Evonik Industries Ag

Ladies and gentlemen, welcome to the Evonik Industries AG Q2 2025 earnings conference call. I am Konstantinos, the course call operator. I would like to remind you that all participants will be in listening mode and the conference is being recorded. The presentation will be followed by a Q&A session. You can register for questions at any time by pressing star and 1 on your telephone. For operator assistance, please press star then 0. 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 Q2 earnings call, ladies and gentlemen. Last time we met in May. We had a quite solid April in our books and we're expecting similar months ahead of us. Today, we all know that the last month of the second quarter got pretty tough across most industries. Still, we could deliver a decent second quarter and to stick to our full year guidance. Admittingly, that's the low end of the range. Having said so, a no. Your main question for today will be, is it still a doable target? Let us give you a first answer by taking a simplified look at the first half of the year before then turning to the month ahead. Our Group MTA decline the first half of the year is more or less exclusively explained by two factors. First, the weakness in our C4 business and second, the US dollar exchange rate combined. they do stand for an EBITDA decline of more than €100 million. Farther further, this means a large part of our core chemicals portfolio could withstand the pressure in the first half of this year and showed quite some resilience. Our two chemical segments jointly even posted slighter higher earnings. Custom solutions remain stable thanks to our resilient editors' business and the expected recovery in healthcare. Advanced technologies were supported by strong volumes in our animal nutrition business. For the second half of the year, we do expect several factors to give us support. So the lower end of the guidance is achievable, however, for sure not guaranteed. Michael will guide you through the main points.

Thank you, Christian, and good morning from my side as well. So what needs to materialize in the second half of the year to reach the low end of our guidance range? First, self-help measures from our optimization programs are fully in our hands and should support H2. Looking at our number of employees, we see them falling by more than 500 since end of last year, and there is more to come. For example, Silica will deliver additional savings from site closures with full effect in the second half of the year. Second, some Evonik-specific business tailwinds should play in our favor. The methionine market will stay healthy until the start of Q4 at least. PA-12 and crosslinkers will have better plant availability without the shutdowns seen in Q2. Higher volumes should also be visible for catalysts thanks to the ramp up of our new alkoxides plant in Singapore. In healthcare, the operational improvements in the last quarters will bear fruits in the second half as well. And our already contracted sales will show the typical year end recognition. But to be very clear, May and June were quite weak months for us, impacted by low consumer confidence and customer cautiousness. So for the next month ahead, and in order to reach the low end of our guidance, an improved macro environment is a premise. Coming to the free cash flow guidance, we have good confidence to again deliver our 40% cash conversion rate. This will be supported by both capex and networking capital in H2. First, we have cut our capex by 100 million for the full year. This means around 60 million lower capex year on year in second half. Second, We will see a strong cash inflow from networking capital in H2 quite similar to the year 2023. We have intentionally finished the last year with a higher networking capital level. We will reduce this level in the course of the year. However, we have not yet been able to do that as intended. This was due to the slowdown in demand, especially during Q2. And it was further enhanced by the maintenance shutdowns during Q2, where we had built inventories before shutdowns based on more optimistic demand assumptions. So, networking capital to sales were still above 19% end of June. We will manage that much stricter in the second half, and we have proven in 2023 that we know how to do it. Our long-term average is around 16% at year-end, so that means that there is significant cash potential towards year-end. Back to Christian for some final words.

Thanks a lot, Maike. Looking at the second quarter across the chemicals industry, the short-term risks are quite imminent at the moment. For the mid- to long-term, however, the opportunities outweigh these risks. We have described that in detail at our Capital Markets Day, and nothing of that has changed. Looking at the EU Chemicals Action Plan, for example, Evonik ticks all the boxes. Just to give you two examples. we will benefit from incentives for decarbonisation projects and with our next-generation technology projects, with quite a lot of them lowering our operating costs and emissions alike. Second, our innovation growth areas will be boosted by the European Union's support on circular economy and bio-based solutions. With this, Quite optimistic view, ladies and gentlemen, into the future. We are now ready and happy to take your questions.

We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on the 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, then you may press star and two. Participants are requested to use only handsets while asking a question. Anyone who has a question may press star 1 at this time. The first question comes from the land of Georgina Fraser with Goldman Sachs. Please go ahead.

Hello, good morning everyone. Thank you so much for taking my questions. The first is, if you could give us a run through of what you're seeing in each of your key end markets. Michael, you very clearly said that a bit of a pickup is needed in the second half to make the low end of your guidance. And I'm particularly in the home laundry or the care solutions business. And then my second question is a bit longer term. Has Evonik conducted any... strategic assessments around raw material availability, just that we're starting to see a lot of European cracker closure announcements, and it feels like headlines suggest that that's something we can expect to see more and more of in the year ahead. So how is Evonik thinking about the security of its raw material supply in that context? Thank you.

