Evonik Industries AG

Tim Lange - IR Klaus Engel - Chairman & CEO Ute Wolf - CFO

Thomas Swoboda - Societe Generale Laurent Favre - Bank of America Merrill Lynch Andreas Heine - MainFirst Andrew Benson - Citi Lutz Grueten - Commerzbank Peter Spengler - DZ Bank AGGRESSIVE

Good morning, ladies and gentlemen, and welcome to our today's Q1 earnings conference call. With me as usual are Klaus Engel, CEO; and Ute Wolf, CFO, of Evonik.

And with that, I would like to hand over directly to Klaus Engel for the presentation.

Thank you, Tim. Good morning, ladies and gentlemen, and welcome also from my side.

I am more than happy to provide you with the big picture for the first quarter of 2016 before Ute will elaborate on the more detailed financial afterwards, as usual. We had all in all a solid start into the year, despite an ongoing, not very inspiring, global economic environment.

All of our businesses developed as expected and guided with our Q4 reporting in March and consequently we confirm our outlook for the full year. In Q1 adjusted EBITDA came in at EUR565 million.

Resource efficiency saw another quarter of good earnings growth; prices in nutrition and care normalized, as expected; and performance materials was impacted certainly by the lower oil price. This led to the overall decline in adjusted EBITDA of 13% against the very strong prior year.

Our profitability, nevertheless, remained high. The adjusted EBITDA margin of 18.2% continues to be among the best in the European chemicals sector.

Our business fundamentals remained strong also for the start into 2016. In the first quarter, resource efficiency and performance materials showed a solid volume growth.

Our two growth segments, nutrition and care and resource efficiency, continued on highly attractive margin levels well above 20%. As to CapEx, we carried on with the disciplined approach for the use of our funds.

We are focusing on attractive and selective investment opportunities. For example, we recently paved the way for the expansion of our PA12 powder and our polyamide fiber membranes capacities.

And in Q1, CapEx was 15% below prior year. Together with solid operating cash flow, this led to a strong free cash flow generation, almost on prior-year level.

Our two growth segments, nutrition and care and resource efficiency, are built on a solid basis for future profitable growth. An important element for this is and remains, of course, innovation.

For example, we are innovation leader in high value additives for personal care products, a fact that was just confirmed in China where we recently won the 2016 China Personal Care and Cosmetics Innovation Award for two new emulsifier systems. And in resource efficiency our oil additive business just became founding member of the Atomic Research Center.

This Institute is a joint center of two top US universities, Penn State and Rice University, and leading industry partners such as Honda, Lockheed Martin and Evonik. It is devoted to the development of advanced coating formulations for resource efficient lubrication.

With that for the time being I would like to hand over to Ute who will comment on the current development of our segments.

Thank you, Klaus, and welcome to everybody on the call also from my side. Let me skip page 7 with the well-known Group KPIs and move directly to the operating segments.

In nutrition and care, Q1 turned out as expected. Sales decreased with both lower prices and volumes.

The main reason for the lower prices was baby care where our selling prices reflect the pass-on of the significantly lower propylene prices. Lysine also saw lower prices whereas methionine price differentials was not that pronounced in Q1 just yet.

As guided, the year-over-year gap in methionine prices will widen in the two upcoming quarters due to the high comparables of last year. Volumes came in below last year, partially in baby care and partially in methionine where in last year's Q1 we had enjoyed a very strong volume expansion.

In methionine, usually Q1 is a weaker volume quarter, especially in Asia, due to the Chinese New Year but this was not the case last year where we benefited from the very tight supply situation in the market. Generally the earnings development in methionine for the first quarter was in line with our expectations and in line with the assumptions incorporated into our full-year guidance.

Apart from the flat declines in animal nutrition and baby care, all other business lines, like healthcare, personal care or comfort and insulation had a promising start into the year with at least stable or higher earnings. Resource efficiency continued its success path.

Good demand led to solid volume growth. Prices declined slightly, as in some businesses we sustained low raw material prices, and we had to start on to - start to pass them on to our customers.

