Good morning, ladies and gentlemen, and thank you for standing by. Welcome to today's Q2 2019 earnings conference call. At this time, I must advise you conference is being recorded today, Thursday, 1st August 2019. I would now like to hand the conference over to Spirit today, Tim Langhwa. Please go ahead.
Thank you very much, and good morning, from the Evony team. It's our Q2 earnings conference call. And with me is our CFO, Utevolf. I will hand over directly to you Utev for the short presentation.
Thank you, Tim. A warm welcome also from me, and thank you for joining us today. Evonik continues to deliver the spite a further weakening market environment. Before providing you with further insights on our financial performance, I would like to comment on our strategic delivery and in particular, the divestment of our MMA business. Last night, we have completed and successfully closed the deal.
We will finally de consolidate the business with our Q3 financial statements. In of the deal, we already report MMA as discontinued operations since January 1st. The net proceeds are a function of the purchase price minus pension provisions, transactional taxes and carve out taxes. The letter result from the reverse carve out of assets, which were part of the divested MMA legal entity, but now remain with Evonik. The fair value step up for these assets leads to one time tax obligations of around 1000000 payable in the second half of twenty nineteen.
At the same time, in higher depreciation and a further tax relief of up to 1,000,000 per year for the next 15 years So both effects balance out over the long run. The divestment proceeds will reduce our leverage from the current elevated level of 3.4 back to our comfort level of around 2.8 times. This definitely helps in the currently further weakening macro environment. Main areas of concern remain auto and quoting related businesses as well as China. While we are not entirely immune to such economic changes, again, we have proven our resilience and delivered on our promises.
Earnings increased sequentially on group level as a whole, as well as in all three chemical segments individually. Based on that, we confirm our guidance for the full year and continue to expect at least stable earnings. The first half performance was based on a more well balanced portfolio combined with the consistent execution of our self help measures. As mentioned before, some industry leading businesses, especially in resource efficiency, were impacted by the current macro development. This has mirrored a negative volume development on segment level in the first half.
Consequently, parts of silica oil additives and the coating businesses experienced slower demand from the auto and coatings industry. These developments were however counterbalanced by our more resilient and defensive businesses in Nutrition And Care as well as our pricing power in resource efficiency. In the first half of twenty nineteen, we consistently pursued our SG and A efficiency program, which delivered additional 1,000,000 of savings. Furthermore, as a reaction to the challenging environment, we cut our CapEx budget for 20 19 by 1000000. While we successfully cut costs and increased efficiencies, we continue to advance our future growth drivers.
Our innovation pipeline is well filled. By 2025, we will generate 1,000,000,000 in revenues from our innovation growth fields with above average margin potential. Already in 2018, we generated 200 1,000,000 in sales from our innovation growth peers. For the future, we anticipate revenues from innovation to grow continuously by 25% per year, mostly in resilient markets with lower dependency on macro cycles. Our latest innovation success story is the Wera Maristron Venture.
We concluded construction at our plant in Blair, Nebraska, ahead schedule and on budget. Currently, the new facility is ramping up with tangible earnings contribution expected already for next year. After this short excursion into our most recent developments and innovation, would like to steer your attention to our Q2 figures. While sales volume declined slightly, pricing was robust and even up in resource efficiency, which underlines the strong added value that our specialty products provide to our customers. Adjusted EBITDA reached 1,000,000, with all segments showing sequential growth.
In the current market environment, it is worth mentioning that we continued to accomplish a margin of above 17%. With this robust development in the first half as well as more favorable phasing in the absence of one time effects in the second half, We confirm our outlook for the adjusted EBITDA and the free cash With respect to the letter, we are cash flow was up by 1,000,000. If you consider the lower earnings and the significantly higher bonus payments, we clearly improved our cash conversion. The bonus payments alone are 1000000 higher in the first half than last year, or even GBP 130,000,000 in Q2. We managed to compensate this effect in 2019.
