Thank you for standing by. Welcome to today's first quarter 2019 earnings conference call. At this time, all participants are in listen-only mode. There will be a presentation followed by the question and answer session. At which time, if you wish to ask a question, you will need to press star and one on your telephone keypad and wait for your name to be announced. I must advise you that this conference is being recorded today on the 7th of May, 2019. I would now like to hand the conference over to our first speaker today, Tim Lange. Please go ahead, sir.
Thank you very much. Welcome. Today's second call of four. We'll keep it short. With me, as usual, Christian and Ute. I will hand over directly to Christian for the short presentation.
Highly appreciate it. Thank you, Tim. 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 three of our peers also reporting. We'll, therefore, not waste any time, start our presentation and keep it as short and crisp as possible. That is why on chart three, we condensed our consistent strategy execution over the last years in one slide. Step by step, we deliver on our strategy by actively shaping our portfolio towards more resilience and less cyclicality. I think it is fair to say that we have achieved quite some progress over the last two years. The next puzzle piece is the start of our Veramaris plant for omega-3 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 two important elements, our rededicated production facility in the U.S. and as well as our longstanding experience in large volume fermentation. Another major block of progress is our SG&A program. From the targeted 1,000 headcounts, 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. We're confident to deliver the rest as well by the end of 2021. Now, into the numbers for quarter one. 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 EUR 539 million. 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 lower earnings, we increased free cash flow by more than EUR 100 million compared to 2018. That brings me to our guidance. The sale of the rather cyclical MMA business enabled us to increase our outlook 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 one, lower cash out for net working capital, as well as the start of our CTA reimbursement supported the free cash flow. Also pre-IFRS effect and after interest payments, our cash generation was really strong in quarter one. Visible also on 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 can 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 to increase selling prices. This is definitively a strong achievement on the back of our superior product offering and close customer relationships. In a lasting period of high capacity utilization for most of our products, the up-pricing 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 markets. The other growth segment, Nutrition & Care, is continuing its resilient performance in most businesses and end markets. Especially volumes grow significantly. This is just another proof of our excellent and consistent market cultivation, both strategically and operationally. Adjusted EBITDA was down year-on-year, mainly due to ramp-up costs and the expected low earnings contribution of Health Care at the start of the year. Further taking into account a negative price effect from methionine of around EUR 40 million, it is clearly visible that Nutrition & Care is growing in its resilient end markets, like nutrition or personal care. Efficiency measures are further supporting earnings. The start in Performance Materials was impacted by raw material constraints in our C4 business, impacting segment EBITDA by around EUR 10 million.
Operationally, lower MTBE prices as a result of a weaker European gasoline market mitigated higher butadiene prices. By contrast, functional solutions, accounting for one quarter of segment sales, benefited from an increased demand for alcoholates and cost advantages from the merger of the two respective business lines. Let's take a closer look at our outlook for 2019 on chart 11. 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 before. Looking ahead into Q2, we are looking forward to a clear sequential step-up in 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 IFRS accounting effect and including interest payments. That closes our brief presentation. Thank you for your attention so far. We are now happy to discuss your questions.
Thank you. Ladies and gentlemen, we will now begin the question and answer session. As a reminder, if you wish to ask a question, please press star and one on your telephone keypad and wait for your name to be announced. The first question comes from the line of Michael Schäffler from Commerzbank. Please ask your question.
Good morning. Good morning, Ute, and to all of you. I have two questions from my side. The first one is on Animal Nutrition, primarily on China. One of your peer reported 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. I 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 China, what you see there on the volume side. The second question is on free cash flow. Strong start into the year. Congrats for this one.
I wonder whether you can provide some insights, whether there are some extra effects we should take into consideration throughout the year, whether there are some cash tax payments which may perform differently than in the past. Apart from those well-known CTA and IFRS effects, anything we should take care of? Thank you.
