Evonik Industries AG

Tim Lange - Head, IR Christian Kullmann - CEO Ute Wolf - CFO

Gunther Zechmann - Bernstein Andreas Heine - MainFirst Andrew Benson - Citi Paul Walsh - Morgan Stanley James Richards - HSBC Geoff Haire - UBS Rikin Patel - Berenberg Laura Lopez - Baader Bank Georgina Iwamoto - Merrill Lynch Thomas Swoboda - Societe Generale Chetan Udashi - JPMorgan Christian Schulte - Kepler Cheuvreux James Knight - Exane

Yes, hello, this is Tim. Good morning and welcome to our Q2 earnings call.

With me today are Christian Kullmann, CEO and Ute Wolf, CFO of Evonik. And with this, I would like to hand over directly to Christian for the short presentation.

Thank you, Tim and good morning to everyone. Thanks for taking the time to be with us today.

I'm pleased to report a quarter with a further sequential earnings increase. And we achieved this in group level as well as in all of our three chemical segments.

We have once again proven that Evonik is more than just methylamine and butadiene. We will come back to this point during our presentation.

Looking at volumes, we delivered strong numbers in our two growth segments with 5% and 4% respectively. This is not only visible in group level, because of the Force Majeure at our C4 plant in Antwerp.

This effect only has reduced group volume on growth by about 3%. This all provides us with a good level of confidence to finish the year within the given EBITDA range of €2.2 billion to €2.4 billion.

Earlier in June, we met many of you in London to update to you on our strategy and our priorities for the coming years. We have started the process to build best-in-class specialty chemicals company.

As we told you, this will not happen overnight. But let me give you some first and early examples of our strategy execution.

In terms of portfolio, we showed you in London that we also has some mature businesses in our portfolio. From one of those, we have found an attractive strategic option in our hydrogen peroxide business, we have licensed our HPPO technology to the Hungarian MOL group for polyur plant.

This is an attractive route for us. Limited risk, low to no CapEx, a reliable income stream via license and fees and thus a very attractive margin supporting our group margin target.

We also continue to selectively strengthen our group engine -- our growth engines. The latest example is the expansion and optimization of our fumed silica capacities in Antwerp.

This investment had to further expand our growth engine, Smart Materials. Those two measures alone, once fully ramped up will lift our EBITDA margin structurally by 10 basis points.

Of course, this is only a small step but each step counts to reach our margin target of 18% to 20%. In terms of our third strategic lever culture, we are holding a conference with our top 200 executives in September.

It is important for me to start a bottom up process with them and get them involved as role agents on our way to establish a corporate culture that drives and rewards performance. In our growth business, Animal Nutrition, we continue to strengthen our position as innovative partner and reliable supplier.

But at the same time, we are actively addressing the current market conditions. In today's more competitive market environment, it is crucial to strengthen our position as cost leader in methionine.

We've always had a very competitive cost position introduction with our sale advantage and technology leadership. Now, we are looking at all potential levers across the whole value chain, like in sales, marketing and supply chain.

And, we also continue to optimize our portfolio of bio-amino acids. Here, we have never been really satisfied with the financial performance.

Our joint venture for Omega-3 fatty acids now provide some nice synergy potential with our lysine business, asset will be located at our lysine site in Blair, Nebraska. Further measures of our bio-amino acids are under evaluation.

At the same time, we continue to capitalize on the growth potential for sustainable nutrition. New innovative solutions like probiotics or CreAMINO are growing strongly.

They offer significant upside potential for our portfolio. These are only first and early examples for our strategy execution.

Further details and more measures will follow. Amongst others, we are working on cost efficiency and lean processes as well as smarter ways to employ CapEx.

We'll keep you updated on our progress. Our other main priority is integration of our acquired specialty additives business is proceeding well.

We started to implement best practices for example within our sales and operations planning, and we continue to collective implement best practices in order to achieve the best-of-both-worlds. We could already implement around € 5 million of synergies in quarter two.

So we are fully on track here. In terms of EBITDA contribution in the second quarter, the acquired businesses realized growing earnings both year-on-year as well as quarter-on-quarter.

Also our Huber Silica acquisition is well on track. We have received clearance from all respective authorities with only minor conditions in Europe.

