Evonik Industries Ag

Thanks a lot and welcome ladies and gentlemen to our full year earnings call. We have four key messages that we want to bring across today. First, we had a successful year 2024 with sector-leading earnings growth and strong free cash flow. Second, we are well prepared for the multiple challenges around us. On top of that, and therefore third, we will further push forward our self-helping measures and programs. And this leads to four. We will deliver further earnings growth in 2025. Maike and I will now go through these messages one by one and give you some more background. Having said this, Maike, the stage is yours.

Thank you, Christian, and good morning also from my side. I will start with the year 2024. we have delivered 25% EBDA growth in a quite tough environment. And yes, admittedly, this was supported by the recovery in animal nutrition, but also smart materials and specialty additives with 11% EBDA growth each have clearly outperformed the average growth of our European chemical peers. This is the result of a 4% volume growth which is partly due to restocking, but also driven by our strong positioning in attractive pockets of growth. And it is supported by the contributions of our cost-saving programs on group as well as on business level. Aside from EBITDA growth, we have extended our strong free cash flow track record and again delivered a cash conversion rate of above 40%. Some quick words also on our fourth quarter. To be honest, here, the pure numbers do not tell you too much about the underlying performance of the businesses. We had the usual year end seasonality, which was even a bit more pronounced this year, especially in the businesses that delivered strong volume growth in the first nine months. And on top, the quarter was impacted by several one-time effects. So I recommend to rather shift your focus to our confident guidance of year-on-year earnings growth for the first quarter. This is a much better proxy to understand the underlying positive dynamics we are currently seeing in our businesses. And back to Christian.

Thanks a lot, Maike. That brings me to the second key message. We are well prepared for the multitude of challenges around us. We have delivered strong earnings growth in 2024 in an environment of weak end market growth, a weak German economy, rising protectionism, and still high earning costs. These challenges did not come as a surprise to us. And this is why we have, with a long view, and over the last years already, prepared ourselves very well. We have continuously invested and strengthened our attractive pockets of growth that has resulted in a combined volume growth of more than 5% in specialty additives and smart materials, and even stronger than that in businesses like coating additives, oil additives, or silica. with a balanced asset footprint across the three main regions. 40% Europe, 30% United States of America, and Asia. And for us, Asia is not only China. Half of our Asian sales are in countries like South Korea, India, Thailand, or Singapore. We, ladies and gentlemen, we produce local for local. For example, for example, We produce 80% of our sales locally in the US. This means that we would rather benefit from any tariffs in the form of higher selling prices in the region. And with our mostly low energy intensive product portfolio, we have a rather low exposure to European energy costs, less than 5% of our total costs. Having said this, back to Microsoft.

I will take over again for the third key message. On top of all that Christian explained and where we already stand today, we will further push forward our self-help program. By that, we are not only improving our cost base and our competitiveness, we are also strategically strengthening the nucleus of our company, namely our business lines, where we earn our money. If you want, this is our own internal program to reduce bureaucracy. TaylorMade is on track and will generate 200 million of aggregate gross savings by the end of this year. We are preparing for the new segment structure, which will go live on April 1st. And we have taken the next milestone for the reorganization of technology and infrastructure. The two parts are now separated and especially the two major German sites, Mahl and Wesseling, are now set up as individual business lines. We will fully carve out both sides until the end of 2025 and then evaluate the strategic options.

Thanks a lot, Michael. My fourth and final key message will deliver. further earnings growth in 2025. Despite the unchanged low growth environment, we are optimistic on our attractive pockets of growth and our innovation growth areas. This is supported by high double-digit net cost savings as well as favorable FX effects. And, ladies and gentlemen, on the energy cost side, we are largely hedged for this year. Our outlook is underpinned by a pretty good start into the year. We do expect the first quarter to be above the prior year level already. And as you know, most of the savings will ramp up further over the year. So we are seeing good volumes in specialty additives and smart materials and even stronger volumes in nutrition and care and animal nutrition specifically. For methionine, the market sentiment has changed from bearish to stable in all regions, or even bullish, as in China. The good market demand continued and even accelerated in the first quarter, and the supply side is tighter than expected. So the first quarter, at least, will be better than our own expectations for methionine. Before we finish, Ladies and gentlemen, we would like to invite you to our Capital Markets Day in Essen, in the center of the Ruhr Valley, on the 22nd of May. We will present an update of our strategy, especially with the new segment structure. And you will have the chance to meet not only the two of us, but especially our new two colleagues on the Executive Board, Lauren and Claudine. If I were you, I would not want to miss this opportunity to meet us live in Essen and not only virtually on your screen. So much from our side and now we are happy to take your questions.

