Evonik Industries Ag

Ladies and gentlemen, thank you for standing by. Welcome to the Evonik Industries AGE second quarter 2024 earnings conference call. I am Vassilios, the course call operator. I would like to remind you that all participants will be in a listen-only mode and the conference is being recorded. The presentation will be followed by question and answer session. You can register for questions at any time by pressing star and one on your telephone. For operator assistance, please press star and zero. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Christian Kuhlmann, CEO. Please go ahead.

Thanks a lot and welcome to our quarterly earnings call also from my side. To sum it up, it was another quarter in which we have pre-released our numbers. It was another quarter where we have again delivered on the quite elevated expectations. Another quarter of sector-leading earnings growth and, ladies and gentlemen, another quarter of very strong free cash flow generation. So, ladies and gentlemen, let's go right into the topics of today. Second quarter has once again more proven that our strategy or agenda is paying off. And our own numbers are more and more reflecting exactly that. What is driving our growth? It is a combination. It is a combination of, first of all, self-helping measures and, at the same time, our positioning in the right pockets of growth. The right pockets of growth, that is, for example, our specialty additives business which has had an unusually tough last year and is now on the path of recovery back to old strengths or our resilient and steadily growing care solutions business. We continue with its targeted investments into these pockets of growth, like the first world scale biosafactance plant, which we inaugurated in May. bias affections will be an additional growth contributor over the next years in an attractive market with strong sustainability trends and already contracted volumes. In respect of self-helping measures, these are our shorter-term contingency measures which continue to support our earnings this year, going at This will be accomplished by the ramp up of the structural cost savings under our Evonik tailor-made program. And by our business optimization programs, like the one in animal nutrition you are well familiar with. We'll continue, ladies and gentlemen, with this strategic approach. Currently, in the still sluggish environment, our full focus is on executing our internal measures and programs, like Evonik TaylorMate, like the organization of technology and infrastructure, or like our business optimization programs. So let me be very clear. I dare even say crystal clear. This means also that any kind of M&A is currently not three letters, one message, not on our agenda, not for this year and also not for the next year. Michael, why don't we go into more detail on one of these internal programs, for example, Evonik Taylor-Mate?

Sure, Christian. This is really a topic very high on our daily agenda these days. We are progressing well, have booked the full provision of 240 million euros this quarter, and are just about to start the third and last phase of the program. The implementation of the target organizations all across our teams and units. We will have the first savings already this year and then ramping up over the next three years. At the end of 2025, we will have realized quite significant accumulated savings of 200 million euros already. And from a cash perspective, the net savings of tailor-made coming through in the bottom line will be higher than the annual cash out in this and each of the upcoming three years. This means that the program will be net positive for our free cash flow year by year. This is a perfect transition of our free cash flow development. Just like in Q1, We have significantly exceeded our prior year's free cash flow in Q2 as well. In total, this is a swing of 500 million in free cash flow in the first six months. However, let me add one little caveat. Our cash generation this year will be more evenly distributed over the individual quarters. Last year, we had a weaker first, and a very strong second half of free cash flow. The weak environment and demand situation allowed us to reduce our networking capital quite drastically towards the end of the year. Luckily, the demand in our business has improved, which on the flip side also means less strong networking capital inflow in the second half of this year. Nevertheless, On a full year basis, we will again deliver a year-on-year higher free cash flow with hopefully less stress for the entire organization, leaving us more room to focus on the next optimization and efficiency topics. Jumping to our outlook, first on Q3 with me and then on the full year with Christian. The start in Q3 has been quite good. Very similar to the trends we have seen across Q2. Autobooks and volumes are still looking healthy in smart materials and specialty additives. Let's see if the latter one can deliver another strong quarter like Q2. Typically, there is a bit of seasonality in specialty additives over the summer months. What is for sure? Nutrition and care will be up sequentially, driven by higher volumes in animal nutrition after our shutdown and the typical H2 weighted seasonality in healthcare. Performance materials will be down sequentially. The other line should reflect our ongoing cost savings with the effect of bonus provisions as typically difficult predict at this stage. All in all, Q3 EBTA is expected to be on the pretty strong Q2 level.

Michael, Michael, Michael. Please forgive me to interrupt and to intervene. And ladies and gentlemen, give me a chance to dismantle. Let's keep it like a tiny secret to you. During my Saturdays joining grammar school, I was anything else than a monster in math. But having said this, I do really believe, Michael, that even from my, let me say, dry point of view, we will have a tremendous good chance to come close to 1.7 billion euros of EBITDA already after nine months.

Actually, yeah, that's also my understanding.

