line ] for us. Crosslinkers had a good start into the year. Silica had a solid start into the year, and here especially with the ramp-up of our new capacities, we expect further improvement throughout the year. Coating Additives more moderate growth expected, and Oil Additives are expected to be lower as they have within the segment the highest auto exposure. PM, now with MMA not included anymore, is stable expected year-on-year. Still have some heavy turnarounds in the [ sika ] industry so that might bring some period of tight C4 supply. But again, naphtha spreads was last year on average level. This is also what we expect for this year, MTBE to be discussed. So that is more or less the constituents. Well, if you look at the segments, overall, we'll have some contribution from our SG&A cost cutting, so that overall stand us up to our guidance.

[Gunther Zechmann, Research Analyst]

Great. And then if I can just sneak in a quick follow-up. Could you give us some flavor on the autos industry, particularly in China, please? More for your order books and how you see that develop throughout the year.

[Christian Kullmann, CEO & Chairman of the Executive Board]

Okay. Gunther, talking about China, it is given that overall, we do see a solid growth in the economy all over, which has not impacted us. But on the other side, the particular in the automotive sector, there is weaker demand of course. But we do not see that it's something which is touching us in a harsh way. So overall, we see a solid development -- positive developments are visible, for example, in the crosslinkers and in PA12. And on the other side, there is somewhat more cautiousness of our customers, therefore, that weaker demand in the automotive sector. But all over it is for Evonik, it is very well compensated on group level, but that is what we see as of today.

[Operator]

The next question comes from the line Chetan Udeshi from JPMorgan.

[Chetan Udeshi, Research Analyst]

Just a couple of questions. Firstly on -- just on pension provisions where -- because of the lower discount rate, there has been an increase in pension provisions. Just to confirm that it doesn't change that $100 million benefit that we have from lower CTA payment going forward. That's number one. And number two question is -- I mean, you raised the methionine prices or at least have tried to raise the prices. Now given your outlook, just to confirm, how do you think second half prices come through in terms of methionine? Just to be clear here, given that you yourself will bring some new capacities in second half. So are you assuming stable prices from where we are right now? Or have you incorporated some caution on maybe for the price declines as you ramp up your own methionine plant?

[Christian Kullmann, CEO & Chairman of the Executive Board]

Thanks a lot for the question. Let me start with the Animal Nutrition. We do have experienced that there's a really good demand, and it is ongoing -- with ongoing strong volumes in all regions all over the world. And having said this, as a consequence, it was announced from us -- we have announced a price increase of 10 -- 7%, which will have an immediate effect. Nevertheless, on the other side during the ramp-ups, there is some competitive pressure. So for the next quarter, prices will still be given a check slightly below the Q1 levels. But due to our contract structure, the price increase expected, which will help to stabilize the segments -- the segment results in quarter 3 and in quarter 4. And I guess you would be aware of the fact that, for example, a competitor like NOVA that they have announced not to build up their new capacities in the U.S. And having the long view, I think that is what will be really helpful for the development of this particular market.

[Ute Wolf, CFO & Member of Executive Board]

Yes. And then on the pension reimbursement for CTA, as the [ MPB ] does not -- the change in [ MPB ], it does not change the pay structure. Our CTA reimbursement schedule remains fully intact.

[Chetan Udeshi, Research Analyst]

Understood. And maybe just one follow-up on Resource Efficiency where prices have remained pretty good in Q1 despite all the weaker end market. Is there some contract structure where I know you maybe have some lag, et cetera, or you think this -- it reflects the underlying momentum overall in the business and not necessary some lag effect from your annual or quarterly contract structure?

[Christian Kullmann, CEO & Chairman of the Executive Board]

First of all, I do really believe that the strong pricing power like we've shown it in the Resource Efficiency segment is still very true. Example for specialty chemicals and for the quality of our products, particular in this part of our portfolio. Having said this, I hand over to Ute.

[Ute Wolf, CFO & Member of Executive Board]

Yes. I'm afraid there's not too much to add to this statement. So the price increases have been really throughout the businesses in our -- in Resource Efficiency though, and I think it is more result of our consistent pricing policy, work on pricing. If you look at raw materials and energy prices, they have not risen so much lately, so this is really some very good and very visible proof of our strength with the product and marketing.

[Operator]

The next question comes from the line of Thomas Swoboda from Societe Generale.

