Evonik Industries AG

XETRA:EVK

Earnings Call Transcript 2018-Q4

[Operator]

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to today's Q4 full year 2018 earnings conference call. [Operator Instructions] I must advise you that this conference is being recorded today, Tuesday, the 5th of March 2019. I would now like to hand the conference over to your speaker today, Tim Lange, Head of Investor Relations. Please go ahead, sir.

[Tim Lange, Head of Investor Relations]

Hello, and good afternoon. Welcome to our Q4 Earnings Call. With me today are Christian Kullmann, CEO of Evonik; and Ute Wolf, the CFO of Evonik. And as we have quite some topics last night and today, I think we'll start directly with our short presentation, followed by the usual Q&A.

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

Of course, we have. Thank you, Tim. And also warm welcome from me. Thanks for taking the time to be with us today. We have some quite busy days behind us, but we are happy that we successfully signed our MMA deal yesterday afternoon. For today, and especially for the 2019 outlook, this was prepared before we knew the exact timing of the deal, so I beg your pardon that the outlook statement didn't include the MMA business. We'll report it as discontinued operations from Q1 onwards. So with Q1, we will also provide an updated outlook statement without the MMA business. So far with the housekeeping remarks. Let us now have a look what we have achieved, what we have achieved over the recent months and what are our main topics today. At first, 2018 was a successful financial year for Evonik. We delivered on our promises even despite a more difficult environment towards the end. Secondly, we addressed one of our main challenges: cash generation. We are not only proud of strong improvement in 2018 but also of the solution for one of our main structural issues, the cash out for pensions. Ute will talk about that in a second. And finally, as announced yesterday, the sale of the MMA business. This is a major step in our portfolio transformation towards a best-in-class specialty chemicals portfolio and another proof point of our consistent strategy execution, reduce the cyclicality and complexity of Evonik by exiting a rather mature and capital-intensive business. And the valuation at 8.5x EBITDA, even above our current trading multiple, is pretty attractive for a rather cyclical business. This is the result of a well-prepared and timed divestment decision. Over the last years, we have successfully restructured the business, and we have set up a fully integrated so-called Verbund structure with downstream products and specialty solution. This made it attractive for a broad range of interested parties. Finally, in 2018, it was a perfect timing to start the divestment process with an improved cost base and at the peak of the cycle. All these efforts finally paid off and led to the attractive margin. This deal, ladies and gentlemen, is not only attractive from a stand-alone perspective. It is another proof of our successful portfolio transformation story. Our target is to establish a more balanced and more specialty chemicals portfolio with improved financial metrics. Looking at the financials of our 4 acquired businesses. They are all stable businesses with GDP-plus growth and EBITDA margin above our target range of 18% to 20%. And also from a cash perspective, these businesses are very attractive, with cash conversion rates of up to 60%. I think we all agree that the MMA business does not deliver KPIs on this stable, attractive level over the cycle, but we achieved a comparable valuation for the divestment as for our acquisitions. The financial strength of our acquired businesses also becomes very obvious on the next chart. Our 4 combined acquisitions show a higher, and over the cycle, significantly more resilient margin profile, north of our target range. MMA was clearly more volatile and on average, below our margin target range. So we are delivering on our specialty chemicals strategy by actively shaping our portfolio towards more resilient and less cyclicality. And last but not least, the proceeds offer financial headroom for deleveraging our balance sheet and further targeted growth. With that, now let me hand over to Ute for the 2018 financials.

