Evonik Industries AG (EVK) Earnings Call Transcript

Ladies and gentlemen, welcome to the Q2 2026 Earnings Conference Call. I am Shari, the Chorus Call operator. [Operator Instructions] The conference is being recorded. The presentation will be followed by a Q&A session. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Christian Kullmann, CEO. Please go ahead.

Thanks a lot and a very warm welcome to our Q2 earnings conference call. And thanks to everybody for joining us this morning. And especially warm welcome goes again to our new CFO, Michael Rauch, who's sitting here next to me. Michael, I am really glad that it is a good start with us in the last month and that you are taking an active role for the first time on this call today. As usual, I will start with selected strategic highlights. Michael then will comment on our strong Q2 results before I will check over again to discuss our upgraded outlook. As you know, from our pre-release, we recorded a second quarter above expectations. Actually, this was the best quarterly result in four years, but we are not resting on this short-term success. We note that structural challenges remain for the sector and for Evonik. What is in our hands, we are actively addressing with determination and we can show really good progress in the first 6 months of this year. demonstrate, that we already presented in February. I can only reiterate, we have more potential, even more potential than others, and we are going to realize this potential. On cost reduction, we have extended and expanded our Evonik Tailor-made program. More on that in a second. On portfolio optimization, we have fully carved out Oxeno and SYNEQT and are highly focused on executing these divestments on growth, we have reorganized our innovation organization and added new investments to enable new business long term. And on cash, we have changed our dividend policy and stay highly disciplined when it comes to CapEx. Many of these are difficult decisions, especially when it comes to employee reduction targets. We're executing these in a socially responsible manner but everybody has to contribute. I'm convinced that these efforts will pay off in the end. They will significantly strengthen our financial KPIs in the years to come. Maybe a few words on the extension of Evonik tailormade. Until the end of 2026, Evonik Tailor-made in our business optimization programs would reflect an employee reduction of around 2,800. You can see it in our numbers. Last year, we reported a reduction of more than 850 employees. Since the beginning of this year, we already count another 700 employees less. For the first time in Evonik history, our workforce is effectively shrinking. And ladies and gentlemen, we'll continue on this path. We'll rightsize our organization by another 3,200 people between 2027 and 2029. The extended Evonik Tailor-made [indiscernible] takes a holistic view, capturing now both administrative functions on the one side and operating businesses on the other. These reduction targets have already been negotiated with workers' representatives. We are right now working on the details of the program and aim to have finalized our plans in the course of the second half of this year. Let me stress again with our potential coming from an already solid start position. Now it is all about execution. And that is, I guess, the perfect transition to you, Michael.

Thank you, Christian. Welcome to all of you. It's great to be here. I'm looking forward to a fruitful dialogue over the years to come. As Christian rightfully said, it's all about execution. That is an important part of my CFO agenda, to get our homework done, especially when it comes to portfolio and strict cost management. I will have a strong focus on cash generation and return on capital improvement. While aiming to realize the significant potential of artificial intelligence across Evonik. Moving on to the numbers. Our adjusted EBITDA rose 24% year-over-year to EUR 630 million in the second quarter. This was clearly above the expectations communicated during the Q1 call in early May. This increase was driven by both higher volumes and higher prices contributing 7 percentage each. Especially Advanced Technologies recorded a strong quarter. You are, of course, all well aware of the favorable market situation Missoni. But this was not the sole driver of earnings growth. Also crosslinkers and our polymers did really well. Last but not least, C4 delivered improved results as expected and cost savings also made a good contribution. As usual, in such an environment, inventory revaluation effects support earnings, higher bonus provisions had an adverse effect. We are well advised to utilize this better-than-expected development to continue with our structural improvements on group level and also in the segments. For example, in Advanced Technologies, we've completed the backwards integration of our methionine production in the U.S. With that, we improved our cost leadership in the U.S. and strengthen our position as the only player with integrated production facilities in all three major regions. We also continue to optimize our production footprint in silicas and our cost position in H1. Our cash generation improved significantly year-over-year in second quarter. Our strong operating results converted nicely into cash. We have our net working capital under control and saw less outflow compared to last year despite inflation. Lower bonus payments, advanced customer payments and higher noncash provisions additionally support our free cash flow. All in all, our good first half year cash flow performance underpins our full year guidance to again achieve around 40% cash conversion. Thanks to this cash generation and the lower dividend payment, the seasonal increase in our net financial debt is less pronounced than in the last years. And with that, back to Christian for the outlook.