Great. Great. And with this, ladies and gentlemen, that should give us some good confidence. good confidence even for upgraded outlook range. As you know, we expect the BTA to come out between 1.9 and 2.2 billion euros. And from what we know and from what we see today, the lower end of this range appears more and more unlikely. Third quarter has started well, and currently we are seeing no, definitely no area where business is weakening. But as you know, visibility on the other side beyond August still remains limited. And as you know us, we prefer to be conservative. But even for me as a conservative, as mentioned, it is difficult to ignore that there's probably some further upside from the midpoint of our new guidance range. Those are nice, I guess. Those are my closing remarks for our call so far. And now we are happy to take your questions. Thanks a lot for listening so far.

We will now begin the question and answer session. Anyone who wishes to ask a question may press star and 1 on their touchtone telephone. You will hear a tone to confirm that you have entered the queue. If you wish to remove yourself from the question queue, you may press star and 2. Participants are requested to use only handsets while asking a question. Anyone who has a question may press star and 1 at this time. The first question comes from the line of Sebastian Brey with Berenberg. Please go ahead.

Hello, hello. Good morning and congratulations on the results. They are pretty good. Could you help me with a question, Christian, on your comments earlier around M&A being off the agenda for the next two years, for 2024 and 2025? Does that also apply to divestments or is it shorthand for acquisitions? What I mean by that is the potential divestment of performance materials or partnering up and the handful of other non-core assets that Evonik has outside superabsorbers. Is that something which we shouldn't be assuming could happen in 2025? And my second question is on tech and infrastructure. It looks as if there has been some underlying improvement in the infrastructure side of the profitability. And I remember Evonik previously had indicated, correct me if I'm wrong, that these assets might move into their own area, presumably with a move to carving out or selling later down the line. Could you give us an idea of what the EBITDA associated with Evonik's infrastructure assets is, please? Thank you.

Okay, I'll start with the first question about M&A. uh here you have to split up um for sure we will go ahead um strictly disciplinedly in respect of um selling the c4 business here the calf out is already done and yes business has improved um numbers and figures over the course of the year whereas here they are not at all in a hurry will um continue to observe the market but to be crispy clear about it um c4 is on the list of our disposal candidates and that is what we are still going to do here we do stay put here we do remain in respect of the super absorbent business um signing is done we do expect the closing in respect of the incoming next weeks then we will have the deconsolidation and then I guess the deal is done. I have talked about M&A in respect of trying to buy other companies or try to buy portfolio parts of other companies. That is what we will definitely quit on for the next two years. That is not on our agenda. For the next two years, we will exclusively focus on first, our internal self-helping measures to restructure the company, to create a better company than it is in current days. And second, on investments, tiny and disciplined ones in organic growth. So to be very clear, once again, yes, we move on selling the disposal candidates and yes, we will quit on doing any M&A in the other respect. With this, I hand over to Maike.

Yes, Sebastian, thank you for the congratulations, and we are also very pleased. And with regards to your technology and infrastructure question, on the one hand side, we have mentioned before that, yes, there is a really good transition It is also partly related to the service dividend that we do not bring into our chemical divisions. However, yes, you're right. With regards to the assets, altogether we had a $3.2 billion sales in 2023. one-third of this is external versus two-thirds are internal sales. And so the splits, we weren't sure in which way your question was going, but the split, if that was what you wanted to hear, is the technology is 25% and the infrastructure part is 75% going into this Maal, Wesseling, and Antwerp part. As I said, we are not sure if this was what you asked us.

Yes. Let's pretend that Evonik in three, four years' time says infrastructure is a nice asset, we want to follow in the footsteps of some other firms that have split these assets out. Is the correct way to say We take 75% of the sales of externals, so call it $750 million, and then apply whatever margin we might think be appropriate for a utilities business to it. Is that fair?

I think, to be quite clear, this is definitely too early to answer that. On the one hand side, what we are currently doing is we put the whole infrastructure, technology infrastructure division on its Yeah, on a carve out versus we bring parts of it also into our chemical divisions. Let us move forward with that and then we can see how the split will be. And also to be very clear, we have mentioned before that we are still open to really pursue all possible next steps. So we are not really clear on how to proceed and bear with us for another couple of quarters here.

That's helpful. Thank you for taking my questions.

The next question comes from the line of Andreas Heine with Stifel. Please go ahead.

Yes, three questions, if I may. The first is on biosulfactants. So you open up the plant. Can you share with us how you expect the ramp up to be? You mentioned that you have already taken off agreements. Maybe some words on this. That's the first question. The second, a smart material with very nice progress year over year. But if I compare that with margins of peers, those are still quite a bit higher. Is that something that you can keep up which is the economy comes back or how do you think about this issue? The last one is capital allocation. So you will not go for M&A. You have strong cash generation. You send the main task to use these free cash to reduce that or would you also consider to increase the dividend.

