Yeah. Ladies and gentlemen, welcome to today's Q3 2020 earnings conference call of Evonik Industries AG. At our customer's request, this conference will be recorded. As a reminder, all participants will be in a listen only mode. And after the presentation, there will be a question and answer session.
If any participant has difficulties hearing the conference, please press star followed by 0 on your telephone for operator assistance. And with that, it is now my pleasure to hand you over to Mister Tim Line, Head of Investor Relations. Please go ahead, sir.
Thank you very much and welcome from our side here at Evonik to our Q3 earnings conference call, with me as usual, Utevolff, our CFO and Christian Kulman, our CEO. And with that, I hand over directly to Christian for the short opening remarks.
Thanks a lot, Tim. Welcome out from my side. I hope you and your families, all safe and doing pretty well in these years of course in treatingly difficult Corona times. As you already know, a strong finish in September led to our pre release mid October So you're already aware of the key figures for the quarter. Nevertheless, our solid performance in 2020 is not only driven by a stronger September.
It is a result of a strategic agenda we have pursued over the recent years. So let's review what we have implemented over the past month. In all modesty, a pretty impressive track record are there same. In August, we announced the acquisition of Pozzo for a very for this type of business attractive multiple below 10 times. Product sales portfolio is a perfect complementary fit to our existing Catalyst business.
The combined 5 years. In September, we announced the decision to carve out baby care business. The business has a strong market position, advanced technology platforms, and excellent process and chemistry know how. However, It does not meet the strategic and financial goals of the group anymore. Therefore, we decided to start the carve out process year, we'll decide about the next steps, which will ultimately result in a divestment or a punish In October, we announced to close our smallest methionine plant in Bethany.
We will now focus on our 3 state of the art global hubs. With a higher utilization rate as well as a double digit cost savings, we are well positioned as cost and technology leader in this industry. So while we made good strategic progress over the last month, we still have ambitious targets and will not stop here. We'll continue to work on our strategic agenda with similar speed also in the next year. During the crisis, we have also pushed forward our innovation initiatives.
These are major contributors to our billion additional sales from new products by 2025. To us two examples. As you know, we are a world leader in pH12 powders for additive manufacturing. Just recently, we launched a new generation of ready to use powders for 3 d printing. This product is about 80% recyclable in the printing process.
And that strongly contributes to Circular Economy. For our 100 percent biodegradable bios effectiveness, our partner, Unilever dignified its collaboration with Evonik as a key pillar of its clean future initiative to drive decarbonization The 1st world scale plant in this field planned for 2022 is a true milestone for the whole industry and will really help will really help us to realize our ambitious growth target. With that, over to Ute for a glance on the financial perspectives.
Thank you, Christian, and welcome from me as well. Indeed, our strategic portfolio transformation is bearing fruits. This is clearly visible in our numbers the year so far. The flow is up year on year despite lower earnings level. High cash awareness, strict costs and CapEx management as well the ongoing benefit from last two years, and this is paying off now even in the time of the crisis.
With resilient performance, we are mastering the crisis better than many of our peers. The resilience is mainly driven by our growth divisions, specialty additives, nutrition and care. Specialty Additives' performance is based on our leading portfolio of custom designed and mission critical It's business model stands the test also in the crisis with a rock solid margin level of 27%. Nutrition And Care earnings are up year on year. This is supported by the robust end markets as well as our active cost management, especially in the health care business.
We have experienced an unchanged strong demand for active ingredients in care and for our on our polymers. Smart Materials has shown a nice sequential improvement. Inorganic for high g personal care and environmental applications are virtually unaffected by the crisis. This is also true for our innovations in pre and membranes for energy efficient gas separation. And the auto related businesses replacement products like silica for tires have led the in the recovery while also PA12 for the OEM market has shown improving trends to the end potential of our portfolio
with our full year outlook. We as one of the very few companies in our sector have given a precise outlook already back in May in the middle of the crisis. II reporting in August. And after the solid performance in the third quarter, we have now narrowed the range to 1,000,000,000. So despite the growing uncertainties around us, We are targeting to extend By the reaction on our pre release mid October, the Q3 beat, in combination with the unchanged full year guidance was strangely enough turned into a potential earnings risk for quarter 4.
