Morning, ladies and gentlemen, and thank you for standing by. Welcome to today's 1st Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen only mode. There will be a presentation followed by the question and I must advise you that this conference is being recorded today on 7th May, 2019. I would now like to hand the conference over to our first speaker today, Tim Laiya.
Please go ahead, sir.
Thank you very much, and welcome to today's second call of 4. So we'll keep it short, with me as usual, and Ute. And I will hand over directly to Christian for the short presentation.
I appreciate it. Thank you, Tim. And also warm welcome from me. Thanks for taking the time to be with us today. I'm aware that this is a busy day for you with 3 of our peers also reporting.
Will therefore not waste any time, start our presentation and keep it as short interest as possible. Strategy execution over the last years in one slide. Step by step, we deliver on our strategy by actively shaping our portfolio that we have achieved quite some progress over the last 2 years. The next puzzle piece, is the start of our Veramaris plant for omega-three fatty acids. Ute and I, we're looking forward to opening the production facility in Blair, Nebraska in July.
To this joint venture with DSM, we are bringing in 2 important elements our re dedicated production facility in the U. S. And as well as our long standing experience in large volume fermentation. Another major block of progress is our SG and A program. From the targeted 1000 headcount, 350 have already left the company.
Very visible also in the reported number of employees on group level. By the end of this year, 550 headcounts will have left the company. Corresponding agreements with the employees have already been signed. That means we are already more than halfway to our goal, and we're confident to deliver the rest as well by the end of 2021. Now into the numbers for quarter 1.
We had a solid start into the year. All three segments performed fully in line with our expectations. In our growth segments, we saw healthy organic growth of combined 3%. It shows that despite macroeconomic headwinds, and a slowdown in some end markets, we can grow even when times are a bit tougher. Our adjusted EBITDA on group level was down slightly to 1,000,000.
The decrease is mainly due to well flagged one offs, like the ramp up costs for our new methionine plant, our limited raw materials availability in our C4 business. Despite our earnings, We increased from we increased free cash flow by more than $100,000,000 compared to 2018. That brings me to our guidance. The sale of the rather cyclical MMA business enabled us to increase our outlook to to an at least stable adjusted EBITDA. For free cash flow, the good Q1 shows that we are well on track to deliver significantly higher free cash flow on a full year basis.
In quarter 1, lower cash out for net working capital as well as the start of our CTA reimbursement supported the free cash flow and also pre IFRS effects and after interest payments, our cash generation was really strong in quarter 1. Visible also a net debt level. This will be true also for the full year. We will cover our dividend also excluding IFRS effects and including interest payments. Let me now hand over to Ute.
She came much better than I could give you some more details on the individual segments.
Thank you, Christian, and welcome also from me. Starting with Resource Efficiency, The pure specialty chemicals portfolio again demonstrated its resilience with higher year on year earnings, driven by strong pricing power, despite an overall weaker macro environment. Although raw material prices were rather stable year on year, virtually all business lines were able increased selling prices. This is definitely a strong achievement on the back of our superior product offering and close customer relationships. In the lasting period of high capacity utilization for most of our products, the uprising effect overcompensated slightly lower volumes.
Softer volumes mainly stem from a subdued demand in the automotive, and Coating Industries. However, demand elsewhere, for example, for PA12, or our broad exposure in silica remained on high levels across Q1. Also, we are very pleased with the good start of our crosslinkers business. This was driven by particularly strong demand for composite applications in the wind energy market. The Other Growth Segment, Nutrition And Care is continuing its resilient performance in most businesses and end markets.
Especially volumes rose significantly. This is just another proof of our excellent and consistent market cultivations, both strategically and operationally. Adjusted EBITDA was down year on year, mainly due to ramp up costs and the expected low earnings contribution of Healthcare at the start of the It is clearly visible that Nutrition And Care is growing in its resilient end markets like Nutrition or Personal Care. Efficiency measures of further supporting earnings. The start in Performance Materials was impacted by raw material constraints in our Q4 business, impacting segment EBITDA by around 1,000,000.
Operationally, lower MTBE prices as a result of a weaker European gasoline market, mitigated higher butadiene prices. By contrast, Functional Solutions accounting for 1 quarter of segment sales, benefited from an increased demand for alcoholics and cost advantages from the merger of the 2 respective business lines. Let's take a closer look at our outlook for 2019 on Chart 11. Now excluding the more cyclical MMA business, we expect our adjusted EBITDA to be at least stable in 2019. Compared to our guidance of slightly lower to stable earnings.
