Evonik Industries AG

XETRA:EVK

Earnings Call Transcript 2018-Q2

[Operator]

Good day, and welcome to the Q2 2018 earnings conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Tim Lange, Head of Investor Relations. Please go ahead, sir.

[Tim Lange, Head of Investor Relations]

Good morning, ladies and gentlemen, and welcome to our Q2 earnings conference call. With me today is Ute Wolf, our CFO, and I'm happy to pass on directly to her for the presentation followed by the usual Q&A.

[Ute Wolf, CFO & Member of Executive Board]

Thank you, Tim, and also a warm welcome from me. Thanks for taking the time to be with us today. After the press release of our second quarter results in July, I am happy to confirm our strong set of numbers and continuous progress on our 2018 agenda. Our successful strategy execution becomes more and more visible in an accelerating financial performance. In terms of portfolio management, we have taken the next step for the methacrylates divestment. A teaser has been sent out to a broader group of potential investors. The overall process is fully on track. With regards to our SG&A efficiency program, the analysis of all admin and sales functions has been completed. As a result, we will reduce headcount by up to 1,000 over the next 3 years and progress is already visible in the first 6 months of 2018 looking at our P&L, admin costs are 5% below last year's level. Following on our already good first quarter, we delivered further key improvements in all KPIs in Q2. We are seeing ongoing strong demand in our 4 growth engines: Health Care, Smart Materials, Specialty Additives and Animal Nutrition. The second quarter results also show first positive effects from our efficiency programs and structural business improvement. We achieved positive volumes in the second quarter with a good development in Nutrition & Care and Performance Materials. In Resource Efficiency, volumes, again, reached the already strong prior year level. Utilization rates are high in some businesses. Here, our new capacities coming within the next month are much needed. However, railway strikes in France had a quite pronounced negative impact on the segment volume. Worth highlighting on Slide 5 is the fact that the earnings growth is broad based across all 3 segments. This year, we will see the strongest earnings growth in our 2 growth segments, Nutrition & Care and Resource Efficiency, both clearly exceeding prior year. Within these segments, earnings growth is very broad based. In Q2, all 16 business lines within Resource Efficiency and Nutrition & Care exceeded prior year earnings. This is quite outstanding and proves our increased performance orientation across the whole organization. Alongside, earnings growth, margin expansion is similarly and mainly driven by our 2 growth segments. Now on to a very important KPI, the free cash flow. We are pleased to report substantial progress also on this end. In the usual seasonality, the second quarter bears substantial cash outflow, but still we achieved a free cash flow of plus EUR 56 million. This is roughly EUR 250 million above prior year. In the first half of the year, our free cash flow reached EUR 140 million, which is also considerably higher than in 2017. Our performance exceeds the prereleased indications of an only just positive free cash flow for the first half. The significant improvement was mainly achieved by a higher operating earnings base, efficiency gains and an increased cash awareness on all levels of the company. Before we go into the quarterly performance of each segment, I would like to highlight Resource Efficiency, which has been developing into an outstanding business in our portfolio. Our strong performance in Q2 was particularly driven by Resource Efficiency. This doesn't come as a surprise. The segment benefits from its high-quality portfolio. No single business accounts for more than 20% of earnings of the segment. Most importantly, Resource Efficiency has been Evonik's major free cash flow contributor over the last years. Based on strong core technology platforms, the segment serves the various industries with more than 100 different high-performance, environment-friendly and energy-efficient products. Let me now go into more detail of the development in the segment. In Resource Efficiency, we had seen an outstanding quarter where everything went extremely well. All 9 business lines delivered year-on-year higher earnings. This is rather exceptional as the nature and strength of this specialty segment is that slight up and downs do easily compensate each other. Capacities are running at high utilization rates to meet the ongoing strong customer demand. This is, for example, the case in silica or high-performance polymers. The situation will ease in 2019 when new capacities come onstream, for example, the new precipitated silica capacities in the U.S. by the end of this year or our PA12 powder capacities, which are currently ramping up. Looking into Q3, we expect another strong quarter as positive trends will continue. However, we will mostly likely not repeat the outstanding level of Q2. Currently, we expect a more normalized level somewhere between the Q1 and Q2 level. For the full year, we are sticking to our guidance of perceptively higher earnings around 10% above the previous year. Next is Nutrition & Care, our second growth segment. The segment is built on noncyclical trends. All end markets from nutrition, [indiscernible] health to industrial specialties offer robust and resilient growth clearly above GDP. Businesses like Health Care, Personal Care and Comfort & Insulation are more and more contributing to earnings. They are currently driving the growth of the segment. As you know, some parts of Nutrition & Care do not perform up to our expectations at the moment, but we have addressed that with dedicated efficiency programs, for instance, in Animal Nutrition or Baby Care, and there is more to come. Let's have a closer look on the quarterly details. In Nutrition & Care, we achieved another quarter of pleasing and improving operational performance focused on higher-margin products. Business optimization and cost reductions supported the segment's margin improvement. Here, earnings in all 7 business lines were up year-on-year as well. The biggest year-on-year earnings improvement came from Health Care. Utilization rates in Pharma Polymers and Exclusive Synthesis further increased as a result of a well-filled project pipeline. In Animal Nutrition, demand from methionine remained very robust. Volumes were higher compared to prior year. This was actually exceeding our own expectations after the already healthy volumes in Q1. A strong performance would continue in the second half. Consequently, we increased the full year outlook for Nutrition & Care. Year-on-year, earnings growth in this segment should be well above 5%, maybe even close to the 10%. Concluding with Performance Materials. The segment delivered another strong quarter, mostly driven by methacrylates, where the market environment remained strong. The methacrylates market will stay healthy going into Q3 as well. Based on a good first half of the year and a promising outlook for Q3, we increased our full year outlook for this segment. We are now expecting year-on-year higher earnings in Performance Materials. Thanks to our strong performance in the first half and our increased confidence and visibility for the second half, we increased our group outlook for the full year. We now expect an adjusted EBITDA above our range given so far, namely, between EUR 2.6 billion and EUR 2.65 million. Additionally, we increased the outlook for the cash flow -- for the free cash flow. Now we expect a notably higher free cash flow compared to last year. With this positive view on the second half, I would like to close our brief presentation with the reinforced confidence for our future targets. We, as a management team, are making progress on our agenda step-by-step. Strategy execution is well on track on the portfolio side with optimization measures on business line levels as well as driving cultural change and cost efficiency throughout our organization. As a result, the operating performance is improving on all levels. Thank you for your attention so far. We are now happy to discuss your questions.