Andreas, thank you very much for the question. I propose Maike takes the first one on biosaffectants and Christian the next two ones on smart materials, margin potential and captive allocation in dividends.

Yeah, good morning Andreas. And regarding your biosaffectants plant question or market question, So what we see is that there will be, in our expectations, the market will go to 1 billion virus-effectiveness markets by 2023 on the one hand side, replacement and new applications. Our target is actually that we will have 30% of the market share in 2032. That would mean around 300 million of sales. we see that the current focus is clearly on personal and home care markets. But we also see further applications and further potentials in areas that will be addressed from us, agriculture, animal nutrition, coding, additive, you name it, you get it. The new plan in Slovakia is probably full in our expectations, running on full capacity by 2026. and should then generate a triple-digit million sales and EBITDA margins of 25%. So this is probably, if you do the math, that will hopefully be helpful. With that, I hand over to Christian.

Thanks a lot. Good to hear you, Andreas. First about smart materials. Yes, here we do have good chances to improve. the profitability in future. Think about utilization rate, which is a little bit higher than 70%. So that translates into additional EBITDA in future terms, if the markets in those businesses and those respective businesses will be back. So there's more to come. And second, what do we do? What do we have in our own hands? Here it means that we will activate additional potential in particular on the cost side as you know here we have different um initiatives in place which will pay off over the course of the incoming month and then there was a third question somewhat like an evergreen about capital allocation and as you know i'm in love with evergreens having said this um first it is that we will stay disciplined. Disciplined in respect of our investments. Here we will focus on decent and disciplined investments in organic growth and focus thereby on our innovational potential. Second, I'm in love, the same is true for Michael, with our investors. That means we will work our knuckles bloody to make sure that the already high and attractive dividend level will remain, will stay put. And third, not to forget, and that is Michael's job because she's a math monster, that we will work on a healthy, that we will work on an attractive balance sheet. After all the initiatives, all the measures, all the decisions we have taken, the continuing strong free cash flow generation, after all those major restructuring processes I've mentioned, after all of this, we will definitely have an open eye and an open ear to listen to the preferences of our shareholders. I guess that it is what I can convey to you honestly.

Thanks a lot. The next question comes from the line of JT Pandya with On Field Research. Please go ahead.

Yes, thanks a lot. My first question is around the healthcare business actually. or more so healthcare and consumer care. I mean, your portfolio is very specialty here. Could you just give us some color of the margin profile? Because when we back out the animal nutrition business, at least I get to an average margin of around 15, 16, 17%, which is similar to some of the peers which have a slightly higher chemicals or ethylene oriented portfolio. So what are we missing here? I mean, do you have a tale of products which you need to prune and improve the quality? So that's my first question. The second question is on the, yeah, moving parts, if you can be, I know we always demand a lot from you guys, but if you can be generous enough, given the visibility you have today for key moving parts for 2025, that would be very helpful. And then the last question really to you, Christian, is sort of tying to Andreas' question, but asking it differently. I mean, your share price hovers around 18 to 20 euros and you're basically doing a lot operationally. I guess the Achilles heel has always been, you know, your anchor shareholder dropping shares at untimely manners. Now that they are 25% of the free float and your balance sheet is robust, Is there a likelihood that you sort of backstop them and therefore prevent this untimely shares coming to the market? Thanks a lot.

Thank you, Jadeep. I suggest the first one, Mikey takes on health and care. Chris, the next two on 2025 and our majority shares. Thank you.

All right, Jaydeep, good morning. And regarding your health and care questions, maybe let me shed some light there. On the one hand side, we mentioned before that the healthcare business is very much age-centered. So we will see better margins and also better sales in the second half of the year. This is a typical seasonality. we have in our healthcare business line. Also, what we see and what we have expected is although we build our lipid plant production in the U.S., it is clear that with our MRA technology, this is ramping up only in the next couple of, let's say, two to three years. This was planned like this, and because we are currently not with COVID-19 or another pandemic situation, the sales is of course lower. As I said, that was totally expected like this. So we see some, I would call it maybe some challenges. We are pruning our business line in healthcare currently. But from an expectation perspective, we are perfectly in line. And also, that also holds true for care solutions. There is a constant pruning going on. We see now the ramp-up of the virus-affectant plant, and so this is why it's becoming bigger and bigger, and we are going more and more in this specialty pocket. And with that, I hope that was helpful. I hand over to Christian.