We will now begin the question and answer session. From Morgan Stanley, please go ahead.

Good morning and thank you very much for the opportunity to ask questions. A couple if I may. The first is on the growth outlook. That seems to be reliant. You're pointing out to high growth in smart materials. I'm keen to understand the split that you give between the polyamide 12 ramp-up and the cost savings and how you see the volume price cost dynamic for smart materials into into 2025. The second question I have is on really on kind of cash flow and debt reduction. So you very successfully delivered, you know, 870 plus or minus million euros of free cash flow. And if we take out the dividend and we take out the interest cost, that leaves around just over 200 million euros of cash that possibly could have lowered net debt, and yet net debt is flat year over year. So is that restructuring costs absorbing that surplus 200 plus million euros of cash? I'm just keen to understand why we're seeing high levels of relative free cash flow, but we're not seeing net debt falling. Thank you.

All right, then I start with the first question. Probably I also take the second. Maybe starting with smart materials. You are right that our guidance is considerably higher. We will on the one hand side continue to work on the cost base of the businesses. And I would very much like to refer to our capital markets day where we will give you more details. However, maybe to broaden the question a little bit and to give, because I guess this is something everybody is interested in. Let me give you a bit more depth on the outlook, our outlook for 2025. Take full year EBTA 2024 as a starting point. So the one at the 2.065. And we need roughly one million more to the midpoint of our 2025 guidance range. We have three factors in the bridge which are pretty clear already. On the one hand side, we have the high double-digit million net savings. We have lower energy costs, which is also mid-double-digit million euros, and we have a favorable FX effect. That already stable of everything year over year, brings us to the midpoint of the guidance range at least. So far in our guidance, we have assumed a slight normalization in methionine prices and therefore slightly lower EBDA in the nutrition and care segment. However, at least for the first half of the year, the performance of methionine is better than expected and assumed in our guidance now. So Q1, nutrition and care will be up by more than 20% year over year. Plus, of course, we have some attractive pockets of growth in our portfolio. On the one hand side, we feel very similar to our peers, the difficult macro environment in our C4 business, and also partly in smart materials. which really differentiates us and our portfolio in the moment is on the one hand side specialty additives with a continued very solid performance and nutrition and care, not only methionine but also a strong care solution business. And then to your second question, your bridge is perfectly clear There's one thing which is not in our free cash flow, and this is the leasing. So if you take out leasing, then you roughly get to the point of the net financial debt. I hope that answered your questions.

Thank you very much. That was very clear.

The next question comes from Andreas Heine from Stiefel. Please go ahead.

I have also a question to the free cash generation, but looking forward to 2025. So my understanding is you have increased networking capital in Q4. You will keep CapEx flat and earnings go up. If nothing happens on the tax side, I am aware that bonuses will be somewhat higher. But wouldn't you get to a higher cash conversion than we have seen in 2024? And also that being possible going forward when earnings hopefully accelerate in a better economic environment in the coming years.

Good morning, Andreas. I'm not sure if I got you right. You said higher than 42% cash conversion rates. Let's put it like this. We are aiming and we are very confident that we will also reach a 40% cash conversion rate again. On the one hand side, yes, you're right, better operating results. CapEx is stable, but for sure we had a higher bonus payout. We will have a higher bonus payout in 2024 because buying bonus 23 to 24 has definitely increased. which is offsetting that part is a positive networking capital effect year over year. We had in 23 a very active networking capital management. And in 2024, you saw that we had a slight build-up by the end of 2024. So that, of course, gives us room to breathe in 2025. And so all that together, I would say, being conservative, we will reach the 40% again.