[Operator]

[Operator Instructions] We will now take our first question from Paul Walsh of Morgan Stanley.

[Paul Richard Walsh, Managing Director]

My first question is, Ute, I wondered if you could give us a sense for how much of the SG&A savings, the EUR 50 million you've achieved at the half-year stage as well as the benefits from the business line actions, so amino acids and the acrylic acid JV and the synergy. So there's 3 different buckets. How much have you seen dropped through to the P&L in the first half, please? That's my first question.

[Ute Wolf, CFO & Member of Executive Board]

Okay, Paul. Is that the first or the only question?

[Paul Richard Walsh, Managing Director]

It's going to be the first, but I thought rather than rapid on, I'd just do it one by one.

[Ute Wolf, CFO & Member of Executive Board]

Okay. So I answer this question now. Okay. So I think for the SG&A part, that is very much dropping through. You see that, if you look at the full P&L statement and you see the line-by-line, how we improved in the admin cost. In the sales and marketing, of course, there is a volume element, but still the increase is much slower than the sales growth. So if you take the relation SG&A [ with ] sales we really made a big improvement already, so that is more or less then the proof of this. The synergies also make their way to the bottom line and you see that margins have improved in both of the segments where the synergies arrive. And for the specific business-specific programs, we said EUR 10 million of the cost savings in Animal Nutrition will arrive in 2018. I would say maybe roughly 48% is already in the numbers, so not the full effect for the year. And Baby Care, EUR 15 million out of these acrylic acid reshaping of the joint ventures, that comes more or less pro rata over the full year.

[Paul Richard Walsh, Managing Director]

Okay. And in terms of the cash flow improvements that you've seen year-on-year in the first half, 2 questions on that. The first is around the cash taxes, there's comment in there that there's different phasing between the quarters this year. How much do you think has been deferred into Q3, Q4, i.e., how much of the cash improvement is just the deferral or different phasing of cash payments on taxes? And the same question around CapEx, I noticed the CapEx was up year-on-year in Q2. So in terms of the phasing of CapEx, are we still looking at that number of EUR 1 billion for the full year?

[Ute Wolf, CFO & Member of Executive Board]

Yes. Our CapEx guidance has not changed, so I think we're more or less pro rata on our way there. For the cash flow, if you look at the second half, we will have a significant improvement in working capital. So if you take our working capital ratios and apply that to the additional sales, the working capital buildup has to be lower for the full year. On the other side, the phasing in the cash taxes is different from last year. We will have higher cash taxes in the second half. In the last year, it was exactly the other way around. Cash taxes this year will be somewhat higher as earnings are higher. So I think that gives you some idea where the cash is coming from in the second half.

