Dear 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 zero on your telephone for operator assistance. With that, it is now my pleasure to hand you over to Mr. Tim Lange, 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, Ute Wolf, our Chief Financial Officer, and Christian Kullmann, our Chief Executive Officer. With that, I hand over directly to Christian for the short opening remarks.
Thanks a lot, Tim. Welcome also from my side. I hope you and your families are all safe and doing pretty well in these, yes, of course, increasingly difficult Corona times. As you already know, a strong finish in September led to our pre-release mid-October. 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. Let's review what we have implemented over the past months. In all modesty, a pretty impressive track record, I dare say. In August, we announced the acquisition of Porocel for this type of business, attractive multiple below 10 times. Porocel's portfolio is a perfect complementary fit to our existing catalyst business.
The combined entity will benefit from Porocel's unused production capacities and should double earnings over the next five 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. It does not meet the strategic and financial goals of the group anymore. We decided to start the carve-out process for this business. After summer next year, we will decide about the next steps, which will ultimately result in a divestment or a partnership. In October, we announced to close our smallest methionine plant in Wesseling. We will now focus on our three 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.
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. The clear focus is on innovative products with a strong sustainability focus. These are major contributors to our EUR 1 billion additional sales from new products by 2025. Just two examples. As you know, we are world leader in PA12 powders for additive manufacturing. Just recently, we launched a new generation of ready-to-use powders for 3D printing. This product is about 80% recyclable in the printing process, and thus strongly contributes to a circular economy. For our 100% biodegradable biosurfactants, our partner, Unilever, has dignified its collaboration with Evonik as a key pillar of its Clean Future Initiative to drive decarbonization.
The first world-scale plant in this field, planned for 2022, is a true milestone for the whole industry and 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 for the year so far. Just a quick overview of what we have achieved. EBITDA and pricing were stable in our growth divisions year to date. Many of our businesses are virtually unaffected by the crisis. This is a strong reflection of our resilient end markets. Free cash flow is up year-on-year despite lower earnings levels. High cash awareness, strict cost, and CapEx management, as well as the ongoing benefit from our CTA pension reimbursement, support the higher cash conversion rate. We have been implementing all these measures in the 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, and Nutrition & Care. Specialty Additives performance is based on our leading portfolio of custom-designed and mission-critical solutions. Its business model stands the test also in the crisis, with a rock-solid margin level of 27%. Nutrition & 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 healthcare business, we have experienced an unchanged strong demand for active ingredients and care and for our pharma polymers. Smart Materials has shown a nice sequential improvement. Inorganic for hygiene, personal care, and environmental applications are virtually unaffected by the crisis. This is also true for our innovations in 3D printing and membranes for energy-efficient gas separation.
In the auto-related businesses, replacement products like silica for tires have led the way in the recovery, while also PA12 for the OEM market has shown improving trends towards the end of Q3. Overall, our portfolio has proven its resilience this year, and the target is clear: to prove the growth potential of our portfolio in the next year. With that, back to Christian.
Thanks a lot, Ute. Let's finish 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. We confirmed the outlook range with our Q2 report in August. After the solid performance in the third quarter, we have now narrowed the range to EUR 1.8 billion-EUR 2 billion. Despite the growing uncertainties around us, we are targeting to extend our track record of promise and deliver this year. We are a bit surprised 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 four by some of you.
Ladies and gentlemen, with the threat of new lockdowns around the world, 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 for 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 EUR 700 million, which translates into a cash conversion rate above 35%. That is what will bring us closer to our midterm target of above 40%. Overall, a pretty solid performance in 2020. This was only possible with the basis we have laid out during the last three years.
The last days have shown that the risks around us are clearly increasing. The environment stays highly uncertain, and our visibility remains low. It is all the more important to have a clear strategy and to improve the resilience of our portfolio further. We will 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. That closes 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. Charles Webb of Morgan Stanley. You have the floor. Please go ahead.
Maybe just a couple from me. First off, just around current trading. Obviously, you flagged the uncertainty as we head potentially into a second lockdown in Europe. 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. Perhaps you can just give us a sense on how things are faring 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? What would be a scenario that would get us towards the lower end of that guidance range? That's the first question. Then just secondly, similarly on free cash flow.
At this point in the year, or nine month stage, you're roughly EUR 100 million ahead of where you were last year, yet you're guiding for flat free cash flow year-on-year for the full year. What's the delta? Why is Q4 free cash flow going to be notably weaker than last year? Just to round out. Thank you.