[Ute Wolf, CFO & Member of Executive Board]

Thank you, Christian, and welcome also from my side. 2018 was a successful year for Evonik. We delivered on our promises. Operationally, we improved on all of our main financial targets and in some cases quite significantly. Free cash flow is one of them, if not the most important one for us. So we are proud to report further progress here with a 30% increase in absolute terms and a clear improvement of the cash conversion ratio. And it is worth highlighting that we achieved our earnings guidance, which we increased at midyear despite the more challenging macro environment and the special situation on the Rhine towards year-end. This was also supported by our efficiency measures. Most important for us when it comes to cutting costs, the progress must be visible in our bottom line numbers. That is what counts in the end. So if you take a look at the P&L lines targeted by our SG&A program, the progress is obvious. Administration costs declined in 2018, and also selling costs moved into the right direction despite the higher logistic costs from the Rhine water levels. Also on the R&D side, Sir Harald Schwager is bringing in much effort and experience. We have made good progress. Leading in innovation does not necessarily mean leading in expenses. We clearly focus the money on our 6 defined innovation growth field. We aim to be more efficient and quicker to market when it comes to innovation. But it is important that we do not cut on future growth prospects here. Hence, it is good to see that sales with new products increased steadily. To give you some color, our membrane business doubled size in 2018, and the CAGR in our 3D printing products was over 100% in the last 5 years. Let us now take a look at the strongly improved cash generation in 2018. We did not only grow free cash flow significantly in absolute terms. Finally, we came out closer to the 7 than the guided 6. Also, our cash conversion as a rate of free cash flow to EBITDA improved to almost 26%. Besides the better operating performance, a high cash flow growth throughout the whole organization as well as our efficiency measures contributed to this improvement. The progress is even more remarkable when you take into account the cautious customer behavior and the logistical challenges on the Rhine towards year-end. This led to an outflow of working capital which was above our expectations. This headwind will turn into a tailwind for 2019. Some support in 2018 arose from lower cash off of taxes. This line item will normalize in 2019. Let me now give you a brief overview of the performance of our operating segments in the fourth quarter. Starting with Resource Efficiency. In 2018, for the fourth year in a row, the segment delivered higher earnings and continued to improve its margin to a now excellent level of 22.6%. The trend of strong pricing continued, and also volumes turned positive again in Q4 despite the just mentioned weaker macro environment. The start into the year was quite solid, so overall, slightly higher earnings in 2019 should be possible. However, not with the excellent growth rates of the last year.Moving on to Nutrition & Care. After some years of heavy pain, 2018 was a step in the right direction for Nutrition & Car,e, although the segment is not yet where it is supposed to be. In Q4, Nutrition & Care had very strong volume, driven by Animal Nutrition and Baby Care. At the latter, demand slowly but steadily improved, admittedly from a low base. On the other hand, the industry-leading businesses, especially the additives for PU foam, felt some cautious customer behavior in China towards year-end. For 2019, we expect slightly lower earnings in Nutrition & Care. Like in 2018, most businesses will grow earnings; but with the arrival of new capacities, we expect the average methionine price to be lower year-on-year. And we will see ramp-up costs of around EUR 30 million for our new methionine plant in the first half of this year. Concluding with Performance Materials. 2018 was a successful year for Performance Materials despite some challenges in the second half. Spreads in our C4 business were rather on average levels throughout the year, but earnings were impacted by the situation around the low Rhine water. This is predominantly visible in the Q4 results, with a negative earnings impact of around EUR 20 million for the quarter. For 2019, we have the expected margin normalization in MMA and PMMA, so overall and not surprisingly, earnings will decline significantly on the segment level. Now to the special topic of pension management. Let us take a more detailed look at what we have done to tackle our above-average pension cash out. We started to address this topic already a couple of years ago. Evonik had set up a contractual trust agreement, or short CTA, in 2010 to mitigate the volatility of pensions on the balance sheet. Until 2015, this piggy bank was steadily filled up with top-ups, and the better-than-planned asset performance constantly enhanced the overall asset base. This helped to reach the targeted CTA funding ratio of 70% 2 years ahead of our initial planning. So we are able to start reimbursing pensions out of the CTA already in 2019. More practically, this means that the pension payments so far done by Evonik will be partly taken over by the CTA. This will lead to a significant relief in pension cash out of around EUR 100 million per year from now on and each and every single year. To wrap it up, we addressed one of our main free cash flow challenges and reviewed our pension setup. We have found a smart solution to decrease the cash burn, and that sustainably improved free cash flow by around EUR 100 million. And to be clear, all without any additional top-ups of funding, also no need to invest any proceeds from the MMA divestment. With that, back to Christian for the outlook.