[Paul Richard Walsh, Managing Director]

Okay. And my final question, please. Just in terms of the disposal process on methacrylates, any sense right now if you were to sell that outright to a third-party, what the kind of tax liability would be? And if you can just remind me of the use of proceeds, please?

[Ute Wolf, CFO & Member of Executive Board]

Yes, I think, for the taxes, it's too early to give precise indications as it really depends how are the structures in the end. The process is on track, so I talked about that in my speech. We started to send off a teaser. We received quite a number of interests here, but that was expected. We will now do the more detailed work for the financial book, data room, due diligence preparation, all that, and then do the next step after that. Use of proceeds, we said we will -- we invest into growth both organic and also potentially acquisitory. But really please keep in mind we are not in a rush here. We have no pressure from whoever, obviously not from ourselves to do something immediately. And a certain portion we'll most probably use to improve our capital structure. You are surely aware that we still have quite substantial pension liabilities. We funded already a dedicated part of that, but the question is if there are more optimal point on the curve and this is what we are looking at now.

[Operator]

We'll now move to our next question from Gunther Zechmann of Bernstein.

[Gunther Zechmann, Research Analyst]

Ute, you highlighted the high operating rates in Resource Efficiency in your prepared speech. Volumes in that segment were flat and the capacity constraints are kind of putting a ceiling to the growth, if you want, in that segment. So can you just outline what we can expect in H2 and also in 2019 in terms of the capacities coming and in terms of the volumes in that business? And the second one, also on free cash and the guidance of notably higher, can you help us be more quantitative around that if that's possible for this year, but also if you could give us some idea of the moving parts into 2019 around free cash and also cash conversion, please?

[Ute Wolf, CFO & Member of Executive Board]

Yes. Thank you for your question. Maybe on Resource Efficiency volume growth, what is really important to keep in mind that we have quite a notable effect coming from the railway strike in France where we could not deliver to France and this was a high-volume part of the business, so the effect is maybe relatively strong or pronounced, although you might not have read it in the newspaper. So that was really a very specific effect of Q2. If we look at the capacities, starting with silica, we are building a new production plant for precipitated silica in the U.S., which will be ramping up by the end of this year. And the plant is needed and designed to supply the local tire industry and the tire valve in the U.S.. In fumed silica, we are currently investing a double-digit million euro amount to expand our fumed silica capacities in Antwerp. It's a highly profitable investment as it's debottlenecking and also an optimization in the operations and production, so that we'll be even more profitable afterwards. Startup is targeted for beginning of next year, 2019. Additionally, we are currently ramping up our new PA12 powder capacities in Marl, so that is for the 3D printing. If we look at our acquisition from Air Products, the Pasadena plant, which was newly constructed 2 years ago, is still ramping up. In other businesses, we are also have some capacities left, for instance, in crosslinkers, we opened a bigger, an above-scale plant in China some years ago. So overall, we have a quite diligent capacity planning, so the business lines really make their master plans when they plan for future growth. They have it on their radar screen. Overall, we are enjoying high utilization rates for that, gives us some pricing power and healthy margin, everything. But the design and the planning of new capacities is on its way and that's the normal course of the business. So from that point of view, Resource Efficiency, we have seen it in the last years very well on track and very, very solid, very reliable performance, not very sensitive to economical swings or cycles. So from that point of view, we are very confident that they will go on, on this path. Free cash flow, we discussed already a little bit what drives the cash flow in the second half. Notably higher, what do we mean by that? I will put it in a very simple sentence: the number has to start with a 6 and I hope that points you to the right corridor.

[Gunther Zechmann, Research Analyst]

And any thoughts around 2019, anything -- any further levers that you can pull to improve the cash profile?

[Ute Wolf, CFO & Member of Executive Board]

If we look at our portfolio, I think we have a lot of businesses, which are already on a very good track. We have seen that in the first and second quarter of this year. We are working on all levels in the business lines and the product lines to really improve product mixes, improve efficiency and all that. So from that point of view, I think the scene is set for further stable and reliable growth in all the growth segments we have. If we look at the overall economy, we have good visibility for 2018, so -- but not much beyond like everybody else in the market and in the sector. We are really working very hard to improve the KPIs like EBITDA, EBITDA margin, free cash flow. The organization really received a wake-up call and I think you see that in the first half development, so we are now where we have to be and we will work very consistently to show the growth path and the cash generation path, which the investors expect from us.