The good news here is that the step up should be driven by all three segments. For both growth segments, we expect slightly higher earnings in Q2 sequentially. For Performance Materials, earnings should be clearly up sequentially as the raw material constraints are already solved at the end of Q1. Free cash flow guidance remains unchanged and so do the major moving parts for 2019. We will cover our dividend in 2019 regardless of what level you are looking at.
So also excluding the IRS, IFRS accounting effects and including interest payments. That closes our brief presentation. Thank you for your attention so far. We are now happy to
The first question comes from the line of Michael Schafer from Commerzbank. Please ask your question.
I have two questions from my side. On the first one is on animal nutrition, primarily on China, one of your peer ordered a strong demand on the poultry side as a result of the swine fever we have there and the dropping production on the pork side. Wonder whether you can shed some light on what you have seen in the first quarter as a result of it and maybe also a sneak preview into the second quarter in animal nutrition primarily in in China, what you see there on the volume side? And the second question is on free cash flow, strong start into the year. Congrats to this one.
I wonder whether there are whether they can provide some insights, whether there are some extra effects we should take into consideration throughout the year, whether there are some tax payments, cash tax payments, which may perform differently than in the past apart from those well known CTA and, and IFRS effects, anything we should take care of?
Michael, good morning. Thank you very much for your question. I'll start with free cash flow. So for the full year, it's some of the drivers that you already see in Q1. We will have a better contribution from working capital.
You might remember that we had to build up last year, which was partially already turned around in Q4, but this is still true for Q1 and Q2. So overall, working capital contribution should be positive in this year in the free cash flow, overall free cash flow statement, but keep in mind this is somehow a reversal of last year. Then we have the reimbursement for our pensions, we will have some 1st small contributions from the PeroxyChem acquisition. We have high cost discipline, of course, on all levels, cash taxes should be somewhat higher than last year. So overall, neutral to slightly more challenging we might have some cash out for our efficiency programs, SG And A in OLEO 2020.
That could also be a double digit amount. And this is especially true for next quarter. We will have higher bonus payments compared to last year as the bonus for 2018. Was very good as the year was very good. So these are the components for the free cash flow for the full year.
Second question on methionine and the China swine flu.
Yes. We had some support from the swine flu as well. You might remember that 80% of our animal nutrition products and methionine goes to poultry. So we had some support here. We have seen good volume development throughout the whole Animal Nutrition business, the whole methionine business.
I think that is something we now are reporting for many, many quarters. We have announced the price increase in April. That will more or less than the porting our earnings in Q3, so as Q2 is already booked. So this is what we see, especially in China good volume development and some support, of course, from the switch to poultry, caused by the swine flu effect.
Thank you.
The next question comes from the line of Laura Lopez from Baader Bank. Please ask your question.
Good morning. I have also a question, methionine. Regarding the ramp up of the new plant. So I remember that in the past, you have mentioned that you'll be very careful on how you will bring these new volumes into the market. As there's also other capacity starting up this year.
So can you maybe walk us through, how will this when the plant is ready in mid of the year? Are you going to do a turnaround in some other plants? And then secondly, in your presentation, you highlighted some destocking on MTBE? Do you have a sense on how the inventory levels is sent at the moment? And if possible, can you comment not only on MTBE, but in general for your other chemical businesses, even resource efficiency, how the inventory levels or visibility is at the moment?
Thanks.
Okay, Laura. Thank you very much. I'm not sure whether I got your second question right. So I'll start with the first one and then we'll see if my answer for the second one is, sufficient. Methionine ramp up we have a long data experience and really organizing a ramp up efficiently and smoothly.
Our activities accordingly. So that has been prepared many quarters in advance. So we have, maintenance to another facilities and we will manage that accordingly so that from our side, we will have a reasonable and efficient ramp up in our new capacity. The MTBE inventory levels and pricing levels are expected to normalize again and go up somewhat in Q2.
Okay. Thank you. And then the other part of the question was, if you also maybe have a visibility on the inventory levels, for your other businesses. So in Resource Efficiency or also in Performance Materials, if you have any visibility on how the in the supply chain, how the inventory levels at your clients are?
We have the normal visibility like 3 months ahead. That has not changed very much in the recent quarters. We see some effects from slowdown in auto and coatings industries, in the last quarters already. So I think that or less on the macro side of what we can report on.