Some of you, but ladies and gentlemen, with the threat of new lockdowns around support, I'm sure you will agree. This is not the time to change our policy of guiding reliably and delivering on what we promise. Last, but not least, we upgraded our cash flow outlook the second time this year. The structural improvement over the last years led to an increase in our cash conversion from 22% in 2017 to 33% in 2019. For this year, we do now expect a free cash flow of around 1,000,000, which translates into cash conversion rate above 35%.
That is what will bring us closer to our midterm time of above 40%. So overall a pretty solid performance in 2020. And this was only possible with the basis we have laid out during the last 3 years. Freezing. The environment stays highly uncertain and our visibility remains slow.
So it is all the more important to have a clear strategy and to improve the resilience of our portfolio further. We'll continue to work on this strategic agenda going forward. And we are convinced that over time, our strategic progress will become visible in a higher valuation as well. Our brief presentation. Thanks for your attention so far.
And now we are happy to discuss your questions.
Our very first question comes in from Mr. Charlie Webb of Morgan Stanley. You have the floor. Please go ahead.
Maybe just a couple for me. First off, just around, current trading, obviously, you flagged the uncertainty as we head potentially into the 2nd lockdown in Europe, but perhaps you can provide us with some current comments around how October trading was maybe by division, obviously we see some prices perhaps in methionine and areas like that a bit softer into the fourth quarter, but perhaps just give us a sense on how things are farings so far, and to put this in context of where we are within the guidance as in what gets us to the upper end? Are we around the midpoint? And what would be a scenario that get us towards the lower end of that guide range. That's the first question.
And then just secondly, similarly on free cash flow, at this point in the year or 9 month stage, roughly 1,000,000 ahead of where you were last year, yet you're guiding for flat free cash flow year on year for the full year. So what's the delta Why is Q4 free cash flow going to be notably weaker than last year? Just to round out.
Thank you. I will take the first one and then Ute will give you some more color about the free cash flow. Again, this fair to say that we've delivered a quite solid performance during our 3, our quarter 3, the earliest only been, below the prior level of an amount of give or take 4%. And, you know, this accelerating trend throughout the third quarter was really promising, because it shown that, we have delivered an improvement, which has become visible in each month of the quarter And therefore, we really, had a good start into the fourth quarter. In other words, the positive trend of the September continued into October.
Having said this, also our Nutrition And Care business will have a solid finish. And they should, again, they should again be above prior year's level in the fourth quarter yes. But don't forget, you know, there's a threat of new lockdowns around the world and the environment will definitely remain highly uncertain. And having said this, it is given that the visibility it's really very low. So we have made let's give Alexis.
We've really made good experience to stay prudent in our guidance. And for us, and in particular, for me, there's definitely an absolutely no reason to change this policy and the environment. Despite this uncertainties I have mentioned, we stepped good to our style, to our behavior, to our attitudes. And it is more than this. It is our obligation and respect of our track record saying it is about promise and delivering.
And this is what holds also true for this year. Please, ladies and gentlemen, remember, we have guided early in the year as one of the very few companies in the sector and are as of today on track to deliver on this guidance. In a nutshell, the positive trends we have seen towards the end of quarter 3 has so far continued into the beginning of quarter number 4. So the billion EBITDA up well, a pretty well underpinned. And that is, but exactly we have promised back in May.
And talking about quarters number 4, let's see where we will finally come out But once again, the 1,900,000,000 EBITDA are pretty well underpinned. So clear target is once again to deliver on our promises in this year and to prove the increasing resilience and the growth potential of our portfolio of Evonik in the next year. So far with this, I will hand over to it.