And based on the bonus accruals we are currently building, we can already say that the bonus cash out in 2020 would be clearly lower than this year. So far in 2019, our measures to strictly manage net working capital clearly bear fruit. We were able to reduce cash out for our net working capital by 1,000,000 in the first half compared to last year in an environment of lower demand and customer destocking. Also, the CTA reimbursement and the very strict CapEx Management supported our free cash flow. Both for costs and cash out, we are currently questioning every spending and will continue to do so.
This will give further support to earnings and cash flow in the second half. Now let's take a look The segment has up well despite the weaker market environment in the second quarter. Achieving sequential earnings growth in this segment was tight, but again, we were able to deliver on our premises. Lower demand from auto and coatings related end markets had an impact on parts of silica, oil additives and coatings, which resulted in lower volumes. Overall, strong pricing continued guaranteed a continuously high margin of above 23%.
Businesses like Crosslinkers and high performance polymers continued their resilient performance. Also, hydrogen peroxide continued to be a solid and stable earnings contributor. Which helped to limit the year on year earnings decline to only 4% in the first half. With easier comparables in the second half, and 1,000,000 license fees from our hydrogen peroxide business, the segment is on track to deliver the projected slightly higher earnings on a and care solutions as well as lower lysine volumes. The latter resulted from the shift of low margin S.
To high margin Veramaris business. Earnings wise Care Solutions experienced another very good quarter and Health Care delivered the expected sequential pickup in earnings, which will further accelerate in the second half. Continued strong volumes in methionine were counterbalanced by the negative price effect of around 1,000,000 year on year, and the ramp up costs for the new Singapore plant of another EUR 15,000,000 in Q2. For the second half, the absence of ramp up costs the acceleration of earnings in Healthcare And Software Methionine Comparables provide comfort to limit the year over year earnings decline in line with our full year guidance slightly lower. Performance Materials delivered notice that the higher earnings compared to Q1 as the raw material constraints in our C4 businesses were solved by the end of the first quarter.
Operationally, good seasonal gasoline demand and refinery shutdowns led to higher MTBE margins, In contrast to this weaker global demand for petrochemical derivatives like butadiene, Ina and butane-one put pressure on the respective product press. For the start into the second half, spreads continue to be weaker, but comparables are clearly softer. Especially in Q4, which was affected by low water levels in the River Rhine in 2018. Finally, we come to the outlook for 2019. Generally, for the second half of the year, we expect the weaker macro environment that we experienced in Q2 to persist.
Consequently, we do not anticipate improvements but also no further macro weakening as a foundation of our outlook. One time effects, which burden, nutrition and care and performance materials in the 1st 6 months by a total of 1,000,000 when not reoccur in the second half. Additionally, earnings in Healthcare will increase sharply in the second half and the comparables are getting softer. Regarding the closing of Doroxachem, we are still awaiting approval from the U. S.
FTC. We are in the last phase of the process and expect a decision on But as most of you already have it in the models from Q3 onwards, you may rather want to move the earnings contribution to Q4. Also, our free cash flow guidance remains unchanged. As already visible in the first half, we will continue our strict CapEx discipline and further closely manage our net working capital. To conclude, despite the lower earnings level in the first half, The higher bonus payments and cash taxes, we are on track to significantly increase the free cash flow generation and cash conversion in 2019.
That closes our brief presentation. Thank you very much for your attention so far and now we are happy to discuss your
questions. First question
from the line of Gunther Sechmann. Please ask your question.
Hi, good morning, Ute. Good morning, Tim. On the free cash flow guidance, can you just confirm that this is excluding the carve out tax payments for the methacrylate fabund and how that guidance would look like if you were to include that cash out that you expect in the second half for this year. And then on the outlook, secondly, on the, fully outlook and the, hey, to outlook. Can you just talk us through what you bake in for your assumptions, particularly around autos and around China?
Anything else you'd like to flag what the sensitivities are? Thank you.
Yes, good morning, Gunther. Thank you very much for your questions. So the carve out taxes are clearly related to the transaction. So they are really not an operating cash flow from our point of view. That's why we have given our free cash flow guidance irrespective of that.