Thanks a lot. I will take the first one, and then Ute will give you some more color about the free cash flow. It is fair to say that we've delivered a quite solid performance during our quarter three. The earnings have only been below the prior level of an amount of give or take 4%. This accelerating trend throughout the third quarter was really promising because it has 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 trends of September continued into October. Having said this, also our Nutrition & Care business will have a solid finish. They should again be above prior year's level in the fourth quarter, yes.
Don't forget, there's a threat of new lockdowns around the world, and the environment will definitely remain highly uncertain. Having said this, it is given that the visibility is really very low. Let's keep it like this. We've really made good experience to stay prudent in our guidance. For us, and in particular for me, there's definitely and absolutely no reason to change this policy in the current environment. Despite these uncertainties I've mentioned, we stay put to our style, to our behavior, to our attitude. It is more than this, it is our obligation in respect of our track record, saying it is about promise and delivery. 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 three have so far continued into the beginning of quarter number four. The EUR 1.9 billion EBITDA are pretty well underpinned, and that is what exactly we have promised back in May. Talking about quarters number four, let's see where we will finally come out. Once again, the EUR 1.9 billion EBITDA are pretty well underpinned. 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. Far with this, I will hand over to Ute.
Thank you, Christian. On Q4 cash flow, I think there's a couple of factors to watch. First of all, the earnings level this year are most probably lower than last year. Please keep in mind that we had licensed income last year in Q4, which was a considerable double-digit amount, so that more or less closes half of the gap already. Of course, we worked a lot on inventories through the year, so you 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 there a little bit different. We have, of course, a technical effect with lower raw material prices, with lower sales.
The payables year-over-year also have a negative effect on the cash flow. I think that more or less are the main factors to keep in mind here. 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. I think that should be the message.
Thank you both. 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?
Yeah, as we said, we had a clear recovery in September, especially towards the last weeks of September. That was also, as far as we can see it, real demand pickup, no restocking or other effects. That continued into October, order books look good so far. Again, as we speak, visibility remains very low. We have to see how the lockdowns really work. It's not only Germany, it's also other European countries. That can affect suppliers from us, customers from us, we have to see how this really turns out in the end. As of today, the positive trend is intact, but of course, with limited visibility.
Okay. Thank you very much, both.
Thank you, Mr. Webb. Our next question comes in from Andreas Heine of MainFirst Bank AG. Please go ahead.
Yeah, thanks for giving me the opportunity to ask some questions. The first is actually on the dividend. You outlined that earnings will be down, cash flow at least flat. Maybe you can outline what that means for the dividend. The cash flow would imply that you can pay the dividend on last year's level as it is fully covered. That's the first question. You can give some clarification on that. 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 the COVID-19 lockdown. Now we have something similar going on. Are there again to be expected supply disruptions due to technical issues, in this quarter, which usually seasonally sees a very high demand?
How do you see the situation in supply demand in methionine for Q4 and maybe even Q1?
Hi, Andreas. I take the first and the second one. It's my pleasure. Let's start with the dividend. As you know, reliability and continuity in our dividend policy is of utmost high priority for us. You will remember that during the last years, whatever has happened, we have not cut the dividend. By the end of the year, yes, we will decide on the dividend for 2020. If you look at our expected free cash flow, as Ute has provided you with, the expected free cash flow level for 2020, what will be around EUR 700 million. That is what will definitely cover, once again, our dividend. 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. 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 analyst conference without tackling questions around methionine. Okay. Let's keep it like this. During the first half of the year, we have been able to provide our customers with a sufficient amount of this product, and everything has run, give or take, in a pretty good way. Reading this between the line, it means that is our 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 Evonik methionine.
On the other side, yes, it is right that we have seen something like a closure of one of our methionine capacities in Antwerp, and this is for the next, I guess, two to three weeks. One of the production facilities of methionine in Antwerp will be out. Let's keep it like this. We are prepared to manage the situation, but it could become to, let me say, a little bit more tighter supply chain situation. Hope that is helpful for you.
Thanks.
Our next question comes in from Chetan Udeshi of JPMorgan. Please go ahead.