Thanks a lot, Maike. I guess you are pretty well informed about the REG. And you are so right. The CEO of the REG Foundation, the chairman of the IND Foundation, Bernd Tönnies, has announced a couple of weeks ago publicly during the annual press conference of the foundation that they are committed to hold 25% in Evonik. And having said this, and taking in mind that they have outstanding exchangeables of an amount by give or take 20% of Evonik shares, it is a fair assumption that they are not far away from this goal. So, in other words, the so often cited so-called overhang topic is frankly and freely no longer existing. Having said this, you have asked about another detail, if we could by share backs directly from REG Foundation. Here it is that we are constrained to do so. It is from a legal point, in other words, close to be impossible. So that is not an opportunity which we do have at hand. Then there was a third question of yours. It is about our expectations for 2025. Let's keep it like this. This year will be, I dare say, even as a conservative, as you know, this year will be a pretty good one for Evonik Industries. And it is now summer 2024, a little bit hard, a little bit hard to predict what we will see in 2025. Please take into consideration, we don't have to deal with political turmoil, we don't have to deal with economical headwind, with inflation, with the global recession, and so on. But we, sorry, but we as Evonik, we are, let's say, confident in a robust way And that is, for example, because of three nameable self-helping factors, self-helping measures we have already in place for the next year. First, we'll have a significant savings impact from our Evonik TaylorMate program, which will be around an amount of, give or take, 150 million euros. Second, think about the additional benefits from our business restructuring programs here. Please, for example, think about animal nutrition, which will contribute in 2025 additional 100 million euros. And then, that is what we have in mind in respect of the third point, think about lower energy costs for Evonik Industries, and here we judge it could be an amount of around 50 million euros, which would come additionally in. So, in other words, it might be that in 2025 there will be a hefty and defty hailstorm outside. But we, doing our homework, focusing on ourselves, helping measures and being invested in the right pockets of growth, we are in this respect really keen on doing better than this year. So far, our answers to your questions.

Thank you so much.

The next question comes from the line of Chetan Udeshi with JP Morgan. Please go ahead.

Yeah, thanks. I had a very quick question. Given the volatility, and Christian, you mentioned the visibility is still low. I was just curious, what is your pulse of where we are in the cycle right now? I mean, you guys play into different end markets. Clearly, you've seen ups and downs over the last... six quarters, what is your pulse of where we are? I mean, do you think, you know, we found a proper bottom or do you think, you know, it's too difficult to see beyond August so you might have more wobbles down the line?

No, no, as you like.

Please, ladies first. I can start with the capacity utilization that gives us some ideas on where we are, Chetan, and then Christian, if you want to add on that, let's do that. So, if I come, if I try to answer your question regarding where we are, I think the volume, the capacity utilization our plants give us probably quite quite good idea on where we are. And we came from the super low volumes, super low profitability in 2023, and there we definitely have hit the trough. So we are coming back. We see that the volumes, it's always difficult because you know that we are in quite a few end markets, but the volumes are really coming back. It's not where it should be. What we say roughly is everything beyond 80% utilization rate is very strong. We are clearly not there yet. In 2023, we had a utilization rate of 70%. So the fixed costs were really hurting us. And so now we are somewhere in between. So we are in 2024, we see a few percentages. percentage points coming up, well, between, let's say, 75% roughly. And so we are getting better. I think Kristin has mentioned it before. We don't see this big macro improvement yet. We are in the right, we haven't invested in the right pockets. We are pretty tough on our cost. But it's not all green out there. With that, I hand over to Christian if you want to add something.

Thanks a lot, Mike, about listening to you. And here, in this respect, we're on the same page. It's really hard for me to add anything. So I guess that's it.

Thank you.

The next question comes from the line of Martin Rediger with Kepler-Severe. Please go ahead.

Your guidance, what are the implied parameters for the lower and the higher end of that range? And I'm particularly keen about your volume growth parameters. You mentioned that the lower end is very unlikely, though obviously indicating that things massively worsen from what you see at the beginning of Q3. Then secondly, the guidance range was already wide at the beginning of the year with a spread of 300 million and that spread is unchanged. Can you explain why you did not reduce the widespread knowing that H1 is already in your books and Evonik is a specialty chemical company, which normally means low volatility in earnings and margins. And the third question is on capex. You guide for 750 million this year down from last year. At your last capital markets day in 2022, you said that the mid-term capex will be between 900 million and 1 billion annually, partly because of the next generation technologies investments. So do you intend to get back to this corridor? And should we expect that to happen in the years to come? And also, is this corridor an average figure so that it eventually could be that in some years you will be above that