[Gunther Zechmann, Research Analyst]

I meant, more for 2019 on the free cash flow if there's anything that you haven't corrected through yet like pensions or working capital, where you see some areas you can address that you haven't addressed yet?

[Ute Wolf, CFO & Member of Executive Board]

That is part of our daily work and this is part of our improvement program. And that is true for 2019, but also the years beyond.

[Operator]

We'll now take our next question from Christian Faitz of Kepler Cheuvreux.

[Christian Faitz, Equity Analyst]

Three questions, if I may. I'll ask them one -- not one at a time, but all in a row. First of all, the high up tensions versus the fiscal '17 level, what is behind the more than EUR 500 million rise? And then just general question. In your industrial activities, do we currently see a more pronounced summer lull or just the same old, normal seasonal August? And then final question, some of your peers in the coatings precursor market are reporting about a slow business development in deco in Europe. Do you also see this in your Additives business at present? Obviously, I'm asking this while there are few positive remarks concerning Q2, but what is the current Q3 trend there?

[Ute Wolf, CFO & Member of Executive Board]

Okay. Thank you very much for your question. Higher pensions, it's 2 influences: one is the interest rate, which dropped a little bit in Q1 already; and then we have in the mortality of what we have regular changes in the mortality rate, so that was also a smaller influence in Q2. On the industrial activities, we at this time really see a good demand, we see a good business development. So no signs of weakness that we see. Of course, in the general political and economical obviously, there are risks. I think we're all pretty aware of that, but from today's point of view, we have no signs of a slowdown in our activities. To your question in Coating Additives, we do not deliver so much into the deco paint and the deco part of that. We benefited from high demand for water, bond coatings especially in China. So from that point of view, we are not so much exposed to that part of the market.

[Christian Faitz, Equity Analyst]

Okay. So it's mostly industrial and mostly Asia, which is going well for you.

[Ute Wolf, CFO & Member of Executive Board]

Yes.

[Operator]

We'll now take our next question from Michael Schäfer of Commerzbank.

[Michael Schäfer, Analyst]

The first one, resource Efficiency, you already elaborate basically on the volume outlook potentially for the second half. I wonder, on the pricing side, you stated in the fact sheet basically that your internal raw material cost basis is slightly higher. So should we expect basically this kind of positive pricing environment we see over the past quarters to continue heading into the second half? And also related to Resource Efficiency, I wonder, looking on the portfolio part of your sales curves you reported, I noticed a rather strong EUR 82 million sales in the second quarter, 20% up. Is this all related to Huber? So shall we translate this into Huber's performance shown in the second quarter compared to the first one? This will be my first question. And the second one is on Nutrition & Care. In the second quarter, we are seeing flat pricing, reversal of trend we have seen in the first quarter. So I wonder whether you can shed some more light on where this is coming from and where do you see this evolving basically heading into the second half with potentially also the headwinds and the base effects getting lighter in methionine pricing?

[Ute Wolf, CFO & Member of Executive Board]

Okay, Michael. Thank you for your questions. In RE, I think pricing in Q2 was also supported by product mix effect, especially in our Coatings business, so that maybe is in effect to be kept in mind. On the other side, if we see raw material price increases rising, of course, we incorporate that into our pricing policy. I think, especially for RE, the overall raw material basket was more or less flat so it's a little bit different from the very much oil-linked raw material basket that you see somewhere else. So I think for Resource Efficiency, it's more really a specific mix of trends that we have seen. The sales increase was not only due to Huber. I think the numbers of Huber are known, so you can really see what is the addition coming from the first-time consolidation and what is an organic growth in that segment. Nutrition & Care pricing, let me start with methionine. Methionine was overall stable in prices. We have had some headwinds from the FX, you might remember that from our last call. So we see really stabilized prices on our methionine business. We see a good volume development, even a little bit better than expected. If you think of pricing in Nutrition & Care, of course, we had better mixes -- product mixes in personal care and household care where sometimes volumes are little bit hurt, but prices develop very nicely, also in interface and performance. And to a certain extent, of course, Baby Care has an influence on pricing as they have pass-on mechanisms for raw materials and are still a relatively high-volume business. So that is the bits and pieces of pricing -- the pricing landscape for Nutrition & Care.

[Operator]

We'll take our next question from Sebastian Bray of Berenberg.