The next question comes from the line of Gunther Zechmann from Bernstein. Please ask your question.
Hi, good morning, Christian. Good morning, Ute. Can you just run me through your assumptions for your increased full year guidance, please? To what extent you factor in a pickup in demand in the second half of the year, other than your comments on Healthcare, I suppose, or can you achieve the earnings growth through internal levels and also taking into account easier comps in the second half of the year, Rhine water impact, etcetera. So can you just run us through the sensitivities to that new guidance, please.
Yes. I go, for that, segment by segment, Gunther, if I may. So we had a solid start into 2019, fully in line with our expectations. We have already delivered good progress on our initiated self help measures as OLEO 2020, adjust 2020 in our Nutrition here. And also our SG and A program, I think Christian has very much illustrated on that.
What is now not not any more part of our guidance is the more cyclical MMA. I think that's a main driver for that. If you look at the segments, Nutrition And Care with slightly lower earnings, that's more or less comparable full year guidance. Animal Nutrition, we expect an ongoing strong volume growth for this year. Again, prices might come down a little bit also in the next quarter, plus we have the ramp up costs, health care, a somewhat slower start in the year.
We said with the rollover of a big contract, they will be more likely flat year on year care solutions on a very good track. So here, the restructuring and repositioning is really bearing good fruit. And we see also some pickup in our comfort and insulation, which also had a somewhat slower start. So that is more or less the picture with Nutrition And Care. For Resource Efficiency, the underlying growth trends are fully intact.
High performance polymers is expected to continue. It's a very good year in class. Crosslinkers had a good start into the year. Silicon had a solid start into the year and here, especially with the ramp up of our new capacities, we expect further improvement throughout the year. Coating Additives, more moderate growth expected and all Additives expected to be lower as they have within the segment the highest order exposure.
PM now, with MMA, not included anymore if stable expected year on year. We'll have some heavy turnarounds in the cracker industry, so that might bring some periods of tight Brexit for supply. But again, and after spreads, was last year on average level, this is also what we expect for year, MTBE we discussed. So that is more or less the constituents where if you look at the segments overall, we'll have some core distribution from our SG and A cost cutting so that overall then adds up to our guidance.
Great. Thanks. And if I can just sneak in a quick follow-up. Could you give us some flavor on the autos industry, but particularly in China, please, more for your order books and how you see that develop throughout the year?
Okay, good morning, Gunther. I'm talking about China, It is given that overall, we do see a solid growth in the economy all over, which has not impacted us. But on the other side, particular in the automotive sector, there is a weaker demand. Of course, But we do not see, that it's that it's something which is touching us in a harsh way. So overall, We see a solid, development, positive developments are visible, for example, in the cross linkers and in PHYF.
And on the other side, there is somewhat more consciousness of our customers, therefore, that the weaker demand in the automotive sector But all over, it is, for Evonik, it is very well compensated on group level. But that is what we see as of today.
Great. Thank you.
The next question comes from the line of Chetan Udeshi from JP Morgan. Please ask your question.
Yes, hi. Thanks. Just a couple of questions. Firstly, on just on pension provisions where you because of the lower discount rate. There has been a increase in pension provisions.
Just to confirm that this doesn't change that $100,000,000 benefit that we have from lower CTA payment going forward. That's number 1. And number 2, question is, I mean, you raised methionine prices or at least have tried to raise the prices. Now within your outlook, just to confirm, how do you think 2nd half prices come through in terms of methionine just to be clear here, given that you yourself will bring some new capacities in second half. So are you assuming a stable prices from where we are right now?
Or have you incorporated some option on maybe for the price declines as you ramp up your own methionine plant?
Thanks a lot for the question. Let me start with the Animal Nutrition. We do have, experience that there is really good demand And it is an ongoing, with ongoing strong volumes in all regions all over the world. And having said this, at the was announced from us, we have announced a price increase of, 10% of a 7%, which will have an immediate effect Nevertheless, on the other side, during the ramp ups, there is some competitive pressure So for the next quarter, prices will still be given a check slightly below the Q1 levels But due to our contract structure, the price increase expected, which will have to stabilize the segments the second result in quarter 3 and in quarter 4. And I guess you will be aware of the fact that for example, a competitor like Novo that they have announced not to build up their new capacities in the U.