Could you highlight or give a rough indication how much more bonus payments do you expect in 2025 compared to last year?

Triple-digit million.

So something between 100 and 900.

Lower triple-digit. Mathematically correct, yes. Mathematically correct, but a lower triple-digit million.

Okay, thanks, and I go back to the queue.

The next question comes from Chetan Udeshi from JP Morgan. Please go ahead.

Yeah, hi, thanks for taking my questions. The first question, and I know this may be a bit too soon, but Christian, I just wanted to understand from you, because Evonik is one of those companies with a relatively high exposure to Germany. The announcement last evening from the new chancellor of a massive infrastructure fund. Can you talk about how that will touch, say, in any of your businesses, any implications that you might have in mind for your business? I know it's early days, but any color there will be useful. Thank you.

Yeah. Hi, Chetan. Good to hear you, and here's my comment about your questions. We, as Evonik, here pretty well placed in Germany, will definitely have a good chance to benefit from such infrastructure fund. And imagine, they have announced that this fund could have an amount of 500 billion euros plus. And for example, in our areas of construction, And, for example, in our areas all around our additives and, for example, in the area of defense even, our businesses will have a tremendous good chance to benefit from this if it comes, if this infrastructure fund would really be installed. So maybe to give you somewhat like a number, we do have around 20%. of our exposure in construction and in specialty additives, as mentioned, and these 20% will have a good chance for a really attractive kind of uplift. So we are strong supporters of this idea, I guess, as the whole German industry, as it could really be an economical recovery booster. And don't forget, ladies and gentlemen, also our C4 chain. our performance intermediates business will have a good chance to benefit and to profit from this kind of infrastructure because here we have a strong footprint in Germany too. That is my idea. That is somewhat like the first color I could provide you with about the infrastructure fund and how the positive impact on Evonik could be.

Thank you.

The next question comes from Sebastian Bray from Bloomberg. Please go ahead.

Hello. Good morning. Thank you for taking my questions. I would have two, please. The first is just a philosophical question on the new segment structure. What is it about the consolidation into two segments that is better than the existing three? Could you give some type of rationale for why the decision was made to reshuffle the segments. And my second question is on performance materials. What has delayed the spin-out or sale of this asset? It now seems to be partly linked to tech and infrastructure, albeit it's been bundled with that. But what is going on in the background that has meant that almost three years have passed since the last update in 2022, and the sales process still seems to be ticking away in the background without concluding. Thank you.

Okay, I take the first one in respect of how we would benefit and what is the idea behind of restructuring our business lines. As of today, it is that we have business lines focused on tailor-made solutions, customer intimacy, They have been mixed in our divisions with businesses which have been much more focused on their let's keep it like saying make the assets sweat strategy. So from this point of view, we have decided to say let's split it up and let's come to a more, by doing so, a more differentiated steering approach, which means in the bucket of the advanced technologies, We have bundled those businesses where we have a good chance to perform because of our superior technology quality, because of the efficiency and effectiveness in these businesses. So in a nutshell here we would have a cash generating unit which is definitely bundled and focused on these, let me say, ideas I've mentioned. And on the other side we have bundled those businesses in the segment custom solutions where we do focus on tailor-made, on the tailor-made approach and where we have a better chance to really precisely, precisely focus on these innovation buckets where we see the most promising ideas to benefit from, which is a different approach to the other one. So in a nutshell, A more and better differentiated steering of our businesses will really help to become better in respect of efficiency, in respect of the allocation of capex and beneath the line of a higher and more attractive growth. And in other words, if we could provide you with some more details and infos you're keen on to get, please. attend our Capital Markets Day in May in Essen in the center of the Ruhr Valley. There we would provide you with much more details and I can do it because a short of time here as of today. With having said this, I hand over to Mike.