We are in the process of divesting some small businesses which are by far less than 1% of our total sales in silica. Once this is completed, we will close the deal.

This will happen in the near future. We have also successfully completed financing the deal with the issuance of a hybrid bond.

We have achieved the lowest coupon ever for euro corporate hybrid issuance. At the same time, it supports our financial policy of having a solid investment grade rating.

Ute and her team have played a crucial role in making this a successful deal. I guess, what a nice and smooth transition over to her for the second part of our presentation.

Thank you, Christian and welcome also from me. Starting with some more financial details on Chart nine, I would like to highlight that for the first time after almost two years, we have a positive price development on group level.

All segments contributed to this development. Price pressure in Nutrition & Care is steadily easing.

Resource Efficiency has successfully pushed through price increases to compensate for higher raw materials. And Performance Materials continues to enjoy market tailwind that goes far beyond butadiene.

Our adjusted earnings per share are up 17% due to the good operated performance. Another contributing factor was the tax refund in connection with our divested real estate business.

In terms of free cash flow, we had the expected outflow in Q2, as we pay our variable remuneration in this quarter. Additionally, we have recorded cash out for net working capital due to higher volumes, rising raw material prices and preparations for maintenance shutdown in Q3.

But this was turned in the second half. In terms of net working capital, we expect the cash inflow in the second half.

Also our cash tax payment will be significantly lower for the remainder of the year. Hence, we confirm our free cash flow guidance.

We expect a clearly positive cash flow, but it will stay considerably below the strong level of 2016. I want to continue with the performance of our segments starting with our strongest earnings contributor, Resource Efficiency.

The excellent and resilient performance continued into Q2. Good demand across the whole segment led to an overall volume growth of 4%.

The EBITDA margin is again above 23%. Like you can expect from a true specialty chemicals business, we successfully managed to pass on higher raw material prices.

So the margin has stayed stable at the previous year level and even expanded on a sequential basis. Let me highlight the excellent development in the area of Smart Materials.

High-performance polymers continued its good performance with automotive and membrane free fibers as strongest drivers. In silica, sales continue to be on high levels with another good quarter for rubber silica and positive development in Asia and the Americas.

The contribution from our product was coming as expected. As part of the integration process, we have combined Evonik's Crosslinkers and a product, Epoxy Curing Agents into 1 business line and shifted the headquarters to the U.S.

The combined business is now run by the former Product Manager, another good example of how our best- of-both-worlds integration approach. We expect a good business momentum to continue into the second half.

Besides that, we will have some planned and larger maintenance within our coating and PA 12 businesses, currently running at full capacity. This will have a negative effect of €10 million to €20 million in the third quarter.

Also in Nutrition & Care, we have successfully managed higher raw material cost. So the margin has been stable or even rising in most businesses at Personal Care, Comfort & Insulation and also interface and performance.

And the segment has proven in Q2 that it is more than methionine. While Methionine prices have not yet shown the expected stabilization towards the end of the quarter, growth in the other businesses has compensated for this.

Consequently, the segment delivered sequentially higher earnings, as we had guided in our Q1 call. The Air Product integration run smoothly also in this segment.

In addition, we continue to strengthen our silicone platform for key businesses like Comfort & Insulation. Commissioning for our new plant in China has finished, and trial product -- production has started.

The new plant will help us to cover the growing demand for PU foam additives locally in Asia. In methionine, the overall market sentiment improved towards the end of the quarter.

Volumes were strong especially in May and June. On the back of this positive momentum, we felt it was the right timing to increase our prices globally at the beginning of July.

First indications regarding customer acceptance are positive. However, today, it is too early to judge on the sustainability.

We expect unchanged positive sentiment in most of our markets and businesses for the remainder of the year. For Q3, we expect slightly lower earnings in health care after a very strong Q2 and due to patterns of our contracts there.

Also Personal Care was sequentially be a touch below the strong Q2. And in methionine, we expect lower sequential volumes as a result of the strong May and June, as well as the announced price increases.

In Performance Materials, volumes in Q2 were clearly impacted by the Force Majeure in Antwerp, and the 3 scheduled shutdowns in our MMA business. The Force Majeure alone has resulted in 10% lower volumes and an EBITDA impact of around €5 million for the segment.

In MMA/ PMMA, market demand remained strong. Supply was further shortened by recent planned and unplanned outages in the industry.