Thank you, Christian. Yes, I'm on Q4 cash flow. I think there is a couple of factors to watch. 1st of all, the earnings level this year were most probably lower than last year. Please keep in mind that we had license income last year in Q4, which was a considerable double digit amount so that this half of the gap already.
Then there are, of course, we worked a lot on inventories through the year. So you'll see that in the quarterly cash flows over the year, especially in Q3, we did a lot in our net working capital already. Last year, the phasing was maybe they're a little bit different. And we have, of course, a effect with lower raw material prices, with lower sales, the payables, no, year on year, also have a negative effect on the cash flow. And I think that more or less are the main factors to keep in mind here.
But I think it is really worth pointing out that although we have significantly lower EBITDA, although we really have to make sure we have enough inventory to be in the position to supply our customers, we are reaching more or less or even a little bit more of prior year's level. And I think actually be the message.
Maybe just one really quick follow-up on current trading. Can you give us any sense on how volumes are trending through October relative to September just so we can get a sense on that?
In as we said, we had a clear recovery in September, especially towards the last weeks of September. So that was all as far as we can see it, real demand pickup, no restocking or other effects. That continued to October. So order books look visibility remains very low. We have to see how the lockdowns really work.
It's not only Germany. It's also other European countries. We that can affect suppliers from us, customers from us. So we have to see how, how this really turns out in the end. Of trend is intact, but of course, with limited visibility.
Thank you, Mr. Webb. Our next question comes in from Andreas Heine of MainFirst Bank AG. Please go ahead.
Thanks for giving your opportunity to ask some questions. The first is actually on the dividend. You outlined that earnings will be down, but flow at least flat. Maybe you can outline what that means for the dividend. So the cash flow would imply that you can pay the dividend online year's level as it is fully covered.
That's the first question. You can give some clarification on that. And the second, as usual, maybe an update on methionine. We have seen quite a number of technical issues at the beginning of the year probably also caused by COVID 19 lockdown. Now we have something similar going on, are there again, to be as back to supply disruptions from due to nickel issues, in this quarter, which usually seasonally sees a very high demand.
How do you see in the situation in supply demand in methionine for Q4 and maybe even Q1?
I take the first and the second one, it's my pleasure. And let's start with the dividend. As you know, a rely ability and continuity in our dividend policy is of utmost high priority for us. And you will Whatever has happened, we have not cut the dividend. And by the end of the year, yes, we will decide on the dividend for 2020.
But if you look, if you look at our expected, free cash flow as Ute has provided you with with the expected free cash flow level for 2020. What will be around 1,000,000. That is what will definitely cover once again our dividend So as of today, I, we do not see any reason to change our dividend policy of being reliable and showing and expressing continuity in this respect. I hope that you've got this early bird message, in the right way. And now it is the second question is about methionine.
Okay, ladies and gentlemen, of course. It can't be that there's any kind of investors or analysts conference without tackling questions around methionine. Okay. Let's keep it like this. During the first graph of the with a sufficient amount of this product and everything run, give or take in a pretty good way.
Reading this between the line, it means that is a key, key and core target to provide our customers with a sufficient amount of best methionine all over the world. It means in other words, of Evonic methionine. But on the other side, yes, it is right that we have, seen something like a closure of one of our, designing, methionine capacities in Antwerp. And this is for the next, I guess, 2 to 3 weeks. 1 of the production facilities of methionine in Antwerp will be out So, let's keep it like this.
We are prepared to manage situation, but it could become to, let me say, a little bit more child supplied chain situation. Hope that is helpful for you.
Our next question comes in from chetan Udeshi of JP Morgan. Please go ahead.
Yes. Hi. Thanks. I just had maybe one question on maybe a couple on cash flow. One is the the the line item on post retirement, provisions, you know, it it seems it's positive so far this year.
I think my understanding was post the CTA reimbursement. It was supposed to be $100,000,000 negative per year. So can you maybe us understand the delta there? And secondly, just on the same topic, given the deficit has risen through this year, the lower discount rates, does that have any bearing on on the future cash out, on on serving the pensions? I you.