[Thomas Swoboda, Research Analyst]

I have 2 questions, please. Firstly, a follow-up on methionine. Prices are obviously much lower than a couple of years ago, and you're trying -- and you are taking out costs and you having the new plant in Singapore. My question is in case prices shouldn't rebound, will you be able to generate satisfactory profitability in the methionine business, in case prices shouldn't rebound with all the measures that you're taking? Or do you really need higher prices in the in the midterm to be happy with methionine? So that was the first one. The second one on Performance Materials. You mentioned in your remarks that the overhead costs improved now with the business being on a stand-alone basis. My question is, is there more to come or was this just a one-off effect in the first quarter of this business being on a stand-alone basis?

[Christian Kullmann, CEO & Chairman of the Executive Board]

Thomas, first of all, you know, being the CEO, I do really like seeing enhancing and lift up prices in all of our businesses. Having said this, touching the methionine price, one thing you can take for granted. And one thing is that certain that we will make sure, particular by our cost -- specific cost measures in the segment in this business, that we will be the cost leader, and therefore, the question -- I will answer the question in a nutshell with yes.

[Thomas Swoboda, Research Analyst]

So even in Q1, you were reasonably happy with the returns in methionine? Is that how we should read it?

[Christian Kullmann, CEO & Chairman of the Executive Board]

Yes, yes, yes. But I would be more happy if the prices would increase. But asking -- answering your question, it is yes. Because it is key is and key will be to become and to be, and to make it better our position as a cost leader. And that is what is key. Reducing costs, fostering our sales forces and in such a mixture, it is crystal clear that we are going to run the businesses. But we are prepared.

[Ute Wolf, CFO & Member of Executive Board]

Okay. Now to the cost basis in Performance Materials. Performance Materials has undergone quite some efficiency improvements before and has taken, of course, the occasion now to reconsider everything to really see how they can have a lean setup. One thing is the merge of the 2 business lines but also in their sales organization, in their more general administration organization, they really are looking for a very lean setup. I would say the main part is already done, but of course, they will continue to work on this even and as part of the overall group initiatives. So I would say, the biggest step is behind us but of course, there is still some potential to come.

[Operator]

The next question comes from the line of Andreas Heine from MainFirst.

[Andreas Heine, Managing Director]

Maybe only 2. One is on Resource Efficiency. So you have already said that Q-on-Q it will better but it will not meet the last year's very high level in the second quarter. Last year was due to mix effect. Could you be -- please a little bit elaborate why the mix this year might be not as variable as last year? And how we should see this segment going forward into the second half? So is that just a mix effect in the second quarter and after that, we will see rising earnings for this segments again? And the second on Nutrition. Will this -- will there be startup costs for this Veramaris joint venture? Or is -- let's say, due to the fact that you use switched reactors and facilities from the lysine to the new omega-3 product? Will that avoid any ramp-up costs?

[Ute Wolf, CFO & Member of Executive Board]

Okay. On Resource Efficiency, Q2 was really outstanding in last year. If you compare the seasonality of the quarters, you will clearly see that. So that will be -- not be repeated most likely this year. As said, a lot of these businesses have really started very well into the year for some, like silica or even the Coating Additives, we see some further improvement throughout the year that will be, I think, starting in Q2. High-performance polymers is on a good track with very good development, very strong pricing power as well. Crosslinkers with a very good start into the year. If you look at the seasonality between Q1 and Q2, of course, Chinese New Year is in Q1, so for some of the businesses that is a seasonality aspect as well. So this is more or less what will drive the Q2 development for Resource Efficiency.

[Christian Kullmann, CEO & Chairman of the Executive Board]

Andreas, last week, Feike, you know, Feike Sijbesma from DSM, has struck my line and given to me that he's so excited being together with Evonik in July to open the Veramaris plant in Blair, Nebraska. And having said this, the construction of our Veramaris site at our chemical park in Blair is definitely on time and on budget, and we will start the production as we have announced in the summer of this year. It is given that the benefit of it will be really outstanding and our experience to see our -- the first experiences we have got with the market tests, are in as such that we are really confident to get here a brilliant business within our portfolio. That is crystal clear. Nevertheless, we have some ramp-up costs of around EUR 10 million, which will mitigate the earnings this year. But I guess this was the answer to your question.

[Operator]

The next question comes from the line of Geoff Haire from UBS.