Yeah, thank you, Georgina. I would suggest Michael starts with the first question on the outlook for Q3 and the second half by segment, and then Christian can continue on the raw material availability.

Yes, let's do that. Georgina, good morning. Thanks for your questions regarding key and markets. So let me go through custom solutions and also advanced technologies especially. What we expect here is that for custom solutions of course we aim for slightly higher earnings in full year 2025 versus 24. So therefore we need a small uptick in Q3. And then obviously we'll see a usual seasonality in Q4. So on the one hand side, additives I think that we see that it's solid. It has a solid performance in H1 and also in the second half of the year we see it continually on a very solid level. Additional support should come on the one hand side from oil additive. Of course we see that there should be a path on higher raw materials because of the pricing formula. And we also expect additional volumes. And I mentioned that before, from a catalyst perspective, we see the alkoxides, the plant in Singapore, we see the ramp up there with the new capacities. And we expect also a recovery of the weak demand in Europe and in North America. So this is one of the parts where we see we need further macro development. to see a ramp up in the catalysts other than in the new capacities of the Alcock sites. Care should improve in H2. So healthcare, we see this usual seasonality, usually the customer contracts are six foot earlier, but then we see the typical year end recognition of the revenues. Also, the improvements of the operational execution, which has been implemented in the first half year, and from a care solutions perspective, we expect an overall demand increase. On the one hand side, remnolipids sales from the new plant in Slovakia, there should be a pickup, but again, in care solutions, we definitely need some further macro improvements as well. Coming to advanced technology, We see slightly lower earnings year over year. Of course, their macro hits us really hard. So the weak macro at end markets, if that remains on the one hand side, we have Q3 probably slightly below Q2. On the one hand side, the animal nutrition and methionine still is holding up very, very nicely. We might see or we will see another maintenance shutdown and we also will not see any further license benefits, benefits from the license sales in the hydrogen peroxide business. From a positive perspective, we see a further ramp up in the PIA 12 with the growing market and With maintenance shutdowns, PH-12 and cross linkers, we see better availability, and of course, lower cost. Also, for these two businesses, Mezzanine, as I said, prices are holding better up than expected. And also with Silica, we should see some cost savings due to site closures, Waterford and Leverkusen, and cost optimization measures in the various So, that was a relatively long answer. I hope I have answered all of your questions, Georgina, and I hand over to the raw material topic and Christian.

Thanks a lot, Maike, and good to have you, Georgina. I tried to keep my answer a little bit shorter in respect of the raw material question you have conveyed to us. we have a pretty good raw material availability overall. So in other words, there are no shortages. But I guess you've asked the question in respect of a longer term perspective, longer term view. And here, let me provide you with the following. Our aim is to create supply and value chain system in each and every growth region. That is because it will help us to stay independent from, let me say, political turmoil, political intervening like we do see it in these current days. And here, to provide you with a current example, as you know, We do sell 80% of the goods and products we do produce in the United States of America in the United States, which means we are here also on the supply side pretty safe because the raw materials we do need to do so in the United States, we do buy in the United States. So we have somewhat like an inner circle of supply, sustained sustainability in the respective regions, which gives us good comfort even to weather, if I may say so, to weather the political turmoil. So yes, we do assess these implications each and every quarter. aim is to become more independent by a regional approach in this respect here. I dare say even, I dare say that we are on the safe side and that is my little bit shorter answer to your question.

Thank you both very much.

The next question comes from the line of David Simmons with BNP Paribas. Please go ahead.

Hi, good morning. Thanks for taking the question. Is there any quantification you can give around some of the supportive second-half elements that you've mentioned? So are you able to say how big the savings are in silica, for example? Is the year-end recognition in the healthcare business any bigger than usual, or is that just sort of normal seasonal patterns? And then secondly, if you were to drop below the lower end of your guidance and you didn't quite hit the 40% free cash flow conversion, how much bonus provision would be unwound in the second half to support earnings?

Thank you very much, David. I think both questions go to Michael.