But overall we've benefited from the low raw material costs and resource efficiencies. Earnings grew nicely by 5%; and the adjusted EBITDA margin climbed to almost 23%.

We saw good business development across our key activities. Silica benefited from strong demand for rubber and specialty silica, especially matting agents.

Crosslinkers continued to enjoy favorable demand trends across the whole value chain and almost all end markets. Oil additives also had another strong quarter, especially in Asia and in Europe.

For performance materials, the first few months of the year were difficult. While volumes increased mainly from the new C4 capacities in Marl and Antwerp, prices were dragged down, again, notably, by the low oil price.

Our methacrylates business showed a mixed picture. MMA was clearly weaker compared to a strong Q1 2015; demand especially from Asian coating and construction markets slowed down, and supply was ample.

PMMA, on the other hand, improved year on year, helped by a strong automotive demand from Europe and the US. Product in the C4 chain felt the impact from further-lowered naphtha quotations.

Prices, and therefore sales, declined notably, also price spreads over naphtha fell further, leading to pressure on earnings. On top came inventory write-downs in the magnitude of a mid-single-digit million euro amount.

The situation, both in MMA and in the C4 chain, stabilized at the end of the quarter, so that we are optimistic for a quarter-over-quarter improvement for performance materials in Q2. With that, I hand back to Klaus for the outlook.

Thank you, Ute. So let me briefly summarize.

Q1 results demonstrate our strong business fundamentals also in 2016. Good demand and solid earnings growth in key business lines such as silica, crosslinkers, oil additives and comfort and insulation.

Volume growth, particularly in resource, efficiency and performance materials. A strong group adjusted EBITDA margin above 18%.

Nutrition and care, and resource efficiency, with adjusted EBITDA margins well above 20%. Disciplined use of funds; CapEx was 15% below prior year in Q1.

And finally, a positive free cash flow generation, almost on prior-year's level. Against this background we confirm our outlook.

So all in all we anticipate slightly lower sales this year against a strong year 2015; and we expect to deliver an adjusted EBITDA between EUR2 billion and EUR2.2 billion. That closes our brief presentation.

Thank you for your attention so far; and Ute and myself are now more than happy to take your questions.

Good morning. The first question, on methionine.

Obviously the prices came down further in April. And my question is do you see more buying interest at the current price level, compared to the demand weakness you are describing, that you saw in Q1?

Second question, still on methionine. You are talking - in your presentation you are talking about increasing supply during Q1.

I'm just curious whether this is the supply from the new ADCO [ph] plant you're talking about? Or is this still the ramp-up from the capacities that were brought online last year?

And the third question, if I may, on free cash flow. Obviously last year you had a very strong increase quarter over quarter in Q2 and Q3 versus Q1.

I think it would be wrong to expect something very similar this year. Still, I'm just wondering if you would still expect a positive seasonality in free cash flow generation in Q2 versus Q1.

Thank you.

Let me start with methionine. I think the price development we see is the normalization we expected.

I think we described that several times, so from our point of view this development is in line with what we expected. Volumes; the Q1 is, if you look at other years, is usually a weaker quarter with regards to volumes, as Q4 is the ramp-up for Chinese New Year.

Then once Chinese New Year has happened there is some smaller, or some slower, volumes in Q1. That's the normal pattern.

This is what we have seen this year. Last year, as I described, we experienced a different development as the market was so tight.

If we look further down on the full year, we had a very strong year in the market last year. So from that point of view, there could be temporarily a lower market growth and shorter-term customer order patterns.

That's what we see. But again, here things are normalizing again.

We continue to execute our value-selling strategy; this is what we have to prize [ph]. So all in all I would say development fully in line with our expectations, and fully in line with the guidance.

Free cash flow, there were some technical effects in Q1. This is just through the timing of certain payments we've had.

At the end of the year we've had payables which were linked to investment projects. That's normal.

But EUR50 million of these payables were paid in Q1, so that goes into that change in the liability. So maybe if you take that into account, the cash flow looks somewhat more.

I think for the full year we stick to our free cash flow guidance. We do not guide the free cash flow on a quarterly basis.

This is helpful. Thank you very much.

Yes, good morning. And thank you for taking two questions.