We ourselves were limited on the volume side in Q2. Prices were at high levels already and will be further supported by our announced price increases for PMMA effective July 1.

All in all, the positive market environment is holding longer than we initially expected. Demand for all derivatives in the C4 chain in particular for MTBE and the plasticizer was strong in the quarter combined with tight supply in Europe.

Looking into Q3 and not surprisingly, average butadiene spreads are expected to be notably below Q2 level. But the segment will prove that it is far more than butadiene.

We expect the butadiene effect should be mitigated by ongoing good spreads for MTBE and plasticizer. In addition, the ongoing health demand, higher volume availability and higher prices for MMA/PMMA will turn Q3 into another strong quarter for Performance Materials, so we enjoy the current market tailwind for as long as it lasts.

Nevertheless, we continue to assume a normalization of the favorable supply/demand situation especially in EcoLite in the next couple of quarters. With this, let me hand back to Christian for the outlook.

Thanks a lot, Ute. Let me briefly summarize the year so far.

We've made the first steps to build the best-in-class specialty chemicals company, and we have delivered, the first half in line with expectations. This what achieved despite the fact that methionine prices were a bit below our own assumptions.

But we are more than methionine. We have compensated for this with good development in Resource Efficiency and Performance Materials.

Looking at the rest of this year with a good level of confidence to finish the year was in the given range of €2.2 billion to €2.4 billion. That closes our brief presentation.

Thanks a lot for your attention so far. We are now happy to discuss your questions.

Question-and-Answer Session Operator Thank you. [Operator Instructions].We will now take our first question from Gunther Zechmann from Bernstein.

Please go ahead, your line is open.

Hi, good morning. Thank you for the presentation.

Two questions, first, sorry to start on methionine. You indicated lower volumes in Q3 after strong May and June.

Is that driven by -- did I hear that right there, more stringent price before volume strategy. Is that the way to think about it?

And if that's the case, does that change your view on growth and margins for this business longer term? That's the first one.

Secondly on the full year guidance. How do you feel about the range now, given good operating results, but then we see a dollar weakness, euro strength, butadiene prices coming off, MMA/PMMA are still very, very tight.

So what would it take to end up at the higher and at the lower end of that guidance range? Thank you.

Okay,Gunther thank you very much for your question. Yes, on methionine, the somewhat lower volumes is mainly -- the expectation is mainly driven by the price before volume approach.

On the other side, we really had very good volumes already in May and June. And the experience shows that sometimes that ease a little bit into the following months.

As we said, we just did the price increases, some other market participants did as well. So we have to see how that really works out in the end, but I think it's a prudent assumption to be prepared for little bit lower volumes in the third quarter.

On the long term, we do have not changed our view on the methionine market. We see the 5% to 6% volume growth over the years, looking back, and also seeing this year.

So from that point of view, that is fully on track from our point of view and we also see the capacity development more or less as announced, so not -- not much changed here.

Okay, good morning, Gunther. We're just happy to report the first half of the year in line with our expectations.

And I guess, we have a good visibility into the next quarter. But as you know, it is far this -- to the extent it's that the -- some way to go to the rest of the year.

And there are some uncertainties if you look to our markets, and therefore for example talking about the timing of when the normalization in our MMA business will become clear. And on the other side, I guess, it is a little bit too early to judge how the positive market momentum in methionine will develop throughout the rest of the year.

And therefore, we are just happy to say, okay. We are in line with our expectations and I just guess it is a little bit too early to give you very a precisive outlook for the rest of the year.

But we guess, it is already pretty precise.

Okay, thank you guys.

Hi, yes good morning. Basically three questions if I may.

The first, could you elaborate a little bit more in detail and give more color on the various supplying demand situations you have in your C4 chain. You have already mentioned that MTBE and the [Indiscernible] is doing better.

Is that something where you now see that the demand is really getting strong enough to fill the capacities globally so that it is something sustainably higher in margin rather than what we have seen in butadiene? Secondly on Resource Efficiency, I would assume maybe you can confirm this and the earnings are year-on-year up also if you exclude the products business.

And could you also confirm that the products consolidation was margin accretive for this business. And the last one is on the free cash flow, you said, it will be positive but substantially lower, do you think the free cash flow will be enough to cover the dividend this year?