average range of 900 million to 1 billion thank you um hi martin good to have you i try to tackle your question about our guidance quality um maybe please forgive me but first of all i want to express um that we are a little bit let me say proud what we've gained already this year and that means also that that holds also true for increasing our guidance, our guidance range by 200 million euros and fair, I guess, to assume to say that that is somewhat like a strong statement. The midpoint, what we have talked about was the old guidance and the former guidance at one point, what was it, 1.7 to 2, so midpoint was 1.7 Now it is from 1.9 to 2.2. So in other words, 2 billion and 50 million. And as you know, because of listening to our call, we have already given you some hints that even I, that even we couldn't ignore that there is some room that it could come out better. Now about the range. My God, please forgive me. You know, is it a broader range? Is it a tighter range? Is it worthwhile sometimes to narrow the range? Or is it more prudent to lift the range up? You know, it depends. It depends. And here, I guess it is fair to say that sometimes the ideas about how to deal are somewhat different, but worthwhile and most important is that we are the ones having lifted up our guidance range that we are the ones who are in respect of MTA development in this year are significantly above our peers and that we are the ones who have already during the first days of the year said without we will do so without once more without any pronounced macro recovery so That is what I could give to you about the guidance range. And meeting you next time, maybe during an analyst conference, we could have a beer about it, discussing the question, is it more clever to lift it up? Is it more clever to tighten or to narrow the guidance range? I guess that is a question. It depends. And with this, to Maike, no? Yeah.

With this, to me, and good morning, Martin, I think what is left for me to answer is, on the one hand side, your question regarding volume assumptions for H2, which is pretty easy on H1 level. So we see that the Q4 seasonality, of course, is a little bit always lower, and I think Kristin has mentioned that we expect pre-merge H1, same level like H2 minus the seasonality in Q4, and that also goes for the volumes. Regarding your capex, the 750 million, what is the mid-term level? I think the 750 is probably on a lower end versus... Fortunately, we don't see any effect that we will need to put another 250 million on 2025 to reach the 1 billion. So we won't see a 1.25 billion capex in the years to come. So this is the reason on the one hand side we have mentioned the volume. So we have some time that volumes are utilization rates are at the 100% level, so we don't need to put international debottlenecking capex into our assumptions. And also we have moved into our specialty chemical, a little asset investment lighter region. So I think the 900 million to 1 billion lies behind us. And we don't see the 750. I think that was probably on a lower end. If you expect a little higher, 800 plus, then I think you are good to go. I hope that was helpful.

Thank you. The next and last question comes from the line of Jonathan Chang with Morgan Stanley. Please go ahead.

Hi, morning, everyone. I've got two, please. The first one on crosslinkers. I think in previous quarters you flagged that there are some competition pressure in crosslinkers. Do you still see that as a weakness in Q2 and in Q3? And then more broadly in specialty additives, based on your current run rate order, when do you think this division will return to the 900 million EBITDA that you flagged on the slides? And then my second question is around your tailor-made program, which is largely personnel-driven. I noted that one of your talents recently moved to head up Crota's life science business. Do you feel that ePhonic will save cost, but at the expense of your technology competitiveness because your talents are moving to the competitions? Thanks.

Hi. I take the second question about your possible concerns of the impact of Evonik TaylorMade. You know, here we at Evonik, here's a very simple saying, and that goes like this, good employees do sometimes leave, better employees do for sure come. Having said this, Evonik TaylorMade will help and will therefore open gates very attractive gauge for our, let me say, talents, highly gifted talents, that is somewhat like a booster for their career. And therefore, we do believe, we are convinced that also in this respect, Evonik TaylorMade will benefit, the company will benefit from Evonik TaylorMade also in enhancing and bettering the careers of our highly gifted talents. And once again, good men leave, good employees leave, better ones do come, and we do hire. And with this, to Michael.

Yes, Jonathan, and with that to the crosslinker specialty additive question. Yes, crosslinkers, we have not put it today too much onto the scene, but crosslinkers still feel competitive pressure. We had some, you call it smart inventory management here in Q2. So it was stronger, put it like this, than expected, despite an additional shutdown, a planned shutdown we had. But it's still not there where it was before. So this is, you are totally right, specialty additives is still currently limited to catch up to the historical levels. by crosslinkers. And that's pretty much all I can say that, yeah, you were totally right in your estimation. And with that, I hand over to the closing remarks by Christian.

Thanks a lot, dear Michael. Ladies and gentlemen, it was a great pleasure for us having had you today for a summer vacation. We wish you all the best and hope to see you soon. in person during an investors or analyst conference. So take care and all the best.

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