Sure. David, regarding the the indication on what is impacted, on which level, and what I just discussed on a very, very high detail. I think on the one hand side, the healthcare season recognition, and that's both the, on the one hand side, the seasonal recognition of healthcare is the usual So if you look into the 2024 or the 2023 guidance, this is, yeah, I would say low double-digit million euros. Silica savings is definitely a bit lower than double-digit, so that should be in the one single-digit million, which is supported here. So all together it is here and there, bits and pieces coming together, and you can do the math. What do we need from MACRO? So it's a little difficult to answer this question on that detail. The bonus provision that is needed, we mentioned before that bonus has not been, so we have been so far, We have been just in the low double-digit benefit for the Q2 results because obviously we keep our guidance. And so it will be, of course, below of the 100% in 2025. So weaker results, of course, clearly lead to a tailwind from the lower bonus. We use that to support in difficult times. So we would, if we go lower than the 2 billion, we would definitely see another double-digit million support. As I said, so far we are in the low double-digit support of bonus, and there could be more to come.

Thank you. If I'm able to squeeze one more in, it's unusual in this results season to hear a company relying on macro for the second half. I think a lot of others have chosen not to bake that into their view. So is there anything that you're seeing in July, which is maybe a glimmer of hope at all for the second half? Or is this sort of just speculative at this point?

Yeah, I can answer this one as well. So in July, I think there we are, like all of our peers, our visibility is super low. So I know we are August 1st, but it's still difficult to make precise statements on July, not even talking about August, before we have seen the actual numbers. It is, however, fair to say that we have not seen a major pickup in volumes and sentiment in July.

Thank you very much.

The next question comes from the land of Thomas Rigglesworth with Morgan Stanley. Please go ahead.

Hi there. Two questions if I may. The first is how you're positioning the business in the context of your change in accounts payable because it's quite an unseasonable decline in accounts payable. Is this purely just price lower costs rolling through accounts payable, or actually are you taking a wait-and-see approach on your inventories, i.e. you're purchasing less because you're not confident on the volume picture as it goes forward? I'm just intrigued to unpack that a little further. Second question, if I may, on our old favorite methionine. Just your view on 2026. We've obviously got, we've had some outages from competitors. We've had, you know, delayed ramp-ups from competitors. And you yourselves have put through a large amount of maintenance in 25. So I'm just kind of intrigued to see, you know, as all of those elements kind of reverse the other way, how you think the market performs and how you'll look to behave in 26 on the finding. Thank you.

All right, so I assume I take the accounting question and then hand over to Christian. So the payables, Tom, you absolutely rightly mentioned that we see a decline here, the decline in liabilities that is due to the fact that the payments were still made for still higher raw material purchase volumes in the previous quarters, and now we should see a kind of more leveled out payable ratio again in Q3 to follow. And with that, I hand over to Christian.

Thanks for that, Maike. What is a conference called good for not tackling the methionine aspect? So I'm happy to give you here some more color about how we think about the future of the methionine business. Maybe let's start with the expectations we do see, we do have in the third quarter. Here we do think that the markets across all regions will definitely stay tight. So that means, in other words, also in the third quarter, we will have a good chance to do our business here in a pretty nice and well way. And I guess the same holds true for sure for the first half of the fourth quarter. And having said so, that means also the incoming capacities from NHU They have since June, they have started to bring the first product into the market. These incoming additional products or this incoming additional volume is already, let me say, well digested from the market. So that means, in other words, despite these new capacities, the industry utilization rate will stay high maybe even really high until mid of the fourth quarter. And now let's have a look, let me say, first testing the water for the next year. In a nutshell, we do not have any kind of indication that the supply-demand, as I've tried to convey to you, will change in the next year. So that gives us some confidence that we will have a chance in 2026, also in 2026, to benefit from our sign-in business as we do in 2025. Very clear.

Thank you both very much.

Pleasure.

The next question comes from the line of Chaitanu Deshi with JP Morgan. Please go ahead.

Hi, thanks for taking my question. Maybe this is for both, you know, Christian and Micah both can chime in. But, you know, one of the key things you guys talked about at the Capital Markets Day was the focus on cost delivery. And I'm just wondering where do I see that in your numbers in H1? Because, you know, if I look at your EBITDA, it is down... 30 to 40 million year on year in H1 versus H1 last year. And I think from memory, you guys were talking about 150 million of net cost savings for 2025. So can you just remind us how much of these savings have you actually seen in H1 and whether the target is still achievable for 2025?