Thanks a lot Michael. We already communicated our upgraded outlook to you a few weeks ago. We've raised the midpoint of our range by EUR 250 million. These are, let me say, good prospects for this year. And while this is supported by tailwinds from global supply chain disruptions, we could not have monetized on this opportunity without our strong business setup in all three regions of the world. These earnings show our potential when we have a more level playing field with China. So ladies and gentlemen, how do we see the second half of this year? With EUR 1.1 billion of adjusted EBITDA in the books in the first half of this year, we need another EUR 1 billion in the second half to reach the midpoint of the upgraded outlook. In the third quarter overall, we do not see a slowdown from our current performance. Let's keep it like this. My gut feeling tells me Q3 earnings could be similar to Q2 earnings with maybe even a slightly more upside than downside. This obviously implies a fairly steep normalization in the fourth quarter, which you could interpret this caution given the high uncertainty of our current environment. Visibility in many businesses still subdued. Across most parts of the portfolio, we expect to see regular light summer dip in August, which makes predictions even harder. Overall, it is fair to assume the normalization in selected business, which had a strong run recently, such as, for example, casino or cross links, but demand for sure, is not falling off a cliff. Advanced technologies will stay advanced technologies will stay the earnings driver for now, especially since [indiscernible] momentum continues into the third quarter. Customer Solutions will continue to show some more intensive earnings profile. With a higher EBITDA outlook, we reiterate our cash flow guidance. This implies higher absolute cash generation, as you know, we do deliver cash in all weathers. The drivers of our cash conversion target remained relatively stable, but we now factoring a certain temporary headwind in net working capital from cost and price inflation. Given our year-on-year much bad cash performance in the first half of this year, we have more flexibility with regards to net working capital in the second half compared to previous years. Having said this, thanks so far for your attention, and now we are happy to take your questions.

[Operator Instructions] The first question is from Anil Shenoy from Barclays.

Just the two, please. The first one is on methionine. In Q2, apparently, the volume was stable, but you've seen gains from pricing. So I was just wondering what is the outlook for methionine in Q3? Because the pricing is apparently has stayed up and you are expecting more volumes as your plans come out of the maintenance. So -- and after Q3, how should we think about the unwinding of this strong performance is driven by price increases? Do you expect the prices to normalize by the end of the year or possibly in 2027? So any color on that will be very helpful. And the second question is on your guidance for Custom Solutions. Previously, you were expecting slightly above, but now you're expecting EBITDA to be stable in FY '26. And you've spoken about normalization and editors demand towards the end of Q2. So maybe you could sort of elaborate on that and help us understand why you're seeing a drop in additives, but not in Advanced Technologies, please?

Thank you, Anil, for the two questions. The first one on methionine that goes to Christian and the second one on the Custom Solutions outlook to Michael, please.

It's good to get your first question because it can't be somewhat like a solid quarterly call without questions about methionine, so I'm really glad about. Let's keep it like this, we do definitely believe that the strength of our methionine business will extend. So we'll continue into the third quarter. Why is it? First, the third quarter will be the first quarter where positive price effects will now come through. That is definitely help. In respect to volumes, let's keep it is a good amount of the volumes are already booked. So my message that the continuation of the strength and the good development of our methionine business into the third quarter is well underpinned. Maybe -- Yes. I'm conservative. But here, I have to tell you that our expectation is that all in all, we do expect the third quarter to be the best quarter for methionine in this year, may be. And now you have talked about the outlook. Yes, let's keep it like this year, that is what you can bank on with timing, we'll do much better than most of you have expected. Why is it? Why is it? First, we are the only player in the market, having a well-balanced geostrategic portfolio architecture in respect of methionine, having world-scale capacity in the United States, having a world-scale capacity in Europe and an additional one in Asia. That is definitely paying off. Because as you know, Here, the import taxes from methionine into the United States of America are really helpful. And really methionine, I guess in Europe, something similar is ongoing. In respect of the current market situation or maybe the outlook for the market situation, I do believe that we will see in 2027, somewhat like a shakeout. Shakeout means that China and maybe weaker competitors will at least mothball even shut down their capacities. And that is my guess about 2027 in summer 2026. Having said this, I dare to hand over to Mike.

Yes. Thank you, Christian. And Anil, I want to address your second question regarding custom solution. You had a question regarding the outlook change here. So maybe as a CFO, let me first argue a bit on the numbers. You might remember that in the first quarter, the EBITDA for Customer Solutions was about EUR 30 million down year-over-year. Now second quarter, EUR 20 million up year-over-year. So if you basically take a stronger third quarter versus the fourth quarter, you are about on even par level. Now when we talk about the businesses and you address the additives, we do see here a normalization on the additives to pre-war levels in the second half year. So which means we're staying rather stable for the full year. Well, if the business stays stronger for longer, then we have a little bit of an upside, but this is how we see on additives. On Catalyst, the alkoxides recovery in the U.S. is materializing. However, less catalysts for refineries are changed due to the war. So that's pretty much overall and stable picture. And also here should be stable for the year. So Care Solutions are suffering from deterioration of market environment in base ingredients, and we're not expecting any macro impulses anymore, so although urgently needed. On the active ingredients, they're doing well and [ Boafections ] part is ramping up and new applications are being identified. And health care, we see positive effects from optimization program becoming increasingly more visible. So this gives you a bit more color on the Custom Solutions segment.