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

Thanks a lot, Ute. 2019 will be a year with less macro tailwind and most likely lower overall growth rate. But nevertheless, we are looking ahead with confidence for good reasons. Our portfolio will show that it is already more resilient and less cyclical than in the past. In our 4 growth engines, the growth trends are fully intact. Despite the more challenging macro environment, we expect year-on-year earnings growth in more than 3/4 of our business lines. Our challenges are clearly addressed, and self-helping measures will contribute to improve our earnings base. As already mentioned, our official outlook statement for 2019 still includes to the MMA business. This means around EUR 150 million lower earnings only from the expected normalization in MMA. Nevertheless, we are confident to achieve only slightly lower if not stable earnings. Today, 2 months of the year are already behind us; and we have seen a very solid start into the year, actually slightly above our own expectations. So as of today, if I had to give a more specific indication for our outlook statement, we would see ourselves closer to a stable than slightly lower earnings level. But probably more important than our earnings outlook, we are targeting another significant improvement in free cash flow. As you know, this is in the apple of our eyes. It goes without saying that this will be more than sufficient to cover our dividend. And to be very clear, that will still hold true after the divestment of the MMA business already in 2019. To wrap it up. Yesterday's deal was a milestone in our portfolio transformation. 2019 will be a more challenging year, but we are pretty well prepared to deliver on our promises also in a more difficult environment. And the start into the year was quite solid and more than underpins our guidance. So ladies and gentlemen, thank you for your attention so far, and we are now happy to discuss your questions.

[Operator]

[Operator Instructions] Your first question comes from the line of Gunther Zechmann.

[Gunther Zechmann, Research Analyst]

I going to start with 2 questions. Firstly, when I look at your current portfolio, then it's still very complex with 17 business lines. From the cyclical and more commoditized business that now remain, how integrated are they? And how complex would it be to perform a carve-out? And also, what are your priorities for those businesses over 2019? That's the first one. The second one on free cash. How much can you just quantify us -- or help us dimensionalize what's the impact on free cash from the low water levels on the Rhine River, please?

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

For your question, I guess I would take the first one, and then Ute will enjoy to answer the second one. Talking about further portfolio opportunities. I guess that is the question behind the question. First of all, as of today, there's still nothing for sale. And as you know, we are still at the start -- at the starting point of our portfolio transformation. That means in other words, that the perspectives to our businesses are constantly changing in a way that things that are maybe today we would describe them as specialty could be from our perspective in the future they could commoditize. And having this in mind, there are some businesses we have identified where we see that the performance during the last 2 to 3 years was not as good as we have expected, and therefore, we have to give it a -- let me say, a deeper look and a second thought how to deal with it. But to bring it to the point, first of all, as you know, how we act, first of all, we have to do our homeworks and then we will give you some more insights about this. It is step by step. And once more, as of today, there is nothing for sale. Having said this, I will hand over to Ute.

[Ute Wolf, CFO & Member of Executive Board]

Yes, thank you. Gunther, free cash flow effect from the low Rhine water level. For the full year, we have given the number. That cost increased by EUR 35 million. So that is 1:1 cash. And the working capital built up is also around EUR 50 million, where we had higher inventories and all that. So that is more or less the cash effect in '18 just from the low Rhine water levels.

[Gunther Zechmann, Research Analyst]

And if I can just follow up on the first question, please, on the portfolio opportunities. If I theorize...

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

Gunther, give me the chance to add something because -- yes, sorry. I guess I was on the right track, but I have to finalize my answer. First of all, yes, we are thinking about the C4 chain. Partly -- it goes partly into our PA12. And no, for example, talking about the Baby Care business. I guess that is complementing my answer.

[Operator]

And your next question comes from the line of Andreas Heine.