Okay, Shetan. I think I'll start and then let's see if Christian wants to add something, because we were both able, of course, to answer your question. So, as you rightly said, our goal is, was, and will be to achieve the high double-digit net saving number in 2025. So, we always mentioned high double-digit, not triple. So we are so confident to achieve this goal. On the one hand side, I mentioned already that we see employee numbers falling since end of last year. So already from June 2025 to December, or versus December 2024, last year, end of last year, we have 660 FTE already reduced and we see for the full year a reduction of roughly 710 FTE that are expected. So obviously then the savings will build up over the course of the year. It's a bit difficult to see that in our numbers because it is, let's say, supporting our EBTA. You could also have a look into our administration costs we show you. And so we expect, as I said, raising FTE or lower FTE numbers in the course of the year. And this is also why we expect higher savings in the course of the year. look into our admin costs. There is one clear line, but other than that, it really goes into all the lines of our P&L.

Chitan, just to sum it up, first, we do definitely stay put to what we have said, that we will have, as Mike has mentioned, high double-digit cost savings coming out of our efficiency programs in this year. Second, in respect of the reduction of headcount, Michael was so right. And being so, it goes without saying that you will have the full impact of this headcount reduction becoming visible in our numbers and figures at year's end. So in this respect, we will meet definitely year's end. And that is what I could cordially and very politely add to Micah's prudent answer she has conveyed to you.

Thank you and one last question I had was as you look into your businesses now into third quarter I mean do you see maybe any signs of incremental pricing pressure because it feels like all the chemical companies are seeing the same thing which is even worsening of demand over second quarter and you know this is an industry which needs to fill the factory. So I'm just curious, you know, in this low demand environment, is there a sort of sign of any incremental pressure? You talked about care chemicals or maybe additives. I mean, is there something that sort of is coming across in your business now in Q3 or is it now stable on pricing?

Yeah, Chetan, what we currently see is, despite, of course, on a relatively low level, But we see pricing relatively stable Q2 and going forward then quarter over quarter Q2 to Q3.

That's clear. Thank you.

The next question comes from Len of Martin Rediger with Kepler Chevron. Please go ahead.

Yes. Thanks for taking my questions. My first question is primarily for Christian, and it's on politics twofold. A, there was recently an initiative made for Germany by 61 companies meeting Chancellor and investing 631 billion until 2028. Do you expect any push from that initiative for the German economy and thus indirectly for you? And as a follow-up to that, you also mentioned in your handout that you refer to the EU chemical industry action plan. What is your honest expectation about that? My second question is on tariffs. I know you produce to a large extent locally for your clients in the US. I hear this 80% ratio. But did you analyze what the tariffs mean for your activities in Mexico and Canada and other regions? And did you look at what the indirect effects will be as you have some clients in Europe who export to the US and they are affected from the 15% tariffs. Thank you.

Martin, good to have you. Three questions here, my three answers. First, do we expect a concrete push of the initiative German companies started and presented to the government? A concrete push we do not expect. We have some hopes, and in this respect, we are confident that it might be something like refreshing the psychological, let me say, view on Germany in particular, for example, for investors and in particular for the atmosphere that it is much too early to pull the flag of German industry down instead of to express a little bit more of confidence. Second, it was a question about the impact of the tariffs, the announced tariffs or the results as far as we are informed between the negotiations of the European Union and the government of the United States. Let's keep it like this. First, it is negligible. As you know, we have calculated that there would be an impact of 10%, that is what we have calculated during the first days of this year, and this kind of impact would be translated into an EBITDA of hereby some approval around 20 million euros. So if it is now 15 million euros, it could be slightly more. But on the other side, they have already announced that there will be an exemption list and as far as we are informed, those goods and products which might be, which might be tackled by this tariff policy of the United States, a good amount of them might be on this list of exemptions. And that includes already the potential impact in respect of our businesses we do in Mexico and in Canada. But, and it is here worthwhile to talk about this but in a shiny and gloomy way, the global impact of the American trade policy is really severe because it is fostering, it is lifting up uncertainty all over the world and all over the markets. So it is a global approach and that is a severe one. And as you see, if you look to global economy, now we talk about GDP of around two point, maybe 2.1, 2.2 plus. I mean, First days of this year it was around 2.6 to 2.7 plus. So here you can see globally somewhat like a decrease and that is fair to say that goes without saying. Third, about the European Union initiative, the so-called action plan. I was one of the CEOs of the chemicals industry having chance to discuss the action plan with the President of the European Commission. And I'm really delighted because there's a change. There's a change not only in the idea of how to bring growth back to Europe, but all the more there are concrete measures and initiatives, let me say, coming in place which will support the growth of companies like Evonik Industries terrifically. Maybe think about energy and decarbonization. In these areas, we would really benefit from it. So here I'm, let me say, confident that in the mid-term, we in Europe and we particularly in Germany will have a good chance to benefit from this.

Thank you.