Michael, good morning. Thank you very much for your question. I start with free cash flow. 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 a build-up last year, which was partially already turned around in Q4, but this is still true for Q1 and Q2. Overall, working capital contribution should be positive in the free cash flow statement. Keep in mind, this is somehow a reversal of last year. Then we have the reimbursement for our pensions. We will have some first 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. Overall, neutral to slightly more challenging.
We might have some cash out for our efficiency programs, SG&A and Oleo 2020. That could also be a double-digit amount. 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. These are the components for the free cash flow for the full year.
Second question on methionine and the China swine flu.
Yeah, 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. 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 then be supporting our earnings in Q3. As Q2 is already booked, so this is what we see, especially in China, so good volume development and some support, of course, from the switch to poultry, caused by the swine flu effect.
Okay. Thank you.
Thank you. The next question comes from line of Laura Lopez from Baader Bank. Please ask your question.
Good morning. I have also a question on methionine regarding the ramp-up of the new plant. I remember that in the past you have mentioned that you'll be very careful in how you will bring these new volumes into the market, as there is also other capacity starting up this year. Can you maybe walk us through how will this happen 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 de-stocking on MTBE. Do you have a sense on how the inventory levels stand at the moment? And if possible, can you comment not only on MTBE, but in general for your other chemical businesses in 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, 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 in really organizing a ramp-up efficiently and smoothly. Our new capacity will start production middle of the year. We will manage our global capacities accordingly. That has been prepared many quarters in advance. We have maintenance due in other 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. The other part of the question was, if you also maybe have a visibility on the inventory levels for your other businesses. 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 three 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. I think that's more or less on the macro side of what we can report on.
Okay. Thank you very much.
Thank you. 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 do you factor in a pickup in demand in the second half of the year, other than your comments on Health Care, I suppose? Can you achieve the earnings growth through internal levers? Also taking into account easier comps in the second half of the year, Rhine water impact, et cetera. Can you just run us through the sensitivities to that new guidance, please?
Yeah. I go through that segment by segment, Gunther, if I may. 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 & Care and also our SG&A program. I think Christian has very much illustrated on that. What is now not anymore part of our guidance is the more cyclical MMA. I think that's the main driver for that. If you look at the segments, Nutrition & Care with slightly lower earnings, that's more or less comparable to 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-over-year. Care Solutions on a very good track. Here the restructuring and repositioning is really bearing good fruit. We see also some pickup in our Comfort & Insulation, which also had a somewhat slower start. That is more or less the picture with Nutrition & Care. For Resource Efficiency, the underlying growth trends are fully intact. High-performance polymers is expected to continue its very good growth path. Crosslinkers had a good start into the year. Silica 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 Oil Additives expected to be lower as they have, within the segment, the highest order exposure.
Performance Materials now with MMA not included anymore, is stable expected year-over-year. We'll have some heavy turnarounds in the cracker industry, that might bring some periods of tight C4 supply. Again, naphtha spreads was last year on average level. This is also what we expect for this year. MTBE, we discussed. That is more or less the constituents, where if you look at the segments overall, we'll have some contribution from our SG&A cost-cutting. Overall then adds up to our guidance.
Great. Thanks, Ute. If I can just sneak in a quick follow-up. Could you give us some flavor on the autos industry, particularly in China, please? More for your order books and how you see that develop throughout the year.
Yeah, one second.
Okay, good morning, Gunther. I'm talking about China. It is given that overall we will see a solid growth in the economy all over, which has not impacted us. On the other side, particular in the automotive sector, there is a weaker demand, of course. We do not see that it's something which is touching us in a harsh way. Overall, we see a solid development, positive development visible, for example, in the Crosslinkers and in PA12. On the other side, there is somewhat more cautiousness of our customers, therefore, there's a weaker demand in the automotive sector. All over, for Evonik, it is very well compensated on group level. That is what we see as of today.
Great. Thank you both.
Thank you. The next question comes from the line of Chetan Udeshi from J.P. Morgan. Please ask your question.