Yeah, Tushan. Thank you very much for the question. Yeah, the payouts for pensions, of course, they fluctuate a little bit from quarter to quarter. So there are also, reimbursements for some tax items and so, so from that point of view, if there is a small positive, total, I think that should not, be overinterpreted. So from that point of view, this is how we handle it.
We I've given you, yeah, one and a half years ago, an orientation, how much that could be. Of course, that can fluctuate a little bit from year to year as we have fundings also in other pension funds around the world. So from that point of view, the indication we gave was really the very rock solid minimum could be somewhat higher here and there. And I think that's basically it. So no interest rate, has not such a high impact on the cash out.
It's more, yeah, the the net present value that you see in the balance sheet and the provisions, of course, over a longer time. If you have lower yields, you have less to dispute, but that's more long term effect on the other side really very well diversified in our asset portfolios to really have sufficient yields. So I would say for the next year, is that should with regard to cash out be no headache for us.
Our next question comes in from Martin Roediger of Kepler Cheuvreux. Please go ahead.
Yes. Good morning, Mr. Kumar and Tim. Just three more clarification questions. First, sorry to come back to methionine, you announced the streamlining of your smaller plant in Wesseling and you mentioned double digit cost savings, but you miss the volumes from miscellaneous going forward.
So can you explain the net benefit from that decision. The second question is on the tax rate in the P and L. I saw that in Q3, it was was was rather high. The adjusted tax rate was 31%. Can you explain why that was that high?
And in that context, you increased the tax rate guidance for this year from 27% to 28%. Is that because of this item in Q3 or is it more structural? And then thirdly, on the bias effectiveness, which is part of your goal for 2025. You mentioned the world Gate plus will be finished by 2022. Can you provide some data about the capacity of that project and how do you see yourself in that bias effectiveness arena versus competition?
Thank you. Let me start with the question about assigning and about vessel. It goes without saying for us that it is to, in this business, to become and to stay to remain being the cost leader. And being the cost leader means to enhance efficiency in every respect. Having said this, We've made this session, to close our tireless methionine capacity in Germany here in Wesseling.
And here we talk about cost savings of a low double digit 1,000,000, and it will be an equal split over the next 2 years. That means, in other words, that translates into 1,000,000. And there will be a second, let me say, plus because additionally, we would increase the utilization rate at our 3 global high as you know, one is in, in the U. S. In Mobile, Alabama, one is in Singapore, and one is in Antwerp.
And in this, let me say, setup, we will be able, not only to remain our positions instead of obtaining them, And that is the next milestone in this respect with this, I hand over to Ute.
Yes, on the tax rate. So I think what you see that finally in P and L is a mix of incomes around the world. And of course, they are always subject to national tax schemes and the mix of these income, of course, influences the final rate as well. So what we have on the other side, we have if we have, for instance, M and A project. So the cost for that project cannot be deducted from taxi in Germany.
So course, the amount of that can hardly be, estimated at the beginning. And in the end, it influences the tax rate. That's one thing. But also, lower income in some countries where we have low tax rates. So year on year, if there is a small deviation of course that moves the overall blended tax rate.
I think that are, 2 very important influencers. And of course, we have all the year, we have the tax auditors here from the finance authorities. And they also claim taxes from old years, and we have to mirror that in our tax liabilities that influences the rate as well. And this is the mix that we have seen this year. And that might lead to smaller fluctuations year on year But again, it's really a couple of minor influences.
Okay.
Yes. Biosefactants. If I would say, bias effectants are one of the game changers, in future in these respective markets, I'm confident that everybody of you would agree upon this. Evonik, will be, the 1st company, building, a world scale, biosurfactants plant, And that is what will go on stream by 2022. For us, The bias effect is innovations.
Innovation is a similar of similar relevance and importance like, for example, our Vedamaris project. And then the next was about, yes, it is, talking about the financials, yes, it That is what is, what will enhance the attractiveness of this because this investment will be a CapEx light 1. And we will only spend mid double digit, million volume here in this. I guess this was your question, if I've got you right?