S. And having the long view, I think that is what will be really helpful for the development of the of this particular market
Yes. And then on the pension, reimbursement for CTA, as the NPV does not change in NPV does not change the payout structure. Our CTA reimbursement schedule remains fully intact.
Understood. Maybe just one follow-up on the source efficiency where prices have remained pretty good in Q1, despite all the weaker end markets. Is there some contract structure where I know you maybe have some lag, etcetera? Or you think this it reflects the underlying momentum overall in the business and not necessarily some lag effect from your annual or quarterly contract structure?
First of all, I do really believe that a strong pricing power like we've shown it in the Resource Efficiency segment It's a very true example for specialty chemicals and for the quality of our products, but in this part of our portfolio. Having said this, I hand over to Ute.
Yes, I'm afraid there's not too much to add to this statement. So the price increases have been really throughout the businesses in our and resource efficiency. So I think it is more a result of our consistent pricing policy, work on pricing. If you look at raw materials and energy rises, they have not risen so much lately. So this is really a very good and very visible proof of our strength with the product and in marketing.
The next question comes from the line of Thomas Voboda from Societe Generale. Please ask your question.
Yes, good morning. I have two questions, please. Firstly, a follow-up on methionine, prices are obviously much lower than a couple of years ago and you're trying and you are taking out costs and you're having the new plant in Singapore, My question is in case prices shouldn't rebound, will you be able to generate satisfactory profitability in the methionine business in case prices shouldn't rebound with all the measures you taking or do you really need higher prices in the midterm to be happy with Methion So that was the first one. The second one on Performance Materials, you mentioned in your remarks that the overhead costs improved now with the business being on a stand alone basis My question is, is there more to come or was this just a one off one off effect in the first quarter of this business being on a stand alone basis? Thank you.
Good morning Thomas. First of all, being the CEO, I do really like seeing enhancing a lift up prices in all of our businesses. Having said this, he attaching the methionine price. One thing you can take for granted and one thing is that certain that we will make sure particularly by our cost specific cost measures in this segment, in this business, that we will be the cost leader And therefore, the question, I will answer the question in a nutshell with yes.
So even in Q1, you were reasonably happy with the returns methionine? Is it how we should read it?
Yes. Yes. Yes. But you know, I would be more happy if the prices would increase but asking but answering your question is yes. Because it is key is, key is, and key will be to become and to be and to make it better, our position as a cost leader.
If that is what is key, you know, reducing costs fostering our, sales forces and in such a mixture, it is crystal clear that we are going to run the businesses, but we are prepared.
Okay. Now to the cost basis in Performance Materials, Ms. Performance Materials has undergone quite some efficiency improvements before, and has taken, of course, the the occasion, now to, we consider everything to really see how they can have a lean setup. One thing is the merge of the 2 business lines, but also in their sales organization in their more general administration organization. They really are looking for a very lean setup I would say the main part is already done, but of course, they will continue to work on this, even as part of the overall group initiatives.
So I would say the biggest step is behind it, but of course, there is still some potential to come.
Perfect, clear. Thank you so much.
The next question comes from the line of Andreas Hain from MainFirst. Please ask your question.
Maybe only 2. One is on resource efficiency. So you have already said that Q on Q will be better, but it will not meet the last year very high level in the second quarter. Last year was due to mix effect. Could you please a little bit elaborate why the mix this year might be not as favorable as last year and how we should see this segment going forward into the second half.
So is that just the
mix effect in the second quarter. And after that, we will see rising earnings for this segment, again. And the second on Nutrition, And will these will there be startup costs for these Veram's joint venture or is, let's say, due to the fact that you use, or switched reactors and facilities from the lysine to the new omega-three product, will that avoid any ramp up costs? Thank you.
Okay. On Resource Efficiency, you Q2 was really outstanding last year. If you compare, the seasonality of the quarters, you will clearly see that. So, that will be not be repeated most likely this year. As said, a lot of these businesses have really started very well into the coating additives, we see some further improvement throughout the year.
That will be, things starting in Q2. High Performance Polymers is on a good track with very good development, very strong pricing power as well. Crosslink. That was a very good start into the year. If you look at the seasonality between Q1 and Q2, of course, Chinese New Year is in Q1.
So for some of the businesses, that is a seasonality aspect as well. So this is more or less what will drive the Q2 development for Resource Efficiency.