Thank you.

Okay, Andreas. Good morning, thank you for your question.

Starting with your question for the C4 chain, of course our Force Majeure situation in [Indiscernible] has stressed the market a little bit, but that was seen in our numbers. Butadiene, I think, we really stressed that from the beginning of the year that the very high prices in the first and second quarters should normalize and that is more or less now happening as expected.

So that is no surprise from our side. If you look at the other C4 product, MTBE.

Trading is strong and also the pricing is above the season expectation. MTBE has a strong season in summer as the gas mix is a little bit different.

Butene-1 over naphtha persist on strong level so far. And also in [Indiscernible] the demand from European customers was robust on good levels.

Of course, that is also seasonally somewhat higher demand and also a shortage of plasticizers supply in the market. The demand for plasticizers in Western Europe remain strong, which shows further support for all positive pricing development.

And again also in last year, although the overall level in PM was relatively low earnings wise, in the C4 chain, we've had seen healthy price mechanism in the product than of course on lower levels as naphtha was much lower. So from that point of view, we do not really see a big shift, but things are really moving into the right direction, yes.

Then your question, if Air Products margin is accretive. Yes, they had higher margins as our overall group that is margin accretive.

If you look further down and think of business lines of course some are as high in margins but overall in the group improved the margins. Then regarding the free cash flow, I think, we want to stay with the more general statement that it will be significantly lower than last year.

So from that point of view, it might not reach the dividend amount level, but again, we are not now here in a position to really forecast the free cash flow on a very precise level, so maybe that as a general comment.

That answered all your question, Andreas? Are you happy?

Yes, thank you, bye.

Okay, thanks, Andreas.

You mentioned a number of sort of moving parts in the Care & Nutrition area, in addition to methionine. I wondered, if you could just give a little bit more color on that?

I wasn't -- perhaps you spoke a bit too fast for me to understand it. Obviously, you made a number of acquisitions.

You're just talking about some pressure on free cash flow now. Can you give us an idea of the sort of mid-term debt and debt ratio targets that you sort of like to see?

You also talked about the synergies within the lysine, Omega-3, production plant in Nebraska. And I wondered if you could detail that and how significant that might be.

And lastly on apologies [ph] for the number. The portfolio change emphasis that you discussed at the Capital Markets evening a couple of months ago, I wondered if you could give any color on how that's evolving?

Thanks.

Okay, Andrew. Thank you very much.

Sorry if I was too fast. Maybe let's go through the…

[Indiscernible]

No, I would not assume that, never. So maybe let's really walk through Nutrition & Care, again, besides the Animal Nutrition.

If you look at health care they had a very good development in the first half, especially also very strong Q2. That is now a more custom contract pattern that Q3 is sequentially a little bit softer.

Personal Care also had a strong Q2. So a few million lower expected in Q3.

Comfort & Insulation had a very good development. Also the product business that gets integrated into that very strong volumes, very good development.

And here, we also see a good development for the remainder of the year. Baby Care is of course in a very tough situation, but I think sequentially not much change here.

So maybe that are the main points to look at Nutrition & Care. The question around our fertility in Nebraska, that will be from 2019 onwards.

So nothing, which affects this year or next year. So from that point of view, I think, it's a little bit too early to talk about very concrete numbers, as we now are really starting the joint venture with DSM and starting to set up the facility there.

Mid-term debt ratio, we've always expressed that we have -- want to have a good and solid investment grade rating. That's exactly where we are.

We discussed several times, is there -- very precise leverage ratio. The difficulty with that is the fluctuation in the pension scheme.

So we really in the end decided to stay with the rating statement, and that's exactly where we are. So that means from my side there is no need to deleverage for the next years.

We are really on a good and sufficient level here.

Good morning, Andrew, I really appreciate your third question, because it gives me once again the chance to point out our disciplined and diligent M&A approach. And as you know the -- it is not size -- it's not decisive -- still not a decisive criteria for M&A.

We really target on the strategic and on a financing fit. And I think, this is what we've really proven with our last two acquisitions.

It is crystal clear and tends to really that an active portfolio management just includes both sides of the coin. On the one side, targeted and disciplined acquisition strategy, but on the other side also divestments.