And we have reiterated our free cash flow guidance also irrespective of that number. We have given you the numbers, so I think you can make up the calculation, how it would like if you took it in or not. But very clearly, from our point of view, the operating business has really improved. The operating cash conversion improves. The carve out taxes are clearly caused by the transactions and from our point of view should not be mixed with the operating cash generation.
For the second half outlook, as we said, we do not see improvement of further deterioration for that outlook. What we've seen is, of course, some slowdown in the auto and coatings businesses. If you look at our volume development, I think you can see how that really is mirrored in our figures. And this is more or less what we have seen now and what we see for the next couple
And maybe I can just follow-up with an unrelated question. In Baby Care, you mentioned an improvement from a low rate. Can you just help us quantify, a, how big the improvement is? And secondly, if that's self help or if the market conditions have improved.
Yes, we see some earnings improvement, which is really in very low double digit number. It's on lower levels still, but if you compare quarter on quarter or against the previous year, it is an improvement, the savings and the portfolio measures we undertook, they now become more and more visible. But again, there is no big support from the market. It's more restructuring and sales hub on our side.
Next question comes from the line of Thomas Voboda. Please ask your question.
Yes. Good morning. I have questions, please. Firstly, on CapEx, the reduction by 1,000,000, is this something we should view as sustainable. So going forward, the run rate of 1,000,000, is this something which looks fair?
For the next years. That was the first question. The second question, on your on your outlook on nutrition, what do you bake in for methionine, if I may ask, do you still expect a negative effect on pricing in H2, or is it already running out? If you could quantify based on powering run rates, it would be great. And firstly, and thirdly, on Resource Efficiency, I understand what you're saying regarding the royalty payments and that they are just not evenly spread this year.
But if I put this into my model, I would still require some other improvement to get to your guidance of likely better than last year. Could you give us a hint what do you have in there in terms of other drivers leading you to this guidance? Thank you.
Yes, Thomas, thank you very much for your questions. I'll start with the CapEx this level is, of course, in the range of our sustainable CapEx level. So from that point of view, I think it is also sustainable. Of course, CapEx spending corresponds to a certain tend to the overall macroeconomic environment. So if you were in a very strong cycle, maybe CapEx would tend to be somewhat higher than in a more sideward or weaker cycle.
So that's why our cut is also not only, but also related to the somewhat weaker macro environment. But the other part is, of course, as well that we need more CapEx discipline and need to bring CapEx to somewhat lower levels by being more efficient and more effective. That's an ongoing process. For methionine, we have seen to we have continued to see a very strong market growth in this year. So the volume growth is very, very satisfactory.
Overall, we see a good and strong global demand, the African swine fever helped a little bit, especially in China. On the other side, the new capacities are in the process of ramping up and that is still impacting the prices and the competitive pressure, we see. So we will still see some slight sequential decline you have seen in Q2 and that might persist also in Q3, but we're really talking about a couple of cents here to put that into the right perspective. We have initiated our efficiency program, already some quarters ago, we will secure our cost leadership. We will operate on good and efficient cost levels.
And for the second half in our case, of course, we will have no further ramp up costs for our methionine plant in Singapore. So that helps in the sequential and sequential assessment in order to quarter. Yes, for resource efficiency, we do not expect the market environment to change. So no further worsening, but also no support if you see at the seasonality, if you look at seasonality, Q3 is also a strong quarter in RE, so that's also seasonality, some support if you look at this. And also, if you look at Q4, we would see a rather stronger quarter here for resource efficiency.
The license fee will more or less be split up. Over the two quarters. So this is what we see in individual effects in Resource Efficiency. Your question with regard to the royalty payments, we have, adjusted our approach in hydrogen peroxide so that giving licenses is part of these HPPO licenses is part of our strategy. So that might occur maybe not every year, but every 2nd year.
So and it's for us also a very CapEx light approach to really make, bear bear fruit of our technology without investing a couple of 100,000,000. So from that point of view, that is something which we will occur here and there, maybe not every year.
Just perfectly clear. Thank you.