Yeah. Hi. Thanks. I just had maybe one question on, or maybe a couple on cash flow. One is the line item on post-retirement provisions. It seems it's positive so far this year. I think my understanding was post the CTA reimbursement, it was supposed to be EUR 100 million negative per year. Can you maybe help us understand the delta there? Secondly, just on the same topic, given the deficit has risen through this year because of lower discount rates, does that have any bearing on the future cash out on serving the pensions? Thank you.
Yeah, Chetan, thank you very much for the question. The payouts for pensions, of course, they fluctuate a little bit from quarter to quarter. There are also reimbursements for some tax items. From that point of view, if there is a small positive total, I think that should not be over-interpreted. From that point of view, this is how we handle it. We have given you, 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. From that point of view, the indication we gave was really the very rock solid minimum amount, could be somewhat higher here and there. I think that's basically it.
The low interest rate has not such a high impact on the cash out. It's more the net present value that you see in the balance sheet and the provisions. Over a longer time, if you have lower yields, you have less to distribute, but that's more a long-term effect. On the other side, we are really very well diversified in our asset portfolios to really have sufficient yields. I would say for the next years, that should, with regard to cash out, be no headache for us.
Understood. Thank you.
Thank you very much. Our next question comes in from Martin Roediger of Kepler Cheuvreux. Please go ahead.
Yes. Good morning, as well, Mr. Kullmann 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 Wesseling go forward. Can you explain the net benefit from that decision? The second question is on the tax rate in the P&L. I saw that in Q3 it was rather high. The tax rate was 31%. Can you explain why that was that high? In that context, you increased the tax rate guidance for this year from 27%-28%. Is that because of this item in Q3, or is it more structural? Thirdly, on biosurfactants, which is part of your goal for 2025, you mentioned the world-scale plant will be finished by 2022.
Can you provide some data about the capacity of that project? How do you see yourself in that biosurfactants arena versus competition? Thank you.
Hi, Martin. Let me start with the question about methionine and about Wesseling. It goes without saying for us that it is, in this business, to become and to remain being the cost leader. Being the cost leader means to enhance efficiency in every respect. Having said this, we've made decision to close our tiniest methionine capacity in Germany here in Wesseling. Here we talk about cost savings of a low double-digit million EUR. It will be an equal split over the next two years. That means, in other words, that translates into EUR 15 million. There will be a second, let me say, plus, because additionally, we will increase the utilization rate at our three global hubs. As you know, one is in the U.S., in Mobile, Alabama, one is in Singapore, and one is in Antwerp.
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.
On the tax rate. I think what you see finally in P&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. What we have on the other side, if we have, for instance, M&A projects, the cost for that project cannot be deducted from tax here in Germany. Of 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. Also, lower income in some countries where we have low tax rates. Year on year, if there is a small deviation, of course, that moves the overall blended tax rate. I think that are two very important influencers.
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. This is the mix that we have seen this year, and that might lead to smaller fluctuations year on year. Again, it's really a couple of minor influences.
Okay.
Let's jump biosurfactants.
You do this one. Okay. Yes, biosurfactants. If I would say biosurfactants 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 first company building a world-scale biosurfactants plant, and that is what will go on stream by 2022. For us, the biosurfactants innovation is of similar relevance and importance like, for example, our Veramaris project. The next was about Yeah, it is talking about the financials. Yes. That is what will enhance the attractiveness of this, because this investment will be a CapEx light one, 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- double digit amount of CapEx you want to invest there, correct?
Correct.
Okay, thanks.
CapEx light. Don't forget about it.
Thank you very much. Our next question comes in from Gunther Zechmann of Bernstein Global Wealth Management. You have the floor. Please go ahead.
Good morning, Ute, Christian, and Tim. 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 nine months. What are you expecting for working capital into year-end? Could you specifically say, or 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, the second one on Baby Care. Christian, you mentioned earlier that in the prepared remarks that divestment or a partnership are potential strategic options. Could you discuss what your preferred options are and what can be achieved? Thank you.
Yeah, 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. That was the standing target for every year. Of course, this year, with the arrival of the crisis, we paused and we very consciously built 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 reduced the inventories again. This is what we did in Q3 and which we'll always also do to a certain extent in Q4. This is what we'll do. Of course, there are some technical effects.
If you see the full year with declining sales, of course, you have a somewhat positive effect from receivables. On the other side, with lower raw material prices and lower volumes here and there, you have a negative effect from payables. This is all what goes into the net 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, we would then try to get back to the normal procedure, we have to see, of course, how lockdowns work, and maybe we'll have some increased inventory rates again in Q1. I think it's too early to give any precise view on that today.