[Andreas Heine, Managing Director]

Yes, 3 small ones. And the first, could you clarify a little bit about the volume trend you've seen in the first 2 months? You said it was above your expectations. The last year in the first half was very strong. So is volume, how you see it in the first 2 months up compared -- in year-on-year comparison? Then secondly on the free cash flow. The free cash flow guidance you provided was obviously also based including MMA. If I would strip that out and assuming that you take EUR 300 million is EBITDA you would have had included MMA, is it fair to assume that the free cash -- your free cash flow guidance might be in the range of EUR 120 million to EUR 150 million less? Is that the right way of looking in it? And then lastly, you pointed out in how you see the growth engines in your portfolio. Is that any kind of indication how you might restructure the organizational portfolio also on the reporting line, if I go to Slide 18, so that we have -- let's say, these 5 reporting businesses going forward, let's say, as of 2020? Or is it premature to talk about this?

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

Thanks a lot for your question. Let me start with the third one, and Ute will take the first and the second one. As you know, we have 4 growth engines: Specialty Additives, Smart Materials, Animal Nutrition and Health & Care. And we are targeting to create revenues between EUR 3 billion to EUR 4 billion in those 4 growth regions of our portfolio. And they are thinking about the future, the skeleton of Evonik, but it's really a little bit too early to talk about restructuring of the organization of Evonik. Having said this, Ute will take the first and the second question.

[Ute Wolf, CFO & Member of Executive Board]

Yes, Andreas. Yes, with the volume development, the current trading, it's early in the year. But what we can say so far, January and February were somewhat better than we would have expected, with [ gross ] efficiency, with growth across virtually all business lines. The only real exception we see is Oil Additives as they have some decent auto exposure. Also growth in a lot of the businesses in Nutrition & Care. Health care, we have stressed that several times last year we'll see more flattish development in this year. So from that point of view -- and normally, it also has some more skewed development towards the second half in their seasonal pattern. So from a phasing perspective, we have higher comparables in H1, so that margin there be important in the comparison. But overall, we expect a solid Q1 as described on the segment. Of course, in the Performance Materials segment, lower prices in MMA, step-by-step materialized. We described that. And we had some weaker spreads in the C4 business as there are some temporary supply constraints, but again, these are relatively small issues at the beginning of the year. You asked on the free cash flow contribution that MMA is -- would have been given in this year. So if you take the EUR 300 million of EBITDA, some CapEx, some tax, you more or less get to a range to EUR 100 million, EUR 130 million, EUR 140 million of cash flow theoretical contribution of MMA.

[Operator]

Your next question comes from the line of Thomas Swoboda.

[Thomas Swoboda, Research Analyst]

Yes. I have 2 questions, please. And I guess both are for Ute. Just coming back to Andreas' question on free cash flow. In 2019, obviously, if we strip out MMA that will be the biggest part, but you still have some other moving parts like the IFRS 16 and the working capital. So my question is, based on a top-down calculation, even without MMA in 2019, I would see a free cash flow number which is relatively close to the EUR 672 million you have reported for 2018. Is there anything seriously wrong in my calculation?

[Ute Wolf, CFO & Member of Executive Board]

We guide for significantly higher cash flow. Of course, that includes all accounting effects. Maybe if I just walk you through the biggest components in the change. First of all, we will have a significantly better contribution from working capital, or less negative if you want to put it this way. Taxes are somewhat higher, as I said. We have the EUR 100 million less pension payout, as we said. Some positive contributions on the savings side. Some maybe cash out for the personnel measures that we have. And then we have the effects from the IFRS accounting. The numbers are known, and that overall leads us to our cash flow guidance. I want to really also underpin what Christian said. Even without MMA, we will cover the dividend with the free cash flow, also if you theoretically stripped out IFRS effect.

[Thomas Swoboda, Research Analyst]

That's fair enough. The second question, if I may, is on your CTA and the pension payments out of the CTA. In many other cases at other companies, actually most of the pension payments are being covered by the CTA. You have for some reasons decided to do it the other way around. And obviously, fixing the issue by taking out the EUR 100 millions of cash payments from your cash flow already helps. But the question I have is, is it all you can do? I mean, your CTA seems to be very well funded. What does speak against the CTA assuming even a higher proportion of the pension payments? I think you have in total roughly EUR 200 million, and you're covering EUR 100 million from the CTA going forward.