Thanks. Just a couple of questions. Firstly, on pension provisions where, because of the lower discount rate, there has been a increase in pension provisions. Just to confirm that this doesn't change that EUR 100 million benefit that we have from lower CTA payment going forward. That's number one. Number two question is, you raised the methionine prices or at least have tried to raise the prices. Now, within your outlook, just to confirm, how do you think second 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. Are you assuming a stable prices from where we are right now, or have you incorporated some caution on maybe further price declines as you ramp up your own methionine plans?
Thanks a lot for the question. Let me start with the Animal Nutrition. It is with ongoing strong volumes in all regions all over the world. Having said this, as a consequence, it was announced from us, we have announced a price increase of 7%, which will have an immediate effect. Nevertheless, on the other side, during the ramp-ups, there is some competitive pressure. For the next quarter, prices will still be, give or take, slightly below the Q1 levels. Due to our contract structure, the price increase expected, which will help to stabilize the segment results in quarter three and in quarter four. I guess you will be aware of the fact that, for example, a competitor like Novus, that they have announced not to build up their new capacities in the U.S.
Having the long view, I think that is what will be really helpful for the development of this particular market.
Yeah. On the pension reimbursement for CTA, as the change in MTBE does not change the payout structure, our CTA reimbursement schedule remains fully intact.
Understood. Maybe just one follow-up on Resource Efficiency, where prices have remained pretty good in Q1, despite all the weaker end market. Is there some contract structure where I know you maybe have some lag, et cetera? Or you think it reflects the underlying momentum overall in the business, and not necessarily some lag effect from your annual or quarterly contract structure? Thank you.
First of all, I do really believe that a strong pricing power, like we've shown it in the Resource Efficiency segment, is a very true example for specialty chemicals and for the quality of our products, particular in this part of our portfolio. Having said this, I hand over to Ute.
I'm afraid there's not too much to add to this statement. The price increases have been really throughout the businesses in our end Resource Efficiency, though I think it is more a result of our consistent pricing policy, work on pricing. If you look at raw materials and energy prices, they have not risen so much lately. This is really a very good and very visible proof of our strength with the products and in marketing.
Thank you.
Thank you. The next question comes from the line of Thomas Boda from Societe Generale. Please ask your question.
Good morning. I have two questions, please. Firstly, a follow-up on methionine. Prices are obviously much lower than a couple of years ago. 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're taking? Or do you really need higher prices in the midterm to be happy with methionine? 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 standalone basis. My question is there more to come, or was this just a one-off effect in the first quarter of this business being on a standalone basis? Thank you.
Good morning, Thomas. First of all, being the CEO, I do really like seeing enhancing and lift up prices in all of our businesses. Having said this here, touching the methionine price, one thing you can take for granted and one thing is dead certain, that we will make sure, particular by our specific cost measures in this segment, in this business, that we will be the cost leader. Therefore, I will answer the question in a nutshell with yes.
Even in Q1, you were reasonably happy with the returns in methionine? Is this how we should read it?
Yes. I would be more happy if the prices would increase. Answering your question is yes, because it is key is, and key will be, to become and to be, and to make it better, our position as a cost leader. That is what is key. Reducing costs, fostering our sales forces, 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 and Performance Materials. Performance Materials has undergone quite some efficiency improvements before, has taken, of course, the occasion now to reconsider everything, to really see how they can have a lean setup. One thing is the merge of the two business lines, 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, of course, they will continue to work on this, even as part of the overall group initiatives. I would say the biggest step is behind it, of course, there is still some potential to come.
Perfectly clear. Thank you so much.
Thank you. The next question comes from the line of Andreas Heine from MainFirst. Please ask your question.
Maybe only two. One is on Resource Efficiency. You have already said that Q on Q, it will be better, but it will not meet the last year very high level in the second quarter. Last year it 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? How we should see this segment going forward into the second half? Is that just a mix effect in the second quarter, and after that we will see rising earnings for this segment again? The second on Nutrition. Will there be startup costs for this Veramaris 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-3 product, will that avoid any ramp-up costs? Thank you.