Yes, correct. Mid some double digit amount of CapEx you want to invest there. Correct?
Correct.
Thank you very much. Our next question comes in from Gunther Sakhman of Bernstein Global Wealth management. You have the floor. Please go ahead.
Good morning, Ute, Christian and Kim. So I've got two questions, please. One is following up from the earlier question on free cash flow and the strong numbers that you reported in the 9 months. What are you expecting for working capital into year end? And could you specifically say what could you quantify any temporary measures due to the pandemic compared to what is sustainable, also in the next year.
That's the first one. And the second one on baby baby cap, Christian, you mentioned earlier that in the prepared remarks that divestment or a partnership potential strategic options Could you discuss, what your preferred options are and what can be achieved?
Yes, Gunther. Good to hear you now. To your net working capital question, we normally were on a path to reduce step by step net working capital intensity. So that was the standing target for every year. Of course, this year with the arrival of the crisis, we pause and be a very consciously build up inventories, especially in Q1 and Q2, to be able to deliver, serve our customers also in times where there is logistic constraints and everything like that.
You see that quite dramatically in the Q2 numbers. Of course, now that we see how the supply chain is working. Logistics has come back again, we step by step, reduce the inventories again This is what we did to do. Of course, there are some technical effects if you see the full year with declining sales. Of course, as you have a somewhat positive effect from receivables.
And on the other side, with low raw material lower raw prices and lower volumes here and there, you have a negative effect from payables. So this is all what goes into the working capital some are more technical, some are as the inventories are under strict management. And this is how we look at it. For next year, of course, would then try to get back to the normal procedure, but we have to see, of course, how lockdowns work maybe we'll have some increased inventory rates again in Q1, but I think it's too early to give any precise view that today.
Hi Gunther. I take the second question about Baby Care and the preferred you know, let me be very straight upon this. I would really prefer a rate divestment, but I would not, be so snoozy to exclude having said this, any other kind of option. And let's see what is going to happen, until summer of next year. And then we will take, as you know, our next step And one thing you can take for granted, and that is that we will, in due course, sell the attractive baby care business for real, attractive us.
Thank you very much for your patience. We continue with Mr. Matthew Yates from Bank of America Merrill Lynch. Please go ahead.
Hey, good morning, everyone. Maybe a couple of questions for Ute around the cash flow and the balance sheet, if that's okay. The first one, hopefully a simple clarification. I think when you talk about free cash flow of 1,000,000, am I right in saying that pre financing. I think you guide 1000000, 1000000 on the P and L.
Can you just remind me if the cash interest or financing would be a different number to that? And then the second question is really just around how you're thinking about the balance sheet and the leverage of the group. I was looking at the last Moody's review done over the summer, and then they mentioned that your leverage of almost four times is high relative to your current rating, but they're budgeting in, I think 1,000,000 of debt pay down next year Is that just an upcoming maturity you're intending to pay out of cash or is there some sort of disposal proceeds factoring or underlying generation of the business to help you deleverage, particularly given the strong dividend commitment you've reiterated on this call?
Yes, Matthew, thank you for the question. So our free cash flow is before financing, cash is cash out. And this is what you expected, and this is how it is. So our free cash flow has to cover the dividend, the lease payments and the interest payments. This is how we look at it.
Cash out interest, will more or less be at the same level next year though we are repaying a bond, that's right, but it didn't have a very high interest rate. So maybe overall effect is, recognizable, but not too big does not move the needle for the full free flow number, I think. So that is it. The Moody's view on our leverage is some more specific as they look at gross debt, yeah? And they are not willing to take a net debt view for I don't know, several reasons they have.