[Ute Wolf, CFO & Member of Executive Board]

First of all, CTA is there for the German pension provisions. So that EUR 200 million, of course, is a group number. And what I have given your is the net. What we have given you is the net effect. So there are, of course, some gross effects in there. In Germany, the companies pay the pensions, so that's just the legal framework. And the CTA can reimburse the pension payments. We started in 2010 to fund the CTA. We started to fund that as the assets were really managed in a very interest-sensitive way. We had this good development, and now we can reimburse the pension payments from the CTA.

[Thomas Swoboda, Research Analyst]

Can I just follow up? Will you be...

[Ute Wolf, CFO & Member of Executive Board]

And so one -- maybe one further comment. We also sell pensions with the MMA business. So there are also pensioners in that legal entity. That also will lower our payouts going forward by around EUR 20 million or so per year.

[Thomas Swoboda, Research Analyst]

Perfect. And if I just may follow-up. Will you be revising the potential of the cash pensions reimbursement from the CTA on a frequent basis? Or is it basically it?

[Ute Wolf, CFO & Member of Executive Board]

We are looking every year what are the pension payments and what is the right level to reimburse from the CTA. For the next years, the EUR 100 million are what we foresee.

[Operator]

And your next question comes from the line of Sebastian Bray, Berenberg.

[Sebastian Christian Bray, Analyst]

I would have 2, please. The first is, again, coming back to the CTA. Can I confirm that the EUR 100 million is fully effective in -- for the year 2019 onwards? And just to double check, have there been any assumptions changed to achieve this funding ratio involving the expected return on future plan assets? Or is it basically you've got a bigger asset base than you were initially anticipating, and that's enough to service the funding ratio at a constant assumed return? That's my first question. And my second is the -- am I right in saying that on a full year basis the MMA is included? You haven't made an assumption? I appreciate this may have been answered before, but I just want to check that you only have 10 months of this business or 9 months, and then it goes. And the guidance for the EUR 2.6 billion or thereabouts as it stands assumes we doing -- you have the whole EUR 300 million or EUR 350 million of EBITDA from the to-be-divested business.

[Ute Wolf, CFO & Member of Executive Board]

Yes, Sebastian. For CTA, very clear, the EUR 100 million is a sustainable level. We took really a lot of time and effort to model our pension portfolio to make it as robust as you are expecting from us. So the return is planned relatively conservative at around 2%. It's what we have seen in the past. In that pensioner group, there are now more and more pensioners. And so that's -- the payouts also over time lead to lower DBOs. So from that point of view, also with the payout with the reimbursement now from our point of view, the 70% funding ratio is quite robust.

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

Second question, the MMA is still included for the 12 months for 2019 in our guidance. Just to make it clear.

[Sebastian Christian Bray, Analyst]

That's helpful. So a quick follow-up. Do you still operate a defined benefit plan open to new employee? Or is that closed? Just quickly, and...

[Ute Wolf, CFO & Member of Executive Board]

No, no. The defined benefit plans are closed for new entrants.

[Operator]

And your next question comes from the line of Chetan Udeshi, JPMorgan.

[Chetan Udeshi, Research Analyst]

It's Chetan. Just a few questions on -- I think there was a question asked on MMA free cash flow in 2019, and I think the number you mentioned was EUR 130 million to EUR 140 million of free, in that range. So if you were to back out, obviously, 2018 numbers, should we be adding EUR 100 million higher number for the higher EBITDA? That's number one question. Number two is -- sorry, I'm not necessarily an expert on pension and CTAs. But just to understand this better, is -- the funding ratio at the moment as it stands is just 70%. So what happens if the funding ratio falls below 70%? Do you have to fund the CTA again? And the second question. If I look at your free cash flow, you would usually have a line for cash outflows to fund the CTA in your investing activities line. And in recent years, it's been more like EUR 25 million. So how do we tie the EUR 100 million benefit that you talk about with the EUR 25 million funding that you've been doing in the recent years on the cash flow line that we saw? And just last question, I was -- just any color on why the pricing has remained strong in Resource Efficiency. Is there any specific businesses that you see strength continuing into Q4, given maybe the raw material pressures and demand had started probably to weaken in Q4?