And to bring it to the point, those both sides of the coin are the core element of our M&A strategy. But there is absolutely no need to rush.

And maybe the speech of Ute was a little bit too fast, our strategy, our M&A strategy is not. And therefore we will be patient.

Okay, thanks very much.

Yes, thanks very much. Good morning guys.

I have three quick ones, if I can. The first one is on Performance Materials.

Obviously, we've gone from [Indiscernible] in butadiene, over-earning in MMA/PMMA businesses. But in Q3, Ute, do you think you can do better EBITDA based on the PMMA change strength than in Q2 for the division as a whole, or are we looking at something that sequentially stable?

So that's my first question. Second question is with regards to Nutrition & Care, at what point if the price increases from methionine have been successful, would you see that in the numbers i.e., the margin lift that would give because on my math at least it looks like that the blend of raw materials for methionine is sort of drifting lower.

And then final question, again, just an extension of that raw material point. You've successfully raised prices in Resource Efficiency, and we've sort of seen a normalization in raw material, shall I say, relative to where we were in Q4, Q1.

What's the raw material outlook for the second half? Are we still seeing inflation year-on-year or is that beginning to fade out of the system?

Thank you.

Okay, Paul. Thank you very much for your questions.

Yes, I think in Performance Materials, there are two diverging trends. On one hand, we see butadiene price is sharply going down to more normalized prices.

On the other side, we have a good development in other products of the C4 chain. And we have the ongoing tight situation in MMA/PMMA.

So we expect another strong quarter if that will be at the level of Q2 or slightly above is a little bit hard to say from the rates point of view. So we would like to leave it really -- we would like to leave it really with the statement -- another strong quarter.

Please keep in mind that PM acquired decisive seasonality in Q4, so Q4 is substantially lower with the non-seasonality than the other quarters.

That's a clear change on the previous view that the Performance Materials business would normalize in the second half. It's going on.

So you said, the performance in that business is kind of going on for longer than expected within the context of the guidance?

Partially, yes. I think, for butadiene it more or less fits very nicely for MMA/PMMA.

Today it looks that that might be stronger, a little bit longer than we had anticipated back in January.

Okay.

So then on the raw materials, the pressure decreased during Q2, if you really talk about Resource Efficiency, please keep in mind, they have a lot of inorganic materials, which have different patterns as well if you compared to the oil derivatives. If you look to the third quarter, what do we really see?

We see some crude oil price weaknesses more or less sideway. The C4 spot prices are following this trend.

If we look to ammonia, the prices continue to soften. Methanol, the Q3 prices now settled at 315 tons, which is a price [Indiscernible] of €90 per ton.

And we see really in -- especially in U.S., really maximum production rate, so that all points to somewhat softer prices there. If you look at acetone, which is important especially for Resource Efficiency, we've had a very, very low price level, especially in the first half of last year.

So from that point of you, of course, in this year, this is quite sharp increase. And the market is also expected to be tied at least until October as we have maintenance and turnaround outages.

If we compare the second half with the first half and the comparison there should be some tailwind from raw materials in the second half.

And just finally on the methionine question, if the price increases prove successful, when should we expect to see that in the numbers?

I think, we will see the first signs in Q3 when we really see the exception -- acceptance, excuse me, from the customers. As I said today, it's really too early to give an indication how sustainable this might be.

On the other side, our people who really work in the market, they really, very diligently thought of that price increase and the fact that others moved in the same direction, I think, gives some room for positive view here. But again, it would be not very serious today to point any one or the other direction.

But I would expect in the course of Q3, we get a good idea how that really works in the market.

Okay. Thanks a lot.

Thank you.

[Indiscernible]. Thanks very much.

Yes. Hello.

I was just wondering if you could update us on the joint venture you have or potential joint venture with DSM on the bio Omega-3. In terms of when you see first commercial sales and update us on CapEx spend as well and might that has changed since the initial announcement.

And then secondly, just going back to the methionine and your comments about volumes and getting prices through. I was wondering, given, we haven't seen any price movements in methionine for most of this year, [Indiscernible] largely.

How much, how far can you reduce volumes to try and encourage price increases in the market?

Okay. Let me start with methionine and Christian will update you on the joint venture.

We are now currently working at with DSM. I think, for methionine, you really have to see the trends in the different regions.