So from that point of view, they are maybe a little bit more cautious or seem to be more skeptic, but there may the main driver of that is that they look at gross debt instead of net debt, like for instance F And P does in a crisis situation people really focus on cash on balance. Of course, that's a little bit contradictory on one hand, but again, we have to respect how they do it. We will repay outstanding bond. We have, 1 quarter before final maturity, we have a call option and I think we will use that option to really reduce the debt and reduce somewhat of the interest payout. So respond.
And if I can just squeeze in one more while I have you, the portfolio is changed an awful lot in the last 5 years. In the event that we do get a change in administration in the U. S, and associated change in corporate tax rates over there, how are you thinking about the impact on Evonik?
On the tax or what do you mean?
Yes, exactly. On the group tax rate, I think particularly given some of the acquisitions you made in the past, had a large U. S. Presence but also came with some shields in at least in the short term. I don't know if those are finished now.
Yes, if tax rates were to rise in the U. S, of course, our goodwill depreciation would then more had higher value on the other side, the taxation on the normal profits where then would be then higher. So I think net would be slightly negative. But again, we also had our business in the U. S.
For many, many years with higher tax rates. So I think the the normal business is not very much affected by that. But if you look at the acquisitions, so the specific value of the as it step up would be higher. But again, then the taxes for the normal for the normal profits would be also higher net effect slightly negative.
Our next question comes in from Mubasher Chaudhry of Citi Investment Research. Please go ahead.
Hi, thank you for taking my questions. Just two, please. Given the strong performance lessons consensus on the EBITDA. Could you help us understand the cost saving measures that were taken and split the cost savings between temporary and, structural. And how do you see them trending going forward, especially the temporary ones.
Should we expect those to come back? And then secondly, just a quick one on methionine again. The spot prices have come off quite sharply. I just wanted to get your thoughts on what you're seeing in the contract market. And how we should think about that for the fourth quarter and potentially being into the first quarter as well?
Yes, Mubasher. Thank you very much. I'll start with the cost savings. Very fundamentally at the beginning. We have been working on our costs for many years now.
Our target is to really track really improve the cost basis in many, many parts of our group, be it and SG and A, be it in some of our businesses. So from that, point of view that is an ongoing measure that we do an ongoing initiative and not so much linked to a specific year with the crisis as we see it, today. Of course, we have some items there is a direct link to the crisis. I think travel costs, that's an obvious one here and there. Some training, marketing costs are also some what, lower.
But again, this is not the biggest portion of our cost achievement over the last years that are of bearing fruit in this year. If we look at travel costs, they might come back to a certain extent, but you all know that from yourself now that we learned what we can do with online meetings, a big portion of meetings will be online also once we are allowed to travel again, as everybody now knows how it works. And for what purposes this is And I think especially for internal meetings, when you meet colleagues, I think that will be used much, much more heavily than it was before more. We also did not, launch a specific cost program this year like some of our peers it because we do not want to over stress the organization. They are already working on the costs.
And from that point of view, I think we are on a good way. And I think our number also underpinned that quite impressively.
Okay. I take quick one on the sign in. And I assume that I will get you by surprise, believing that you're true reader of feed info. Why? Why?
Here's the answer. Looking at the market, as the price volatility has clearly come down once more has clearly come down over the last years. For example, our average contract price for this year is pretty much, ladies and gentlemen, on the same level as it was in the last year. And maybe to give you one more, the maximum price volatility in our realized contract price, so the difference between highest and lowest price was only around $0.20 over the last 2 years. And as I have mentioned, if you see, if you look to our strategy in respect of methionine, bettering enhancing fostering our cost efficiency and our cost positions.
That is, I hope, for you, relevant and attractive news. So once again, we talk about the price difference between highest and lowest and of around 20% sorry, 20¢ over the last 2 years.
That's very helpful. Thank you.
I hope so. And having said this, ladies and gentlemen, that is what closes our call today. Thanks a lot for your interest. Thanks a lot for your intention. And from the bottom of the heart of Ute, the Investor Relations team and me, JKR, and stay healthy.
Goodbye.
Ladies and gentlemen. Thank you so much for your attendance. This call has been concluded. You may now disconnect.