[Geoffrey Robert Haire, Managing Director and Equity Research Analyst]

Just wanted to ask this. Could you just confirm that there will be another EUR 15 million ramp-up costs to the Singapore methionine plant in Q2 and then there will be no more in the second half? And also from the implication of your outlook, I assume you're seeing EUR 80 million per quarter as a sustainable EBITDA level for Performance Materials, is that correct? And then finally, just on defining strategy. As well as Sumitomo obviously NHU are planning to bring in some large amounts of capacity potentially in China. If that happens, would you consider cutting some of your capacity to tighten the market in the medium term?

[Ute Wolf, CFO & Member of Executive Board]

Okay, Geoff. Thank you for your questions. I'll start with the first ones as they are relatively forward to answer the EUR 15 million ramp-up costs of Q2, that is what we see and as the facility is starting up, no further ramp-up costs are expected. The level of $80 million per quarter, just a given seasonality that we have is also a fair assumption for our Performance Materials.

[Geoffrey Robert Haire, Managing Director and Equity Research Analyst]

Yes.

[Christian Kullmann, CEO & Chairman of the Executive Board]

Okay. I take the second one. It is publicly available knowledge that, for example, several peers are reporting losses at current price levels. And as you know, I guess the cancellation and more disciplined expansion plans at current price levels where we have through more balanced supply/demand situation going forward. So that is the case in this situation.

[Geoffrey Robert Haire, Managing Director and Equity Research Analyst]

But sorry, what I'm asking is would you consider cutting capacity if needed to be to tighten the market to increase prices?

[Christian Kullmann, CEO & Chairman of the Executive Board]

You are informed that we do really have to close to brilliant volume growth. And having said this, there's -- for Evonik and for our methionine capacities, no need to think about that to give it a second thought.

[Operator]

The next question comes from the line of Alexandra Thrum from Morgan Stanley.

[Alexandra Thrum, Equity Analyst]

Most of my questions have actually been answered, but just a quick one then on PeroxyChem. Obviously, this isn't included in your current guidance. But if we were to assume, let's just say, it's flat. I'm not asking to -- you to confirm that, but let's just say that $60 million of EBITDA in FY '19, would we then assume, if it closed at the end of Q2 beginning of Q3, $30 million of EBITDA in the second half, or is there some seasonality in that business?

[Ute Wolf, CFO & Member of Executive Board]

No. I think that's a fair assumption.

[Operator]

The next question comes from the line of Sebastian Bray from Berenberg.

[Sebastian Christian Bray, Analyst]

I would have 2, please. One is on PeroxyChem, the other is on the phasing of CapEx throughout the year. Firstly on PeroxyChem, am I right in saying that the EBITDA of this business could actually be fairly up fairly substantially from 2018 levels looking at what has happened to hydrogen peroxide prices so far this year? And if so, could you perhaps give us a feel for what that number might be?And the second question is on CapEx phasing. How exactly do you think about the phasing of CapEx through the year in terms of your free cash flow guidance? Is there likely to be a material step-up in Q2 or Q3? Or are we roughly looking at even levels through the year?

[Christian Kullmann, CEO & Chairman of the Executive Board]

Before -- just before closing, it is hard for us to comment on your questions in detail. But due to your question, it is crystal clear that we are really happy having the PeroxyChem bought last year. And we are confident -- really confident on getting a strong EBITDA machine in our portfolio in, and that is what I can say as of today to this. I ask you please for your understanding because it is a little bit difficult to comment in detail before closing.

[Sebastian Christian Bray, Analyst]

Understood.

[Ute Wolf, CFO & Member of Executive Board]

Yes. On CapEx, the CapEx is relatively evenly spread over the quarters. Q4, maybe is the somewhat higher CapEx spending if you look at the past. What we do to bring down CapEx is on one end, of course, disciplined allocation and -- of resources and spending. On the other side, we have some contributions from customers or other partners which also then help financing our CapEx projects. That will also have a good impact on our cash flow for this year.

[Sebastian Christian Bray, Analyst]

So just as a quick follow-up. Ute, can I ask on the methionine comment you made earlier that there was a $40 million impact in Q1? Does that refer -- I assume that refers to EBITDA, no? Or the EBITDA?

[Ute Wolf, CFO & Member of Executive Board]

Yes. The price of [ EBITDA ].

[Operator]

We are not taking any further questions. Dear speakers, I hope -- I will hand over to you.

[Christian Kullmann, CEO & Chairman of the Executive Board]

Ladies and gentlemen, that closes our call today. Thanks a lot for your attention, and take care. Goodbye.

[Operator]

That does conclude our conference for today. Thank you for participating. You may all disconnect. Have a nice day.