If you look at North America, that's very stable, robust poultry demand. Pig and poultry production is really here on a very solid growth trend of 1% to 2%.

Europe, broadly stable, we've had some competition here especially in the first half, but that is now also sequentially easing somewhat. If we look at China, quite volatile on the other side, if you followed some announcement of feed info.

There had been already some price increases in the last week. So from that point of view, we will see how it really works out over the next weeks.

We have favorable corn and soya prices there. So, that are the positives for North Asia, China.

If you look at Southern Asia, Southeast Asia, good development, we have a growing animal protein demand in the whole region. We have improvement in our agriculture business, which also comes from that.

So that is a very solidly growing region, which really performed smartly. We look to Latin America, of course there is some weakness, but that has not changed over the whole year as some of these countries are really in difficult political and economic state.

So that is what we see overall. And we now will work through the regions with the price increase and see how that really works.

I would say, the biggest chance is in China, as we really see trends there changing very rapidly. And as this region is under -- has a good underlying growth.

Okay, good morning, Geoff. You've asked to get some more informations about our cooperation with the DSM.

I think, the start-up of this joint venture will be in two years -- sorry, will be in two years. And now the CapEx details, you've asked for.

Yes, it is an investment of roughly €200 million and €100 million will be carried by each partner. And I think, Evonik will be able to bring some more assets of its existing site especially in Blair, in Nebraska.

So that, we think, that we could realize synergies and sourcing and more over, we could take some of the existing infrastructure to bring it in and to make use of it.

Thank you.

Hi. Good morning and thank you for taking for taking my question.

I just got one. Given you've raised prices in methionine, how do you expect this to reconcile with your capacity expansion in Singapore?

And on that topic, do you have any guidance on when that part is going to ramp-up? Thank you.

Yes. Hi, Rikin.

Good morning. Thank you very much for your question.

I think, the price increase is more a tactical move as we really work in all of the market. There are also -- there have been phases in the past, where we had also price differences between regions, different price, politics in several regions as they have different growth pattern and sometimes also different national, different cyclicals and different growth patterns.

So from that point of view, that price increase is a tactical maneuver as we felt it would be a good time now, and it might be well accepted by the market. If we look at the longer term view, we do not see any change in the underlying growth trends and the driving forces of this market.

We see this 5% to 6% volume growth in the next years as well. To remind you, where does that come from?

It's only one to two percentage points that is really underlying growth in meat consumption. So another three to four percentage points really are dedicated to process utilization in the meat production and to sustainability aspect especially in the developed market.

If you look at the capacities, so, it's more or less known what is planned for the next year. So [Indiscernible] has a smaller capacity of 40 kt for next year -- end of next year.

Sumitomo another 100 kt for next year and then our capacity would be available in the second half of 2019. But we are really flexible, so we've ramped that up.

If you look back to the year 2014, where we had our Singapore plant, we were very flexible in adapting to the market condition. We have big size up in the other regions, which needs maintenance, sometimes also more fundamental maintenance.

So we are really flexible, how we time that, how we communicated to the market. And if we look back, we really made a good job and being prudent and diligent in introducing new capacities in a smart way to the market.

Great. Thank you.

Thank you for taking my questions. So first, on the presentation, you mentioned that probiotics and CreAMINO were going slow -- strongly.

And can you maybe tell us how much does this currently represents from your sales in Animal Nutrition? And also, you mentioned that bio-amino acids were under revision, so this business that you were not very happy on the performance.

So what alternatives are you considering for this business, maybe divestment or more efficiency improvement? And last but not least, can you maybe remind us, how much is your U.S.

dollar exposure and how much is the negative impact you're expecting in the second half? Thanks.

I'll start with the dollar question then Christian will give you more information on bio product and so on. We have 15 months rolling forward hedging policy.

So that means, two/third of our net exposure is hedged in advance. So for us, that means, for the remainder of the year, there is not so much open exposure left.

If we have a general rule, it's €7 million per U.S. dollar cent but that's the full year FX.

So as we know, we have half a year to go, that of course, half more or less, yes. The whole exposure [ph] we are around US$1.5 billion long in, so two/third of that are hedged.

So that leaves a net exposure of around €500 million -- €600 million, but that's a transaction point of view, of course there are translation effects, which run through the whole balance sheet and P&L. But I think that these two numbers, that should give you some idea.