The next question comes from the line of Matthew Yates with Bank of America. Please go ahead.

Hey, good morning, everyone. A couple of questions, please. I'm struggling with some contradictions within the messaging, or maybe it's just my confusion. But firstly, as it pertains to working capital and the inventory situation. So if I heard correctly, you built inventory expecting better demand and ahead of your shutdowns. I'm not sure if this was focused on particular business lines or that was across the board. So when I think about your second half comments, on the one hand, you're saying profits can recover because you'll have more capacity available in certain lines. But then you're also saying from a cash flow perspective, you'll be able to reduce the inventory. Now, I would assume part of the way you can reduce inventory is to scale back production, and that then lends a risk around utilization rates and profitability. So can you help me reconcile the way you're running the business right now in terms of managing the balance sheet and the cash flow versus managing the P&L? Thank you, and then I've got a follow-up.

Okay. I'll start, Matthew, with your networking capital topic. On the one hand side, maybe allow me to mention that with the shutdowns, there's not only a build up of the inventories coming with, but also a very high cost, which is from our perspective, of course, graded as operational. But if you do a shutdown, then there is high well, or not high, but mid double digit million euros are allocated also from a cost perspective to these shutdowns. On the other hand, you are of course right. If you have higher networking capital, so to say higher inventories, there is a trade off now for the second half of the year regarding selling off inventories and also the EBTA and so profit and cash flow. I think it will of course be an additional constraint because we need to lower the inventories in the second half despite the fact that we expect to reach the guidance at the lower end. But this is why we said there are a couple of topics which support H2, and this is the lowering of the inventories is definitely one where we have headwind regarding the profits.

Thank you. And maybe the second one is particularly for Christian. At the CMD, you introduced this concept of being a super force in the industry. And I see it again in the slide deck today. In your introductory remarks, you had to say that a large part of the earnings decline or volatility relates to the C4 business. And so far, there hasn't been any timeline given on a strategic exit of the assets. Would you go as far as to commit to saying that you will be out of this before the end of your tenure? Or are we still in the situation where we're waiting for a cyclical upturn which may or may not come?

Matthew, that's a very prudent kind of question. And here is what I have in mind about it. First, yes, of course, this business is for a is suffering from the current economical environment, the current economical instance that is stating the obvious. Second, as you know, a good, maybe one-third even, a good part of the revenues we do in this business belongs to the construction industry. And here I have confidence. confidence because of the infrastructure program the government of Germany has announced and the additional initiatives of the European Commission. I do think that these initiatives will lift up construction industries and the respective markets over the course of 2026. And that is what I expect and therefore it would be not very, let me say, smart from our side to start the sales process in these days. Here it is to try to better the market, let me say, to wage. until the market perspectives, until the cycle will turn into the better. And in the meanwhile, we'll do our homework. We'll not tilt away from initiatives to better the cost positions of our C4 business, which will then in the long term or even in the midterm already pay off. Thank you both.

The next question comes from Lano Fanil Shenoy with Barclays. Please go ahead.

Hi. Thank you for taking my questions and good morning. So I had a couple of follow-up questions on methionine. Now it's good to hear that you've not seen any change in the supply-demand scenario so far and you don't expect that to change in 2026 as well. But I'm trying to understand what kind of a demand growth have you factored in while calculating this for 2026? In other words, what would be the demand growth required in 2026 so that the supply-demand scenario remains similar to what it is right now? And secondly, on the shorter term in methionine, We've been hearing from industry sources that currently the demand is weak and suppliers who are currently in maintenance have not been lowering prices and this has resulted in very low percentage of contracted volumes for Q4. Otherwise the volumes of Q4 are at least partially contracted by now. So could this imply that customers are actually waiting for prices to fall before contracting the Q4 volumes? In other words, do you see a risk that the prices may decline in Q4 or are you confident about prices holding up till the end of 2025? Thank you.

Hi. The first question, you know me, I guess even quite well. So you know me as a quite conservative person. CEO and having said so, my assumption is that we will have a three to four percent growth, but that is what I would underpin saying it is a conservative assumption from a conservative man. Second, I do not agree upon the noises you've heard from the market that in the course of the fourth quarter, we could see, we would see a decline of pricing. We do, and that is here, that our market intelligence, we do hear the opposite from our sources that the demand and that the pricing for 2025 is pretty okay. In other words, remains good. Thank you.

That's very helpful.

Pleasure. So, ladies and gentlemen, having said so, this ends our call for today. Michael, the entire crew of our investigations team and I do wish you a pretty good summer vacation and thanks so far for your attention. Take care and bye-bye.

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