The first one is in nutrition and care. You're talking about improving personal care products, silicon, chemicals, etc.

Can you talk about the margin gap of the products that are clearly under pressure, i.e., nutrition and baby care, versus the rest of the division? That would be very helpful.

Then the second question, again back on the cash flow point, and operating cash flow conversion. Apart from that timing issue, can you maybe talk a little bit about cash taxes, which definitely went up year on year?

And more generally about other things we should be aware of when we think about conversion - EBITDA to operating cash flow conversion this year versus last year? Because obviously last year was very strong, and I think a lot of us were thinking that this step-up was due to your good action, as opposed to some exceptional factors.

Thank you.

Thank you for your questions; I will start with some more color on personal care, and then Ute takes the cash flow question. First of all, let me say that we had a good start into the year, with year-on-year improved performance across all market segments and regions, as we speak about personal care, NAFTA, APAC and EMEA.

And this is mainly due to a favorable product mix. So we had a higher share of specialty businesses, actives and functional additives.

We have seen a solid market demand in this part of our business, and that combined also with the lower raw material costs. This is also a segment of our business where we are able to keep our margins; you see this very nicely and it shows that here we have, of course, some pricing power.

In particular we see increased contribution from our new oleochemical plants. You might recall from other calls that we mentioned our activities in Shanghai, China; all parts of the plant are now in operation, so the base business and specialties.

We are happy to report we have already a high utilization rate, at least in some products like the esterquats for fabric softeners. We also had additionally successful launch of new sustainable betaine products for local customers.

And from there we are currently operating, very successfully, deliveries to China, Japan, Vietnam and Philippines and Indonesia. The situation in Americana, Brazil, that was the other major investment in the area of personal care, here production started up successfully.

The start-up measures were finished in December. Again all product lines here are producing including betaine and esterquats.

The ramp-up underway is accompanied by a successful product registration with our customers. We see, of course, a very particular current economic situation in Latin America.

We are all aware of this, but this even more motivates our customers to switch to local supply, so that's not all bad. We think the long-term perspective, despite the very difficult environment in Latin America, is clearly there.

Industry-linked businesses, to finish on this issue; silicone-based products also continue to perform well here, comfort and insulation with a strong performance driven by the stabilizer business in all regions. Also here we have a raw material advantage.

Interface and performance, also a good performance with EU and NAFTA - particularly in the EU and NAFTA core markets. And finally also good start in healthcare; as expected, earnings are more back-end loaded in 2016, but we had a good start here and according to our projections in the year as well.

But still please bear in mind that it is part of the business here that production starts in the first half and we get the billings here usually in the second half of this year, which is a particularity of the healthcare business. Ute?

Yes, okay, to the cash flow. Cash taxes, I think there are some regulatory and technical effects.

First of all we have a tax audit every three years, so there will be some tax payments related to prior periods just coming out of the tax audit, and also the tax prepayments are calculated with some time lag. So from that point of view, we will have higher state taxes in this year; I think we've described it here and there.

But this is really more or less due to a very technical process, how the authorities calculate prepayments and run then the amounts out of the tax audits. That's basically what you see in our cash flow.

And sorry, Ute, on the working…

On the cash conversion I think we've had an extraordinary year last year, and I think we return to the more normal rates in this year again. Net working capital, I think there is a significant effort that this will improve, so this should lead to overall a positive contribution in the full-year cash flow.

Thank you.

Good morning. I would like to know some more flavor on the raw material price impact and cost advantage in the research results efficiency, how do you see this going forward?

Then particularly in methionine volume, as far as I know they have two shutdowns in the second quarter. Will that impact your volume or have you built up enough inventories that you run as the demand is with the pick-up in the market, demand in the second quarter?

Will you follow this or are you affected by the constraints you have with the shutdowns? And I would like to know whether you could share a little bit more on what you see on the contract prices.

There was a considerable decline in methionine spot prices but usually that is not converting to the same extent to contract price. If you could put some flavor what you see in your discussions with customers going forward, how they see the situation between rather high contract prices in the first quarter and now the very low spot prices we see currently.

Thank you.