Okay. On Resource Efficiency, Q2 was really outstanding last year. If you compare the seasonality of the quarters, you will really see that. That will not be repeated most likely this year. As said, a lot of these businesses have really started very well into the year. For some, like Silica or even the coating additives, we see some further improvement throughout the year. That will be, I think, starting in Q2. High-performance polymers is on a good track with very good development, very strong pricing power as well. Crosslinkers with 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, for some of the businesses, that is a seasonality aspect as well. This is more or less what will drive the Q2 development for Resource Efficiency.
Okay. Good morning, Andreas.
Morning.
Last week, Feike, you know Feike Sijbesma from DSM, has dropped me a line and given to me that he's so excited being together with Evonik in July to open the Veramaris plant in Blair in Nebraska. Having said this, the construction of our Veramaris site at our chemical park in Blair is definitely on time and on budget. 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. Our experience this year, the first experiences we have 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 EUR 10 million, which will mitigate the earnings this year.
I guess this was the answer to your question.
Thanks. Yeah.
Thank you. The next question comes from line of Geoff Haire from UBS. Please ask your question.
Good morning. Thank you for the opportunity to ask some questions. Just wanted to ask, could you confirm that there will be another EUR 15 million of ramp-up costs for the Singapore methionine plant in Q2? Then there will be no more in the second half. Also, from the implication of your outlook, I assume you're seeing EUR 80 million per quarter as a sustainable EBITDA level for Performance Materials. Is that correct? Then finally, just on the lysine strategy, as well as Sumitomo, obviously NHU are planning to bring in some large amounts of capacity potentially in China. If that happens, would you consider cutting some of your capacity to tighten the market in the medium term?
Okay, Geoff. Thank you for your questions. I'll start with the first one, as they are relatively straightforward to answer. The EUR 15 million ramp-up costs for Q2, that is what we see. As then the facility is starting up, no further ramp-up costs are expected. The level of EUR 80 million per quarter with the given seasonality that we have is also a fair assumption for Performance Materials.
Yep.
Okay. I take the second one. It is public available knowledge that, for example, several peers are reporting losses at current price levels. As you know, I guess the cancellation and more disciplined expansion plans at current price levels will really help to a more balanced supply-demand situation going forward. That is the case in this situation.
Sorry, what I'm asking is, would you consider cutting capacity, if need be, to tighten the market to increase prices?
You are informed that we do really have a close to brilliant volume growth. Having said this, there is, for Evonik and for our methionine capacities, no need to think about that, to give it a second thought.
Okay. Thank you.
Thank you. The next question comes from line of Alexandra Schramm from Morgan Stanley. Please ask the 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. If we were to assume, let's just say it's flat. I'm not asking you to confirm that, but let's just say that EUR 60 million of EBITDA in FY 2019. Would we then assume, if it closed at the end of Q2, beginning of Q3, EUR 30 million of EBITDA in the second half? Is there some seasonality in that business?
No, I think that's a fair assumption.
Okay. Thank you.
Thank you. The next question comes from the line of Sebastian Bray from Berenberg. Please ask the question.
Good morning, thank you for taking my questions. I would have two, 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 EBITDA of this business could actually be fairly up fairly substantially from 2018 levels, looking at what has happened to hydrogen peroxide prices so far this year? If so, could you perhaps give us a feel for what that number might be? 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 Q2 or Q3, or are we roughly looking at even levels through the year? Thank you.
Just before closing, it is hard for us to comment on your questions in detail. Due to your question, it is crystal clear that we are really happy having the PeroxyChem bought last year, and we are 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.
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 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.
Just as a quick follow-up, Ute, could I ask on the methane comment you made earlier that there was a EUR 40 million impact in Q1. I assume that refers to EBITDA, no?
Yeah. Price effect, yeah.
Thank you.
Thank you. We are not taking any further questions. Dear speakers, I will hand over to you.
Ladies and 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.