Last week, Feike, you know, Feike Zibysma from DSM has dropped me a line and given to me that he's so excited being together with the Evonix in July to open the Veramaris plant in Blair. Nebraska. Having said this, the construction of our veverimer site, at our chemical park in Blair is definitely on time and on budget. And we will start the production as we have announced in the summer of this year. It is given that the benefit of it will be really outstanding in our experience this year.
The first experiences we've got with the market tests are in such that we are really confident to get here a brilliant business within our portfolio. That is crystal clear. Nevertheless, we have some ramp up costs of around 1,000,000 which will mitigate the earnings this year. But I guess this was the answer to your question.
Thank you. The next question comes from the line of Geoff Haire from UBS. Please ask your question.
Good morning and thank you for the opportunity to ask some questions. Just wanted to ask, could you just confirm that there will be another $15,000,000 of ramp up costs for the Singapore the thionine plant in Q2. And then there will be no more in the second half. And also from the implication of your right look, I assume you're seeing 1,000,000 per quarter at a sustainable EBITDA level for Performance Materials. Is that correct?
And then finally, just on the financing strategy, as well as Sumitomo, obviously NHU are planning to bring in some larger months of capacity potentially in China. If that happens, would you consider cutting some of your capacity to tighten the market in the medium term.
Quick questions. I'll start with the first ones as they are available to be forward to answer the million rental costs for Q2. That is what we see. And as then the facility is starting up. No further ramp up costs are expected.
The level of 1,000,000 per quarter, with the given seasonality that we have is also a fair assumption for Performance Materials.
Yes.
Okay. I'll take the second one. It is public available knowledge that, for example, several peers are reporting losses. At current price levels. And as you know, I guess the cancellation and more disciplined expansion plans at current price leavens will rehab, through more balanced supplydemand situation going forward.
So that is the case in this situation.
Sorry, what I'm asking is would you consider cutting capacity of needed to be to tighten the market to increase prices?
You are informed that we do really have a close to brilliant volume growth. And having said this, there is, for Evonik and for our methionine capacities, no need to think about that to give it a second thought.
Thank you. The next question comes from the line of Alexander Ram from Morgan Stanley. Please ask a question, Alexandra.
Morning. Most of my questions have actually been answered, but just a quick one then on peroxychem. Obviously, this isn't included in your current guidance. But if we were to assume, let's just say it's flat, I'm not asking to you to confirm that, but let's just say $60,000,000 of EBITDA in FY 2019, would we then assume if it closed at the end of Q2 beginning of Q3, thirty million dollars of EBITDA in the second half or is SM seasonality in that business?
No, I think that's a fair assumption.
The next question comes from the line of Sebastian Bray from Berenberg. Please ask your question.
Good morning and thank you for taking my questions. I would have 2, please. One is on PeroxyChem. The other is on the phasing of CapEx throughout the year. Firstly, on PeroxyChem, am I right in saying that the DaraF's business could actually be fairly up fairly substantially from 2018 levels, looking at what has happened to hydrogen peroxide prices.
So far this year? And if so, could you perhaps give us a feel for what that number might be? And the second question is on CapEx phasing. How exactly do you think about the phasing of CapEx through the year in terms of your free cash flow guidance? Is there likely to be a material step up in Q3 to or Q3?
Or are we roughly looking at even levels through the year?
You know, before just before closing, it is hard for us to comment on your quest in detail. But due to your question, it is crystal clear that we are really happy, having the PeroxyChem bought last year and we are confident, really confident getting a strong EBITDA machine in our portfolio in, and that is what I can say as of today to this. I ask you please for your understanding because it is a little bit difficult to comment in detail before closing.
Understood.
Yes, on CapEx, the CapEx is relatively evenly spread over the quarters Q4 maybe is somewhat higher CapEx spending if you look at the past. What we do to bring down CapEx is on one hand, of course, disciplined allocation and of resources and spending. On the other side, we have some contributions from customers or other partners, which also then help financing our CapEx projects. That will also have a good impact on our cash flow for this year.
So just as a quick follow-up, Ute, could I ask on the methionine comment you made earlier, but there was a million impact in Q1 does that refer I assume that refers to EBITDA or?
Thank you. We are not taking any further questions. Dear speakers, I will hand over to you.
Thanks, gentlemen. That closes our call today. Thanks a lot for your attention, and take care. Goodbye.
That does conclude our conference for today. Thank you for participating. You may all disconnect. Have a nice day