I start with the raw material part and then Klaus will carry on with methionine details. Yes, we've had again some lower raw material prices in the first quarter.

On the other side we have seen, at least with regard to the oil price, again some correction of this. So going into Q2, we see a stabilization for the key raw material prices.

So I think that was maybe a specially pronounced effect in Q1. What have we seen in Q1?

Low propylene prices, this is beneficiary for methionine, but has a negative effect on baby care, so I think in that segment there is a big offtake for that. Before I think we described that.

For MMA we've had in specialty, ethanol and methanol decrease again in Q1. I think we have also in resource efficiency in some parts of the product, some - mechanisms.

If you took PA12, there, of course, our customers know the inputs there will be over time, a certain pass-on of specific portions of raw material.

Andreas, if I may take the one on the methionine shutdowns and product availability. I think we have publically announced that the shutdown of our biggest methionine complex in Antwerp will take place at the end of Q3, beginning of Q4; it's not 100% definite but in this area.

And this is a normal scheduled maintenance procedure as planned. We expect no major impact on our volumes or sales expected.

Please, first of all, remember that we are the only one that has a pretty high flexibility on world-scale plans on all continents in Europe, in the US and in Singapore. The demand/supply situation is a little bit more relaxed this year, so we have a lot of flexibility to serve our customers competitively from all of these plants.

And of course we have also built up some inventory to be prepared for this maintenance shutdown. So this is 100% business as usual.

On the general picture, of course as we said, we take on here our responsibility as a market leader. The situation is as Ute has pointed out, all in line with our expectations here and there.

You might have seen that we have sacrificed some volumes, so we have not taken every business in the methionine competition because we focus on keeping the margin still high. So that has caused some volume decrease but we believe this is the right strategy for the time being.

Does this answer your question?

Yes, on the volume side yes, and maybe some flavor how the discussion with your customers run if it comes to contract prices, given the very high spread between [cross talks] and contract prices and very low spot prices we see right now?

Yes, I think it's common knowledge and we have stated this several times, what you can see and feed info in the other publications. It is somehow, of course, a proxy for the overall situation but you know that we have - that we have a particular situation, we don't have too much distribution, it's very, very rare, we directly serve our customers.

It's a very differentiated picture. If we talk about the US, Europe and Asia, all in all what I can see, particularly to Q2, is that we expect a further price normalization.

That is what we have in our plans and that - we expect a stabilization of the price trends in the second half of the year. It's fair to say that this is not only true for the methionine business, it's for many, many businesses, that in the overall environment all customers have become more and more short-sighted on the order and quarterly foresight is already something.

So that is something we have to live with in our industry and we get more and more used to this.

Thanks.

Thanks very much. Could you give us a bit more flavor on Lysine?

The spot prices do seem to have bounced but you're still talking about it being a very difficult market, so perhaps it will take a while for that to feed through. On the performance materials side, we've seen Asian butadiene prices rise quite sharply and it appears that European and US prices are nudging up.

So I wonder if you can give perhaps a bit more detail on the outlook that you think for the next couple of quarters within that division, because you - at the start of the year you had been pretty bearish on the outlook. And lastly just on acquisitions.

We've seen some deals, some of the larger deals by some of your quoted peers leading to quite a poor share price performance. I think the market's taken a view that one or two deals are a bit on the expensive side.

So what reassurance can you give as you approach doing whatever it is you'll eventually do that there'll be a positive impact on the share price from any event?

Yes. I'll start with Lysine and performance materials, and then Klaus will answer the more strategic part of your questions.

Yes, Lysine had a slow start into the year. Prices were down significantly if you compare to last year's Q1.

Several factors impacted that. China, again, changed their corn subsidy policy leading to lower corn prices, so that, again, led to higher production in Asia and then that flooding into the other markets.

Furthermore, we had a drop of the prices for soybean meal. This is a substitute for Lysine in feed formulations.

So that, again, weighed on that. So from that point of view, also a demand depressing factor is the currently low production rate of the Chinese wine industry, so very much then a good cause in China with the several aspects we had.

We see actually that the markets bottom out and slightly improve. We have firmer soybean prices ahead of us and we have seen some price increases announced in China.