[Ute Wolf, CFO & Member of Executive Board]

Yes, Chetan. Thank you very much for your questions. As the earnings level for MMA was more or less EUR 100 million higher last year, so the free cash flow contribution is more towards EUR 200 million in '18. But we have to ask for a little bit of patience. We will get then, with the discontinued representation more detail on that. But that's more or less the level that we have to look at. CTA. CTA is a voluntary funding under German regulations. So we are not obliged to really show any funding level. The 70% was our internal target. And it's more or less, also from a financial policy point of view, an optimal level for funding our German pensions. Why does the funding level appear so robust? As we have pensioners in that, so the payout of the actual pensions also lowers over time the obligation. So that's why, according to our model calculation, the payout, with the given conservative return expectations, really is robust in the next years. So we are very, very confident that we can keep the level. The funding that you see is more or less a tax reimbursement where you have the capital income taxes which go to the company and then have to give -- be given back to the CTA. That's more technical point of view. And again, this is already included in the net effect of the EUR 100 million we have given you.

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

Okay. As you know, the last quarter of 2018 Resource Efficiency was somewhat weaker in the automotive sector, particularly in China. And looking to Q1, what do we see? First of all, there is an underlying growth trend, which I guess is fully intact. High-performance polymers expected to really to continue its growth path also in this year with continued very strong demand for PA12. Moreover, the cross-linkers have also started pretty well to this year. And if you look to the silica, there we have also seen a solid start despite some more isolated cases of more cautious customer behavior. But nevertheless, it was a good start. And for the coatings and additives, our business line, we do also expect a moderate growth start into this year. And then what's -- okay. And then maybe mentioning the Oil Additives. Here, we expect to be a little bit -- the start could be a little bit lower into the year because of the higher automotive exposure in this business line. But -- however, all -- the underlying growth trends are fully intact, and we do see a good growth start in this year in respect of Resource Efficiency.

[Operator]

And your next question comes from the line of Mubasher Chaudhry, Citi.

[Mubasher Ahmed Chaudhry, Vice President]

I've got 2. Is it -- could you provide some color on the SAP end market and how you're seeing the margins develop in that business, given some softening expected in the acrylics market? And then the other question is on the change in treatment for interest expenses on the cash flow. So given that, that will be going into the financing section of the cash flow statement, should be -- are we right to assume that the dividends will be covered, even if you were to add those expenses back into the cash flow from operations level of the after plan?

[Ute Wolf, CFO & Member of Executive Board]

Yes. Thank you, Mubasher. I'll start with the last question. First of all, that representation is what our peers do, so we'll make our free cash flow statement -- or our cash flow statement more comparable towards the peer group. And yes, the dividend has to be covered even including all these effects, be it leasing or be it interest expense. That's very clear for us.

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

Okay. Next, on -- talking about Baby Care. The demand is slowly but steadily improving. And I have to admit that it is from a low base but, nevertheless, slowly but steadily improving. And our job is to successfully restructure the Baby Care business, and that is what we have to do next. And I would provide you with more information about this next time.

[Operator]

Your next question comes from the line of Geoff Haire, UBS.

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

I was wondering just if I could ask some -- 3 quick questions. First of all, I was wondering could you give us a target net debt-to-EBITDA excluding pensions for the business now that you have sold the -- given back the acrylics asset? And also in the presentation you kindly gave us last night on the disposal, you mentioned remnant cost. I was wondering if you could just explain to me what that -- what those actually are. Because it seems to be EUR 50 million benefit to the group. I was trying to understand exactly what you mean by that. And then I was wondering, if possible, would you be willing to give us a target free cash flow for this year as you did last year?