The next question is from Martin Roediger, Kepler Cheuvreux.

I have, in fact, three, if I may. The first question is for Christian. You have been rather vocal in varies media regarding the intended changes by the EU commission for the emission trading scheme within the European Union. What is your view regarding the upcoming changes, which are planned? Secondly, this is certainly for Michael Rauch. Regarding the new cost-cutting program with another 3,200 FTEs being used between 2027 and 2029, what is the best guess regarding the split between admin people and operating workforce? And as a follow-up, are the EUR 207 million onetime costs in Q2 related to that program? I guess, for example, the closure of the Polyester business is related to that and which amount of restructuring costs should we expect in the second half and also in the year 2027? And the final question, doesn't matter who's answering that it's about the current drought situation in Germany. The water level of the Rhine River is rather low. Does this affect Evonik's logistic costs and logistics handling in any case?

Well, thank you, Martin, for making my job here by just saying you should answer here. So Christian will, of course, start with ETS, Michael, then going on the tailor-made savings and so on. And then back to Christian for the Rhine water levels.

Martin, good to have you. Let's start with the emission trading system, some bits and pieces about first. I do think that the European Commission has got that change is need to better the competitive position of European industry overall. Having said this, the proposals they have now brought to the table are for sure, a step into the right direction because they will ease -- they will definitely ease and mitigate the pressure we do suffer as of today from. So it is a chance to enhance the competitive positions of European chemicals industry. Now it is, I guess that will start after summer vacation that the European Commission will have some negotiations with the European Parliament and on the other side, with the representatives of the 24/7 member states of the European Union to discuss it more in detail. And please, you can believe in my word, you can bank on my word, and we, as Evonik, will also intervene to maybe to put these kind of proposals on the table and they are a good step into the right direction to bring it a little bit more on to our butter side. That is what I can give you as of today. So helpful, yes, first step, right? Now it is about negotiations with European Parliament on the one side and representatives of the 27 member states of the European Union. We, as one of the stakeholders will participate and then let's see what will come out of it. Having said this, I do hand over to Michael.

Thank you, Christian. And Martin, I'm happy to take your second question, which was on the extended restructuring program, which we have announced. So, let me just reiterate what we have been saying also earlier. So we released the information that we're going to release about 3,200 positions until end of 2029 from our company, which is something which we announced. And we also said that we are in the negotiation now on the details. So please bear with me that I can comment not on all of the effects of that program yet. This is going to come in the third quarter. However, you asked broadly what is the split between admin and business functions. Let me go back to the first program, one Taylor-made. Here, it was about 80% admin functions and about 20% more business-related functions. This time, this is a more holistic approach also affecting our businesses. So we would grow more into the direction of about 60 admin and about 40 business details to come out, as I said, in the third quarter. You also asked a question regarding part of your second question regarding the restructuring, which we booked in the second quarter into our books, that was an adjustment for the site closure for [indiscernible] and that is within EUR 50 million within our books. And this is independent from the program which we announced and which we're going to talk more about when we come to the Q3 call. With that, I would hand back to Christian, please.

Yes. And I'll try to give you some more color about the impact of the lower Rhine water. It goes without saying that as of today, the level is on a very, let me say, historical low. But on the other side, we are well prepared because that is what is coming around the corner since [indiscernible] days, so in other words, since 10 years. And you would be really surprised if we would give you that we are not here pretty well prepared for this because that is what we have to deal with since as mentioned 10 years' time. And what does it mean? Yes, okay. There will be a tiny impact because as a result of the lower in water, we would have maybe some increase in respect of the freight costs. But on the other side, all overall, it is manageable, so manageable. And if so, a tiny impact, and we are prepared to manage it because we are familiar with the situation since decade. So far from my side.

The next question is from David Symonds, BNP Pariba.

Three from me, please. The first one is a quick follow-up on methionine. So there was an outage announced yesterday, France related to the Roan river levels, different River. Would you also expect that to be a minimal impact? Or do you think that river is more effected and that could actually impact methionine prices? I'm going to count this is the same question, but a small follow-up on methionine again. You mentioned the shakeout in 2027. Does that imply that you think prices fall a lot next year? Or is it just that you have smaller players currently in operating or not making a windfall to support them into next year? Secondly, you mentioned -- well, actually, I'll start with the -- there's a tire antidumping duty you think imposed on Chinese tires, now 45% from the start of July. Could you comment on whether you expect that to impact your selected business at all? And then finally, you previously said there'd be no buyback before 2027, but cash in the first half has been very good, particularly considering seasonality. Is there any chance that you bring a buyback forward or that a buyback moves up your order of capital allocation priorities before 2027.

Thank you, David. The first one on refining will be addressed by Christian, and then we go to Michael for the antidumping on tires and the share buyback.