So I think there is some fair reason to say we've seen the worst of it. But I think it's a little bit too early to build on that.

Performance materials, yes, you were right. We were somewhat cautious in the middle of the first quarter as the oil price was so low.

Now oil price, and also the respective derivatives, have regained some momentum and price. So from that point of view, we are somewhat more optimistic for Q2 than we were for Q1.

Spreads have widened again, so in the other product lines, MMA prices have stabilized. PMMA continues to enjoy good demand, so from that point of view, on the back of these developments, as I said in my speech, we are somewhat more optimistic for Q2 for that segment.

Andrew, on M&A strategy, honestly, there has been no change in our growth strategy. And let me reiterate that finding the right target strategically and financially is for us more important than simply closing a deal at a given point in time for maybe unreasonable prices.

Our M&A discipline in 2015 is a proof for our diligent and deliberate approach and so we will stay disciplined in using our funds also in 2016. We are not under pressure and there are no M&A deadlines.

If and when there's anything to report on the M&A side, we will let you and the public, of course, know.

That's very clear. Thank you very much.

Hi, good morning. Thanks for taking my two questions.

The first is on the Q1 performance on a monthly base. I'm not expecting you giving me the numbers here, but some of your competitors have stated that the performance towards the end of the quarter has improved and especially end of March going into April.

And it would be great to give us your insight here on the performance in that quarter. And the second question is regarding volumes in performance materials.

We have seen there an uptick of 5% in the first quarter and I try to find out if that is more restocking related because your customers started to speculate on rising raw material prices, or if you can really put that into the box of underlying demand, which has improved. Thank you.

I think there is some limitation to really discuss developments month over month. Overall, we have not seen a real change in the sentiment over the last months, neither to the positive or the negative.

The major trends we described for Q1, I think, are also true for the start into Q2. I think one different angle is the oil price.

I think I described that with the other question. If you look at methionine, we described that market prices will continue to normalize.

Also here there is more or less seamless extension of the trends into Q2. And I think our activities with resource efficiencies will continue to do well and support the growth that we expect from them.

Raw material tailwinds might persist, at least for the next month. So from that I think that describes a little bit the trend.

As I see for volume increase, it's mainly our new capacity that we have in Marl and Antwerp, so we started to premarket these volumes very much ahead of the start of the facility. So I think that's the normal procedure if we have a new big-scale facility that we make sure we have a certain utilization guarantee from beginning on.

So that's the main effect.

Thank you.

Good day ladies and gentlemen, one question, if I can. The situation of the superabsorbers is quite dire, so how do you see the overcapacities in the market?

Is it a cyclical problem and is there a light at the end of the tunnel or is this structural? So how do you tackle the situation as a market leader?

Peter, of course baby care, there is a difficult situation that will prevail in both acrylic acid and superabsorbents. We have seen newly negotiated lower contract prices and volumes effective being, for the beginning of this year.

As well, we have seen continued pressure on the private label markets, resulting in lower earnings in the first quarter. And we clearly expect this trend to persist throughout all of the full year.

So we are working on all parts of the value chain to improve this profitability. Therefore we are working, for instance, on improvements in our raw material supply.

We have some options here. We are negotiating with one or the other partner in the industry to optimize this.

In addition, we work, of course, on improving our process technology, as well as our cost structure and further intensify our strong ties to our key customers. Overall, I have to say the global market is currently characterized by an increased competition and price pressure due to the existing clear overcapacities, as well as further investment plans by competitors, in particular in Asia.

You are probably aware that there have been significant capacity additions over the last years and the challenging situation for all acrylic acid and superabsorbent producers will probably - are expected to persist throughout 2016. It will clearly take some time for the market growth rates, which we expect to be around 5% still, to absorb the additional capacities.

However, it should be also noted that the superabsorbent demand growth remains sustainably at an attractive level, which is well above GDP. So we need to be patient here and you can be sure that will try the utmost to use all the options that we have to mitigate the pressure here.

Okay, thank you very much.

Yes. Thank you, folks.

Ladies and gentlemen, thank you again for joining today's call and goodbye.