Thank you.

Okay. Here we are.

Through amino there’s some – one of our several newly launched products for efficiency and healthy annual growth of our Animal Nutrition business and it is the only supplemental creatine source for chicken nutrition. And therefore, we guess, it is -- it will -- it is very complex to compensate this, and the current -- that was the current business size, for one, it is, for sure, it is still small, but the market growth is about -- it is about 20% and that shows the future potential, especially from regional diversification, for example, expand from broilers into swine and other species.

And in bio-amino acids?

Was there another question left?

The other one was, also during the presentation, you mentioned that bio-amino acids was under revision for this business segment. And I was just wondering, what alternatives are you considering there to make it better, more divestment maybe is an option or more efficiency improvements?

Okay, I think to the last question, in due course, we will convey a good answer to this.

Okay. Thank you.

Amanda, we have other questions in the line?

Good morning, it's actually Stephanie Bothwell from Bank of America Merrill Lynch. I had three quick questions, two on Nutrition & Care and one on cash flow, if I may.

The first one, sorry to get back to Animal Nutrition again on methionine, but I just wanted to clarify some of the comments on methionine price over volume strategy. So you mentioned earlier that demand was relatively strong, still in the market, so 5% to 6% year-on-year was still a reasonable assumption.

And -- but given you're moving forward with this price over volume strategy, how do you think about market share from here? And can you just confirm that your competitors are also moving more towards this tactical sort of price over volume strategy here?

The second one is on Baby Care. Would you mind just confirming that Baby Care is contributing positively at the EBITDA line, today?

And the third one on cash flow. I'm trying to assess the level of exceptional one-off items in your cash flow statements that were booked in the first half.

So, if you wouldn't mind just quantifying how much you had in there for acquisition and transaction costs associated with APD acquisition? And as we look to H2, whether or not there are indeed further exceptional or one-off payments or items that would drive on that cash flow performance in the second half?

Thanks.

Hi, Stephanie. Thank you very much.

I'm starting with the cash flow question. It's about 20 million for integration costs and this is more or less also the amount that will appear in the second half.

If you look at the cash flow, also the PPA effect on the inventories play a role. So if you want to go into much detail, I would like to confess, we do it in a bilateral call, because we would have to go on line by line, that would may be not be helpful now in this forum here.

Baby Care, your question, yes, it’s contributed positively to the EBITDA. I can confirm that.

And for Animal Nutrition, we've always expressed that we have a high market share already around 40%. Our strategy is to keep that market share.

If others -- other competitors play a price over volume strategy, I have to ask for your understanding, this is nothing we can comment on. So from that point of view, as I said, our sales people are in the market, they talk to the customers.

And for them, it's now a tactical move that they think and their assessment is at a good point in time to go for that price increase. It is a little bit early for us to say, how that really in the end will work out.

I think, it's prudent to at least cater for some volume effect on that and that's all we can say as today.

Okay. Thank you very much.

Yes. Hello.

Thank you for taking -- two questions. Firstly on Resource Efficiency, I'm just wondering if you were able to recover all the price inflation you saw during the quarter or whether there is a lagging effect that we could see in Q3.

So that's the first question. The second question on cash flow, again, sorry to come back on that.

More from a top down level, you have mentioned several optimization points, thank you for that, by the way. But you haven't mentioned cash flow over the last months.

Do you see fundamental possibilities to improve your free cash generation? I'm pretty much aware that 2017 probably is not representative, but still your free cash flow generation looks not obviously low.

Can you improve it over time, and what would be your target, if you could share with us? Thank you.

Yes, Thomas. Thank you very much for the question on the cash flow.

If you look back some years, you've seen, we've had years [ph] so we had a very strong cash flow generation. Two things, I think which are most prominent, one is networking capital.

This is what we working on. So there is still some room for improvement.

The second big item is investment. We've had quite a strong investment cycle from 2012 to 2016.

That is now normalizing step-by-step. But it's not only about being in an investment cycle, it's also about making the investment spending more efficient, to really check every project, check maintenance, how can we really get to the point we want to be with the optimal amount of money.

This is what we just started. The first indications show quite a sizable cash savings year, but that will have to be implemented step-by-step.