Next question comes from the line Sebastian Bray. Please ask your question.
Thank you for taking my questions. I would have 2, please. The first is on the polyamide 12 plant. Can I just ask for an idea of timing for when this starts to make an impact on Evonix P and L? Is it that the plant enters operation at the very start of 2022 and ramps quite quickly.
That's the first question. And the second question is on the methionine market. How far away are competitors now from having fully ramped their volumes, given the volume development in the market as a whole seems quite strong what exactly is the time period over which we could expect Evonik to fill its own plant?
Yes, good morning, Sebastian. So PA12, I think from today's point of view, would start to contribute by the middle of 20 22. It's still a little bit away. Sometimes we have also managed to be out of schedule, but I think from this day of today, it sets the fairest assumption you can take. The timing we see that the volume demand is strong.
So the competitors have I also already started to introduce their capacities over the last couple of quarters. We are flexible with our asset park where we really can see how in the global environment, what is really the best mix we are prepared to do that step by step. Normally, a new plant ramps up or until it is fully utilized, that takes 3 to 4 years So that's the more general view to that. But again, we are prepared to have a very flexible end market adequate approach to that.
And just as a follow-up to that, do you see, do you think we are currently a trough utilization levels in methionine, our utilization will improve if nothing bad happens on the demand side in 2020?
As the demand is growing very robustly. So from that point of view, the market growth into the facilities. I think there is no change to that view on the market. And there are not many new audits announced. So I think what had been announced is more or less built, it went up now.
So this is what we see for the next 2 years. Thank you.
Your next question comes from the line of Geoff Haire. Please ask your question.
Oh, hello. I'm sorry. I just wanted, I may have missed this, but could you just confirm if you can, how much the license fee for the hydrogen peroxide license is, how much you're getting from that? And my second question is slightly more detailed When you had the Innovation Day in September last year in London, the question was asked about what the margin would be to the group of those products. And at that time, it was said that there would be no margin contribution because it would be replacing other products that we're falling away.
So I was just wondering if you could help us understand what's changed since September last year, where you're now saying that there will be margin contribution?
Yes, hello, Geoff. On the first question, 1,000,000, that's the license fee we are expecting. For the second question, I'm not 100% sure whether I got it right. But of course, if you have new products, there is always some replacement of aging products. But again, they tend to have the mills cases.
They have higher margins. So there is a margin improvement by the innovation pipeline overall.
But when the same question when my question was asked about that in September last year, the comment was that it would have no impact on margins. I'm just trying to understand where the changes come, but maybe I can discuss this in more detail later.
So I do not exactly know what kind of discussion you are referring to, but as I said, there is a portion where aging products are replaced And there is a portion when new products come in. If you take, for instance, our Veramaris joint venture where we rededicate a Lysine plant with relatively low margins with another product, which has clearly higher margins. So maybe that is one example. For the chance.
Your next question comes from the line of Laura Lopez. Please ask your question.
Hi, good morning. So first on Nutrition. During your presentation, you already mentioned it, but can you maybe go a little bit into detail what was driving the weakness, on the volume side of nutrition despite Methionine being so strong in the quarter. And my second question will be So problems in the Rhine cannot really be completely excluded. There's see all at risk, let's say, midterm or in the second half of twenty nineteen.
So my question will be, have you prepared your supply chain for this? So if something happens, then will we see like a less pronounced impact compared to what happened last year? And then the third one is on health care. Your peers in this market have a very good visibility on this business as normally contracts are longer. I know you're facing now, going away from one of your biggest contracts, but how is your visibility next year?
So next year, you expect a flat development, but Can we expect that business picking up again next year? And can you maybe remind us more or less the size of that business at the moment?
Yes, good morning, Laura. So on the volumes in Nutrition And Care, as I said methionine volumes were good. We had a switch or, from bulk to specialty products in care solutions. So that is part of our care solutions strategy. So we have now a more favorable product mix For instance, within the cosmetic solutions, that is what you see in the earnings development, but of course, that led to trace in our volumes development.