[Sebastian Christian August Bray, Analyst]

I would have three, please, firstly is on the improvement in cash flows. Can you give any outlook on your [indiscernible] ability to cover its dividend post the divestment of MMA, which I assume will take place end of this year, start of next given the underlying improvement in group cash flows? The second is also on cash flow. To what extent do you think you have completed the easily available measures for cash flow improvement? Is this a process that, as is the case for cost savings, is likely to stretch into 2020? And lastly, more of a technical point on Resource Efficiency. The slides, Ute, as I think you mentioned said that, at most, 20% of the -- their single largest business unit does not comprise more than 20% of earnings in Resource Efficiency. Is this likely to remain the case as you ramp up for 2 new fumed silica facilities?

[Ute Wolf, CFO & Member of Executive Board]

Okay. Thank you very much. Yes, I start with the last question. I think as all other business lines in Resource Efficiency also have capacity efficiency in there, that general pattern will not change very much even if silica has new capacities. To your first question, the contribution of methacrylates to the free cash flow improvement, so our free cash flow improvement was driven by higher earnings throughout the whole group and the strict cash flow goes on all levels. So that's really is making everybody busy, not only one business line -- is keeping everybody busy, not only 1 business line here. The earnings improvement is broad based, so it's really all 16 business lines of our Nutrition & Care and Resource Efficiency. They have produced higher earnings, so that is not just 1 product or 1 business line that is driving this here. The development of the MMA business is strategically the right decision. The timing is, from our point of view, very good as we have streamlined. They'll already optimized the business. The market is in a good shape. So from that point of view, I think it's a good timing to now go and to take that step. If we look at the cash flow contribution, I'm sure you are aware of the main KPIs like sales and EBITDA margin and EBITDA, but they also consume roughly EUR 100 million of CapEx in the whole group. So from that point of view, maybe the cash flow generation is not as strong as it might seem from the outside. I have to admit we've had here where the cash contribution from this business was relatively modest and so we are actually happy, of course, to enjoy the good situation, the good cash contribution from a finance business in our group so -- but also from others like the Performance Materials, C4 chain and others like Active Oxygens, so we have some who are really also cash contributed in the group. Going into next year, it is clear where our KPIs have to be. This is our task as management to make sure that the business development in terms of sales and EBITDA, but also in terms of free cash flow is according to the expectations of our shareholders and it's clear, of course, that the cash flow should be higher than the dividend. So that's one thing we have to deal with and one thing in the end where we have reach the right level.

[Sebastian Christian August Bray, Analyst]

Makes sense. And in terms of the extent of completions, what I take from that is that your shareholders expect you to cover your dividend and therefore you would hope that you would be able to fill that in 2019, please correct me if I have misinterpreted this. And the extent of completion, so am I my right in saying that we're likely to see a steady improvement in underlying cash flow through to 2020, which happens as you pull the same levers you are currently using for cost savings?

[Ute Wolf, CFO & Member of Executive Board]

As we develop the portfolio more to high margin for more efficient organization, that, in the next step, leads to a better cash generation. We have to have an eye on our CapEx. We do that now for the last years already. You see how we manage that. We have to make sure that the CapEx spending is efficient given the growth needs we have. This is our normal management schedule that we proceed. So from that point of view, we know where we have to go and it is our task and our management task to deliver that.

[Operator]

We'll now take our next question from Thomas Swoboda of Societe Generale.

[Thomas Swoboda, Research Analyst]

Most of my questions were already asked, one left. So in terms of your leverage, net debt-to-EBITDA will be approaching 1x at the end of 2018. What is the range where you are feeling comfortable with your net debt, please?

[Ute Wolf, CFO & Member of Executive Board]

Yes, Thomas. Thank you for the question. We are not monitoring only the leverage for the net financial debt. We have to incorporate the pension debt as well because this is what the rating agencies take into consideration. If we take this total financial debt -- or this total debt, excuse me, together we are around 3x, which is I think an appropriate level for our company. In our financial policy, we monitor the rating. You might have noticed that we would set a good investment grade rating, which leaves some room for higher leverage, but not too much. So I think we're more or less at a good level.

[Operator]

We'll now take our next question from Knud Hinkel of equinet.

[Knud Hinkel, Research Analyst]

Four questions from my side, please. The first one, could you, on methionine, could you update us on your current view on future capacity increases in the industry, how you see it? Secondly, on the proceeds from the disposal of methacrylates, would you rule out a special dividend at the moment as you mentioned several other uses for the cash? And thirdly, with regard to Resource Efficiency, you posted very nice margins today. Should we regard these margins as the new kind of cruising altitude for the next couple of years? And lastly, I would also be happy if you can say something on your perception on a good level of mid-cycle margin for Nutrition & Care and Performance Materials?