Thank you. Good morning, Sebastian. Regarding the C4 business, There is not really much going on in the background, but we continue on what we have said before. We continue to monitor the EEC4 market for a value maximizing start of the divestment process. We have no hurry here. Maybe the start is coming now, and as Christian mentioned before, There might be opportunities now, especially with European-based assets, to move ahead.

That's helpful. Do you mind if I just ask a follow-up that occurred to me? The CO2 certificates, what happened at the end of Q4 that meant that this was a positive effect? Are they marked up before sale in 2025, or can you give some color on what the adjustment was there?

It's relatively simple, Sebastian. These very unused CO2 certificates that were still allocated to the PMMA, MMA business that were sold, and so they were not in the books at present value, and so it was a one-time effect we had now in Q4.

I see. And there's no intention to sell them in 2025 and make it cash effective, or it is the case?

Yes, it is. There will be cash effective then in 2025.

That's helpful.

Thank you.

Absolutely. The last question for today's call comes from Martin Rudiger from Kepler Chevrolet. Please go ahead.

Thank you for taking my question. First, on the energy costs where we know you will have a benefit of 15 million this year because of your hedges, but Assuming that, for example, spot market price for natural gas springs in the coming up quarters or months, would you have a benefit then next year, having in mind that there is a hedge also partly for next year valid? And maybe one clarification question also again to energy costs. Can you repeat what you said about the split of the energy cost by region i understood that europe is five percent but although the four europe accounts for forty percent of your sales maybe you can clarify what you mentioned about the split of energy costs thank you um all right good morning martin i start with the development of cost development um so

Yes, you were right. The double-digit million decline for year-over-year energy cost is expected in our budget. And of course, as we never hedge the 100 percent, there is always a small unhedged part. So that smaller unhedged part will fluctuate according to the spot market of energy cost. And so we further expect further cost relief in 2026. However, of course, this is then according to the unhedged part, can of course be differentiated. And then you asked about the energy cost by region. And this is basically, maybe with Europe, including the C4 business, we have more than 60% of our energy cost apply in Europe. We have roughly 20% in Asia Pacific, and around 10% of our energy costs can be allocated to North America. I hope that helps.

Martin, the 5% you mentioned is the total cost.

Sorry, that is the total cost. Exactly.

Thank you.

We have a last-minute registration from Georgina Fraser from Goldman Sachs. Please go ahead.

Hi. Good afternoon almost. Good morning, Micah and Christian. Just one question. In the health solutions business in the fourth quarter, You talked about inventory devaluations. On the one hand, just a bit, if you could explain the dynamic that was going on there and why it was necessary. But at the same time, should we take this as your organization is going through making restructurings and getting the business into a better alignment ahead of the capital markets day so we can see what the full potential is? Just any insights you can provide would be great.

Hi, Georgina. Good to have you. In respect of our health care business line, first of all, it is to say that we are convinced that in the future we will have a good chance to harvest from our new technologies we have placed right here. And in respect of the restructuring ideas They are not called a restructuring case, but let me say it is bettering the structure of this business line. It is that we have observed over the last years an increase of the organizational complexity driven by the hefty and deftly high amount of young projects because the pipeline is pretty well filled up. If you think about, for example, about our lipid businesses and so it was need to say um let's overhaul it in such to bring some more transparency into it and to reorganize it in a way that we can steer this business nine in a better way and that is behind um i guess that is answering your question and second in respect of our capital markets day um I would highly appreciate if you would find time to attend in person, and then we could provide you with much more details what we do have in mind about the future structure and how the company and our investors have brilliant chances to benefit from it.

Thank you, will do.

Great. I'd appreciate it.

Ladies and gentlemen, this concludes today's question and answer session. I would like to turn the conference back over to Christian Kuhlmann for any closing remarks.

Ladies and gentlemen, it was our great pleasure having you today. We wish you a brilliant Easter time and a brilliant spring time and hope to meet you soon in person wherever all over the world to provide you with a cutting edge of Evonik Industries. So far, take care and goodbye.