But that are two general resources of improved cash generation also improving the operating performance, is an important source. So I think there are lot of drivers that help for positive free cash flow generation in the future.

First question, I guess was on Resource Efficiency and then raw material compensation.

And with the raw materials broadly compensated, yes, sorry.

Lovely. Thank you.

Hi. Thanks.

My question was -- actually there are two questions. First one is on PMMA and MMA.

Have you internally quantified what could be the sort of -- the fly up margin so as to speak that you might be earning at the moment in that business from tight demand-supply situation. And the related question is mainly on 2018, as we look at the moment, it's probably early, but just in terms of directionally, when think about it, probably PMMA/MMA market normalizes, methionine stabilizes, butadiene if remains at this low level, there might be some headwind for full year next year.

So how do you see the earnings trajectory for next year in terms of ups and downs? Thanks.

Yes, Chetan, thank you very much for the questions. Yes, with PMMA and MMA.

I think that it is somewhat supernatural situation. I think, if you look back the years and you get an idea what a normalized margin is in such a business.

Our assessment towards the normalized margin has really not changed.

Okay, here is the second -- answer to the second question. We expect normalization in the MMA and PMMA market.

But it's difficult to predict the exact phasing. The favorable market situation just already last longer than we previously have expected and therefore once again it is difficult to predict an exact phasing of how it will go on.

Our C4 capacities are full utilized and in particular demand for the plasticizers and MTBE is expected to remain robust. I guess that's the answer to the question.

And what is the normalize margin you consider in PMMA/MMA that we should be thinking about as such?

Sorry, we do not provide margins on business line levels.

Okay. Thanks.

Yes. Thank you.

Christian Schulte from Kepler Cheuvreux. Just a final question, maybe we haven't touched on the conference call at all on automotive demand.

You mentioned some positive demand trends in Q2 from automotive for your Performance Materials. How has that demand from one of the most important customer industries within Performance Materials evolved in Q3?

Thank you.

Yes, Christian. Thank you for the question.

All of our BLs supply directly or indirectly into automotive application. And they are all enjoying a robust demand.

What are the supporting trends? On one hand we have in the automotive coating, strict regulations that we have stronger higher portion of water-based coatings that helps for our -- for the marketing of our product.

Green tires is still a very good trends. Green tire labeling, many countries are introducing that.

Lightweight issue, so that the overall weight of the car has to be improved. That's helps in MMA and crosslinkers, but also e-mobility that we have for cooling of e-components.

We need certain transmission fluid that oil additives produce and so on, so on. So overall, where we supply, but we have very specific innovation driven product.

So there we see a robust demand, so no slowdown or something like that.

Okay, great. Very helpful.

Thank you.

Hi. Sorry for the late question.

I have a new phone and of course it’s not that easy to use. But I've got one question remaining on Huber and the choice of the hybrid.

I mean, clearly it’s a low coupon for a hybrid, but obviously there are cheaper routes. So I'm just wondering the reasons why you chose the hybrid route maybe being a little bit cynical here.

But is there anything from RAG in terms of what they require or even their constitution that you -- that Evonik needs to be solidly investment grade and that might have been at risk without the hybrids? Thank you.

Thank you, James, for the question. I think the hybrid issuance was not done solely to finance the Huber deal.

It's now a coincident on the timeline. But on the other side, if you look at the fluctuation we've had in our pension liabilities in the last two to three years, we felt that it would be very, very much advisable to do an instrument which helps a little bit, it's only half that is accounted for as equity that helps a little bit to bolster here our rating profile.

Of course the Huber acquisition also played a role, but it was not only for the acquisition. The deduction of the leverage profile or the credit profile is something that we do really with respect to what do we need to really have the company solidly financed through our cycles, throughout also economically more difficult situations.

Today, everything runs smoothly but we had years where this was not the case. So from our point of view, we need a long-term financing profile, long-term credit profile that really guarantees that the company has good access to financing sources in the next years.

That's clear. I'm not sure you could comment but maybe I will ask on RAG, do they require you remaining investment grade across the cycle?

I described to you how we derived it and I think, RAG did not-- was not mentioned in that statement.

Okay. Understood.

Thank you very much.

Ladies and gentlemen, this brings us to the end of today's call. Thank you for your attention, enjoy the rest of the summer and goodbye.