[Ute Wolf, CFO & Member of Executive Board]

Okay. Thank you very much. I will shortly answer the questions 2 to 4 and then Tim will elaborate on the methionine capacities afterwards. Proceeds, MMA, I already described the use of proceeds. Special dividend is not on the list, that is a clear understanding of the Management Board and also Supervisory Board from today's point of view of that situation. Margin in Resource Efficiency, the margin in Q2 was very well -- we said everything went extremely well that quarter. Normally, in normal quarters, Resource Efficiency is more like 22.5%, 23%. I think that's a normalized margin. This is what they have proven in many, many quarters. So from that point of view, Q2 was a perfect quarter for them and this is where then the margin was. We see no peakish environment. We are developing our capacities. We see good demand in all -- and robust demand in all the sectors we deliver into. As the reach is so diverse, there is no single market where we are especially dependent on. So from that point of view, I'm pretty confident that RE will continue on the path of consistently and very reliably good growth with good margins as I described. Reliable margin for Nutrition & Care, as it is one of our growth segments, so it should be, of course, higher than it is today. They already made good progress on their way, but I think they should be also over 20 in the next years. But again, this is a step-by-step process. Performance Materials has a different pattern in their dynamics. So here, a normalized margin is more low to mid-teens and they are now a little bit above that. But that maybe gives you some idea of where normalized margin could be.

[Tim Lange, Head of Investor Relations]

Regarding the methionine capacities, I think no news here. The announced capacities are expected. The 2 new capacities for the second half of 2018 or 2019, let's see when they finally come. We have the 40 kilotons from Adisseo in Spain, second half 2018, most likely maybe 2019. And we have the 100 kt from Sumitomo in Japan similarly expected second half 2018, 2019 so far and that's what we said also in the reporting. We are seeing good volume demand, I think, in Q1 and in Q2 has surprised us even somewhat on the positive side. In the second quarter, also for the third quarter, I think we can say we are already today well covered. I think this is a good indication that also going forward demand stays healthy, although we need to see whether it stays on the good levels of Q1, Q2. Might be just customer destocking and a bit of seasonality might be a bit down in the second half, but otherwise, demand stays good, as I said, well covered for the third quarter. So also going forward, we are looking and expecting a healthy supply-demand balance to continue in that market at, again, stable prices in local currency on a more normalized price level. So all good.

[Operator]

We now move to our next question from Geoff Haire of UBS.

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

I just have a couple of questions. In your opening remarks, you made a comment that Resource Efficiency is the biggest contributor to your free cash flow for the group. Could you just give us some idea of how big a contributor it is in percentage terms? And then also just on the cash flow, looking at cash provisions, which I think you've guided to will be somewhere in the region of EUR 400 million for this year, what can we expect going further right? Is that a number that we should expect for next 3 to 4 years? Or is there stuff that you can do to bring that number down?

[Ute Wolf, CFO & Member of Executive Board]

Geoff, could you please repeat the second question. I'm sure -- I mean, we did not...

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

In your free cash flow, the cash provisions that you have -- or the cash adjustments that you have, I was wondering what level they will be at into '19 and '20?

[Ute Wolf, CFO & Member of Executive Board]

Payout from provisions, that is what you mean?

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

Yes. Yes.

[Ute Wolf, CFO & Member of Executive Board]

Okay. Yes, maybe to your first question, contribution of Resource Efficiency will be free cash flow. Of course, that differs a little bit from year-to-year, it would not be very reasonable to give you a precise number. But if you look at the nature of the business, it is not so CapEx-intense. It's really a very stable, growing business at good margins so that really drives the cash generation of that business and also the cash contribution to the group if you compare to the other segments, which are, here and there, have big investments to do so maybe that gives you an idea how the relation could be. Payout from provisions this year is not so much different from last year. There are some early retirement effects that we have, but this is more -- really a smaller double-digit amount and that will be the level also for the next years going forward. So there is not -- besides this early retirement, there is not such a big structural change in there. And of course, this early retirement payment are, to a certain extent, payout from restructuring programs of the past. So depending which kinds of form we take for our SG&A program, this might also be an influence then in the next years.

[Operator]

We'll now take our next question from Laura Lopez of Baader Bank.