Hi, Gunther. I take the second question about Baby Care as the preferred option. Let me be very straight upon this. I would really prefer a straight divestment. I would not be so smoothie to exclude, having said this, any other kind of option. Let's see what is going to happen until summer of next year, and then we will take, as you know, our next step. One thing you can take for granted, and that is that we will in due course, sell the attractive Baby Care business for a real attractive price.
Okay. Thank you both.
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 EUR 700 million, am I right in saying that's pre-financing? I think you guide EUR 100 million, EUR 130 million on the P&L. Can you just remind me if the cash interest or financing would be a different number to that. 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, they mentioned that your leverage of almost four times is high relative to your current rating. They're budgeting in, I think, EUR 500 million 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 factor in or underlying cash generation of the business to help you deleverage, particularly given the strong dividend commitment you've reiterated on this call?
Matthew, thank you for the question. Our free cash flow is before financing cash in or cash out and this is what you've expected, and this is how it is. 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, although we are repaying a bond, that's right. It didn't have a very high interest rate. Maybe the overall effect is recognizable but not too big. Does not move the needle for the full free cash flow number, I think. That is it. The Moody's view on our leverage is somewhat specific as they look at gross debt, yeah.
They are not willing to take a net debt view for, I don't know, several reasons they have. From their point of view, they are maybe a little bit more cautious or seem to be more skeptic, but the main driver of that is that they look at gross debt instead of net debt, like for instance, S&P does. In a crisis situation where people really focus on cash on balance, of course, that's a little bit contradictory on one end, but again, we have to respect how they do it. We will repay the outstanding bond. We have one 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 for this bond.
If I can just squeeze in one more while I have you. The portfolio has changed an awful lot in the last five years. In the event that we do get a change in administration in the U.S., an associated change in corporate tax rates over there, how are you thinking about the impact on Evonik?
On the tax rate, or what do you mean?
Yeah, 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, at least in the short term. I don't know if those are finished now.
Yeah. If tax rates were to rise in the U.S., of course, our goodwill depreciation would then be more, had a higher value. On the other side, the taxation on the normal profits would be then higher. I think net, that would be slightly negative. Again, we also had our business in the U.S. for many, many years with higher tax rates. I think the normal business is not very much affected by that. If you look at the acquisitions, the specific value of the, as a step up would be higher, again, then the taxes for the normal profits would be also higher. Net effect, slightly negative.
Thanks very much.
Our next question comes in from Mubasher Chaudhry of Citi Research. Please go ahead.
Hi. Thank you for taking my questions. Just two, please. Given the strong performance versus consensus on the EBITDA, could you help us understand the cost-saving measures that were taken and kind of split the cost savings between temporary and structural? How do you see them trending going forward, especially the temporary ones? Should we expect those to come back? Secondly, just a quick one on the methionine again. The stock 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 going into the first quarter as well. Thank you.
Yeah, 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 structurally improve the cost basis in many, many parts of our group, be it in SG&A, be it in some of our businesses. 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 a crisis as we see it today. Of course, we have some items where 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 somewhat lower. Again, this is not the biggest portion of our cost achievement over the last years that are also bearing fruit in this year.
If we look at travel costs, they might come back to a certain extent, but I think 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 good. I think especially for internal meetings, when you meet colleagues, I think that will be used much more heavily than it was before. We also did not launch a specific cost program this year like some of our peers did, because we do not want to overstress the organization. They are already working on the costs. From that point of view, I think we are on a good way, and I think our numbers also underpin that quite impressively.
Okay. I take the quick one on methionine. I assume that I will get you by surprise, believing that you're a true reader of Feedinfo. Why? Here's the answer. Looking at the market, 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. 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 EUR 0.20 over the last two years. As I've mentioned, 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.
Once again, we talk about a price difference between highest and lowest end of around EUR 0.20 over the last two years.
That's very helpful. Thank you.
I hope so. Having said this, ladies and gentlemen, that is what closes our call today. Thanks a lot for your interest. Thanks a lot for your attention. From the bottom of the hearts of Ute, the investor relations team, and me take care and stay healthy. Goodbye.
Ladies and gentlemen, thank you so much for your attendance. This call has been concluded. You may now disconnect.