[Ute Wolf, CFO & Member of Executive Board]

Yes, Geoff, thank you very much for your questions. I'll start with your leverage question. In -- for our creditworthiness, pensions and financial debt are considered as debt, so it makes on a limited sense to isolate those and manage them separately. This is what we have to accept. So from that point of view, we are looking at the overall debt position. And how that is mirrored in the rating for 2018, you'll find that on our slide. The leverage was 2.5, and that corresponds with our solid investment-grade rating, and we feel quite comfortable with that. The proceeds, of course, will strengthen our financial profile in the first round and then in future years will be invested into our profitable growth, make the portfolio more resilient, more specialty and more balanced. For the remnant cost, of course, that's the snapshot of this year. It's a mix of typical dis-synergies and also impact from changed pricing mechanisms, where we've before had in-house pricing and now have to go -- are going to market prices. It is very clear that we will reduce these dis-synergies over the next 2 years. And from that point of view, that will phase out over the next years.

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

I'm referring to the free cash flow question. One thing is dead certain. Dead certain is that we will see a significantly higher free cash flow, and I personally would really be disappointed if it would be only around 10% FCF growth. And having said this, it is a little bit too early in the year to give you here more detailed information, so I ask you here for your patience. But one thing is clear that the message is, and that is what we are working toward, the free cash flow will be significantly higher.

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

Could I just ask one follow-up question? Just on the remnant cost, given what you just said, does that imply that your downstream businesses were paying higher than market price for the MMA that they were sourcing internally?

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

No.

[Ute Wolf, CFO & Member of Executive Board]

No, lower. Otherwise, it wouldn't have...

[Georgia Emily Mabel Harris, Research Analyst]

Okay.

[Operator]

Your last question comes from the line of Martin Roediger, Kepler.

[Martin Roediger, Equity Research Analyst]

I have 3 questions, please. Just coming back to Resource Efficiency and your -- the positive experience in the first 2 months. You mentioned already the business lines. Can you help us to understand the different dynamics in the individual region here? I refer especially to the dynamics in China after the Chinese New Year. The second question is on the financial result in Q4, which was obviously much better than I have assumed and also better than the previous quarters. Can you explain why the financial result was less worse than previously? And thirdly, for the financial result, you have -- you give a guidance for 2019, and you say that this will -- this line, the adjusted financial result will be minus EUR 119 million -- sorry, EUR 190 million. That it compares to minus EUR 162 million in 2018. EUR 10 million of that comes from the worsening from the IFRS 16 accounting change. I know that you have not factored in financing cost for the PeroxyChem in your guidance. So what are the levers behind that worsening financial result in the year 2019?

[Ute Wolf, CFO & Member of Executive Board]

Yes. Maybe, Martin -- maybe I start directly with that question. In our financial result, there are also effects from cost -- currency swaps that we have as a hedge for internal financing. And that's very heavily depends on interest differences between the big currencies. So I think I do not need to explain that this is very hard to forecast and even harder to forecast precisely. And that is more or less the effect you have seen in the Q4 that did work out better. But again, that can be in 1 quarter. EUR 10 million or something like that cannot seriously forecast out. The increase this year is mainly driven by the effect of the IFRS, leasing accounting, plus a more normalized level for those currency effects that I just explained.

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

Okay, Martin. The second question. It's really hard to judge upon the economical chances, expectations in respect of China. Because on the one hand, there are the trade negotiations, and they could create tremendous turmoil. But on the other hand, if the Chinese and the Americans could resolve this topic, that could really be, let me say, a push. What we have seen in the first -- in the last quarter of last year was a sign, in particular signs of slowdown, for example, in the automotive and in the coating area. But, however -- Martin, however, from today's perspective, we do not expect any significant impact on the overall business performance for 2019. And I guess that answered your question.

[Martin Roediger, Equity Research Analyst]

So that means after Chinese New Year, demand came back to a normal level.

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

Yes. Yes, of course.

[Operator]

Thank you. I would now like to hand the call back to the speakers for closing remarks. Please go ahead.

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

Ladies and gentlemen, Ute, Tim and I have really appreciated having had you today. That closes today's call. Thanks for your attention. Have a nice day, and goodbye.

[Operator]

That does conclude the conference for today. Thank you for participating. You may all disconnect.