[Laura Lopez Pineda, Analyst]

So first, I would like to know what is the main driver for the strong performance in the Health Care business, so is it more the CMO or the specialty polymers for delivery systems? And how are the capacities in this business? Are you also coming close to be working at full rate? Secondly, on Baby Care, one of your competitors mentioned that the situation gotten even worse. How do you see that? So I know now that now you're, of course, benefiting from the changes you are doing, but in general how do you see the general supply-demand situation and also from the demand side in the business? And then, lastly, so several in the solar technology companies are becoming very cautious expecting a significant slowdown in the automotive business in the second half of this year. Can you remind us what is your exposure to the automotive business and also how good is your visibility for the remainder of the year? Or maybe just -- is just only until the third quarter that you have your visibility? Or do you expect the full -- the full remaining part of the year to be also positive?

[Ute Wolf, CFO & Member of Executive Board]

Okay, Laura, thank you very much for your questions. I will answer your 2 last questions and then Tim will explorate on the Health Care development. Yes, Baby Care, we also addressed that several times. It is stable, but on very low levels so we see no real signs of recovery there. We do homework to improve our cost base to keep the overall level in an acceptable shape. But I can only agree to that there is no sign of improvement, and from today's point of view, that might take still a while until we see better times there. Automotive, we are not so much exposed to automotive. I think for the overall group, it's between 10% and 15%. But please keep in mind that we really deliver into very specific applications where you sometimes have a different cycle than in the normal automotive cycle if there are replacements and other things. If it comes to the tire portion of it, there is also replacement tires. So from that point of view, we're maybe not 1-to-1 exposed as it might seem at the first glance. From today's point of view, we see no signs of weakness, but, again, of course, our foresight is a couple of months. But again, from today's point of view, no slowdown on the horizon.

[Tim Lange, Head of Investor Relations]

Yes, Laura, Health Care, we are at the moment very happy with the business. I think we decided in the second quarter in Nutrition & Care, it was the biggest absolute earnings contributor in euros, so this is in the meantime the driver of the segment, if you want to. And I think happy also with the utilization rate. You know the Tippecanoe site in the U.S., which we've taken over, this is finally working very nicely on high standards, good quality levels and at increased utilization rates. At the same time, and you said it, we are expanding capacities. We have to expand capacities here. This is what we're also doing to the U.S., 2 locations. The one is the facility we've taken over from Transferra, a small acquisition in Vancouver, and the other one is the Birmingham Laboratories in the U.S. both for polymer and liposome-based dosage forms. This is mainly the drug delivery business, and here, we are expanding over the next years. Total investment is EUR 35 million. So we -- absolutely we are confident to keep this track in the health care industry. And often in this case, if we're talking about expansions or new projects, new products, we also have to keep in mind that these are often customer financed and more and more customer financed. We have to say in the past where we struggled here, but we are now seeing strong customer commitment and customer prepayments therefore new projects in that business. So summarizing it, the business we are currently very happy with.

[Laura Lopez Pineda, Analyst]

Great. And then I have one more, just like kind of a housekeeping. So the adjustments have been lower than expected in the first 2 quarters. So of course, you have less integration costs that you had last year. But is it a run rate between EUR 20 million and EUR 30 million also good for the next quarters? Or do you believe that some restructuring costs might be -- might increase and then in the second half the adjustments might be a little bit higher?

[Ute Wolf, CFO & Member of Executive Board]

Yes, I think what will come is the provision for the SG&A., but I can't give you the precise number now. Besides that you might have some smaller restructuring efforts to do as we are working on the portfolio, but that will not be to a large extent. And very honestly, we really do not plan for this as we really try to keep a good operating business and not so much rely on adjustments here. But there might be some smaller portions from restructuring in one or the other side or one or the other product line here and there as you have seen it in the past and then a bigger chunk for the SG&A program where we said 1,000 FTE. It depends which form of measure we will take in the end to have a precise number. So today, I cannot give you really precise number. That can only be booked when the headcount are also fully identified and which legal entity they are, so it's a little bit technical here. But if you look back on our Admin Excellence program some 5 years ago, we had more or less the same magnitude of personnel reduction, maybe that gives you a little bit of feeling where the onetime cost might be.

[Tim Lange, Head of Investor Relations]

[Operator Instructions]

[Operator]

We will now take our next question from Andreas Heine of MainFirst.