And the second influencing factor was really taking volumes out of the low margin life scene business to prepare the new facility for the Veramaris joint venture. The Rhine water levels, of course, we are closely monitoring that. So far, they are not critical. So there are currently no logistic restrictions. But of course, after last year's experience, we started very early to consider additional measures to secure our transportation and of course minimize our risks.
So we have already ordered other ships for instance, better vessels or with reduced loads. We have alternative supply routes, for our raw materials and intermediate products worked out, railway capacities, we have expanded railway capacities additional ratings and so on and so forth. So we are really prepared as well as we can should there be a situation like this. Again, the situation so far is not critical and we are much better prepared than we were last year. Healthcare, the visibility is good as you describe it.
That's why we can really count very much on the second half pickup. So the reset from the beginning of the year, that health care will be back end loaded this year. So this is exactly what we are seeing. For next year, of course, they also have their pipeline very well filled. So it could be like a 10% growth for next year.
And the size of the business is a larger than 1,000,000 in sales, so to give you some data here.
Thank you so much.
From my side. First, just to confirm, Ote, did I hear you mentioned that methionine, you expect further price decline sequentially or you were talking about just the run rate for Q2, probably the exit rate being down versus the start of the quarter and that has some impact small in Q3. The second question was the transfer of pension assets as part of the MMAD, does that change anything on the ongoing cash flow for Evonik in terms of pension contribution at all? And the last question I had was on the comment around targeted specialty chemicals acquisition as a use for the proceeds. Maybe can you throw some light, whether that that means it's more bolt on in nature or are you guys willing to consider even more bigger transactions if one was to come?
Thank you.
Yes. Good morning, Tidjane. Machining, as I said, we have seen a couple of sent price deterioration in Q2. And I think it's a fair assumption that also in Q3 prices can decline still a little bit. The transfer of the pension assets with the sale of our Metaculate businesses of course, is linked to a 1,000,000 service cost we wish will be not have.
But again, this is already counted as this continues. So we don't see it in our numbers in this year. M and A, we expressed several times that we are looking more for bolt on kind of deals. And again, we are not under pressure to do something We have already some ideas where we reinvest the proceeds. So we can really take a cold lot of view here to step by step, we invest the money.
Your next question comes from the line of Mubasher Chaudhry. Please ask your question.
Hi. Most of my questions have been answered, but just one quick on the CapEx, the reduction. Is that coming from any particular business line or is that coming across the board That's it. Thank you.
Next question comes from the line of Alexandra Tium. Please ask your question.
Hi, good morning guys. I just got 3 hopefully very quick questions. Firstly, on cost savings, I see that you're already running at $30,000,000. Is there any chance that there could be upside to the $50,000,000 you expect this year? The second question, is this on some of the business lines that haven't really been contributing much to EBITDA so far?
Like baby care and bio amino acids. So I see that you've mentioned some self help measures that can help with margins in baby care. What's your expectations going forward into the second half? Is there further self help that you can do here Or is there some can you expect any improvement in the industry? And then finally, the 3rd question was just on CapEx Obviously, you've lowered your guidance for this year.
What do you see as the normalized level of CapEx with the current business?
Yes. Good morning, Alexandra. Thank you for your questions. So cost savings, giving the Given the weaker macro environment, we have already initiated further contingency measures here for the second half in all our business and functions. So we have a very high level of cost awareness for everybody, more or less on a daily basis.
So it is difficult to put a precise number behind that, but for sure, this will be a double digit million number, to really make sure that we achieve our outlook on the given assumptions. Baby Care, they are running they have been running their program now for years. So they are really executing that. Maybe here and there, there is an extra effort, but again, the cost savings and the contingencies have to be spread over the whole company to be really meaningful and influential for this year. Normalized CapEx, we see around 1,000,000 for the group as it is after the sale of the methacrylitz business.
There are no further questions. Please continue.
So thank you very much ladies and gentlemen that concludes our call. Have a nice day.
That does conclude our conference for today. Thank you for participating. You may all disconnect.