[Andreas Heine, Managing Director]

Resource Efficiency, you mentioned that everything went very perfect in the second quarter. Now 1 month is over in Q3. Do you see already a change in what went so well in Q2 and might not be so well in the second half? And related to this, you said that the product mix has improved and that has also increased the margin, which I would think is something ongoing. Looking not only in the product mix, but also on the segment, the business unit mix, is the improvement in the margin, what we have seen in Q2 also driven by a different percentage split of the various business units? Or was it broadly based that the margin improvement happened in the second quarter?

[Ute Wolf, CFO & Member of Executive Board]

Yes, Andreas. Thank you for your question. As I said, it was a quarter where everything went extremely well. We've given you some indication that Q3 is between Q1 and Q2, so also a good growth. In the longer line, I described what could be a normalized margin for Resource Efficiency and I think there is not so much magic around that. It has been just a very good quarter. That happens, sometimes we have it on the other side where EUR 20 million are missing here and there. So from that point of view, I hope that is enough information points for you to work on that.

[Operator]

We will take our next question from Chetan Udeshi of JPMorgan.

[Chetan Udeshi, Research Analyst]

Maybe just one, I had two, but I'll restate to one. Can you just give some color on how we should think about cash taxes for full year given that first half it was -- there was some phasing impact? I think P&L tax is more than EUR 400 million. So how should we think about the full year cash taxes on cash flow line?

[Ute Wolf, CFO & Member of Executive Board]

Yes, cash taxes, as I said, first half was relatively low. In the second half, we will have then, yes, the biggest chunk of it. Overall, for the full year, the cash taxes will most probably be higher than last year as our earnings are higher. So maybe that gives you a little bit of feeling. On the other side, please keep in mind that net working capital still has reduced significantly in the second half as well so that's more or less then counterbalancing on the cash side.

[Chetan Udeshi, Research Analyst]

Sorry, did you say that cash taxes won't be higher than last year? I didn't...

[Ute Wolf, CFO & Member of Executive Board]

Will be.

[Chetan Udeshi, Research Analyst]

Will be higher.

[Ute Wolf, CFO & Member of Executive Board]

Will be higher if the earnings are higher.

[Chetan Udeshi, Research Analyst]

Okay. And is there a strange -- is it more like maybe not as much as P&L's more than EUR 400 million, but somewhere between EUR 350 million to EUR 400 million, is that right range to look at?

[Ute Wolf, CFO & Member of Executive Board]

I think if you look at the cash taxes of last year and add up more or less the earnings growth, then you're more or less there.

[Operator]

We will now take our final question from Martin Evans of HSBC.

[Martin John Evans, Analyst of Global Chemicals]

Just a very quick question and then obviously it's always delightful and interesting speaking to you, Ute and Tim. But I'm just wondering, and you may have addressed this before, why the CEO is not on this particular call? And I wouldn't have asked that except I noticed in the September, that the management he is also not in there and the deputy is there. Is there any particular reason? Or is this just logistical complications?

[Tim Lange, Head of Investor Relations]

Martin, I think from our side, just some organizational issues. For the Meet the Management, the agenda, and we sent out the invitation, this is an operational event and you've seen it. It will be on our growth segments, Nutrition & Care, Resource Efficiency, we'll do a deep dive here and we'll have a broad audience and a broad number of participants from the segments, not only the segment heads, but also the -- some of the business line managers there. So you meet quite a few number of Evonik representatives, which also you don't know yet, so I think this is interesting. We'll be joined by the Deputy CEO, Harald Schwager, who's responsible for the operating businesses. So this is the focus for the Meet the Management and I think therefore neither CFO nor CEO are there to make it really for you an interesting day on our growth segments. And for the call today, I think that's not unusual. [ We've done it ] in the past as well. It was either CFO or CEO or both and we always have calls. You will remember that in the past where we did it only with CFO, this is a call where we had the prerelease already in July, 17th of July, so we also didn't expect it to last 1 hour. Now we're at an hour. I think there's limited news flow today, so I think that's easy as it is.

[Operator]

This concludes today's question-and-answer session. I would now like to turn it back to your host for any additional or closing remarks.

[Ute Wolf, CFO & Member of Executive Board]

Thank you. Yes, ladies and gentlemen, before we come to the final end of today's call, I would like to invite you to our Meet the Management on September 14. You should have already received the invitation via e-mail last week. As Tim said, Harald Schwager as well as our growth segment heads, Reiner Beste and Claus Rettig, are looking forward to meeting you in London and explaining growth stories of their segments. Thank you very much for your attention today, and goodbye.

[Operator]

This concludes today's call. Thank you for your participation. You may now disconnect.