Solid start for Evonik and strategic update
The company made a solid start to the new year despite the economic slowdown caused by the corona pandemic. In particular, the two growth segments Resource Efficiency and Nutrition & Care held their course in a challenging environment. The company’s sales decreased slightly by 1 percent to €3.24 billion in the first quarter compared with the previous year. Adjusted earnings before interest, tax, depreciation and amortization (EBITDA) fell 5 percent to €513 million.
“We implemented measures early and consistently to protect as best as possible the health of our employees and at the same time maintain operations,” said Christian Kullmann, chairman of the management board. “We stand for stability even in difficult times. We are doing everything we can to ensure that we supply our customers reliably.”
While the company is facing challenges in logistics and production, their global network is paying off. Supply chains are intact and there are hardly any restrictions on production worldwide, except for a few government-ordered shutdowns at smaller sites. At all sites, very high hygiene standards apply. Wherever possible for administrative posts, conditions were created within a very short time to enable working from home and existing flexible working-time models utilized. An internal steering committee is monitoring the dynamic situation closely and enables the company to react to new developments at short notice. At the same time, Evonik has sufficient liquidity and committed unused credit lines.
Increased efficiency pays off
“Our efforts in the last three years to cut costs and increase efficiency at the company are now paying off,” said Ute Wolf, chief financial officer. “We have a strong balance sheet and a good liquidity cushion.” Lower volumes and selling prices were responsible for the decline in adjusted EBITDA in the first quarter. Additionally, weak demand and inventory impairments, due to the significantly lower oil price, burdened the Performance Materials segment. Accordingly, the adjusted EBITDA margin declined from 16.4 percent to 15.8 percent.
Adjusted net income dropped 27 percent to €181 million with adjusted earnings per share declining from €0.53 to €0.39. The company generated a significantly positive free cash flow of €113 million in the first quarter. Compared with the prior-year quarter, this was down by €46 million, primarily because of higher tax payments. The effects of the Corona pandemic on Evonik’s sales and earnings remained modest in the first quarter. Since then it has become much clearer to what extent the pandemic will burden the global economy. That was not yet visible at the beginning of the year.
In light of this, the company is adjusting its outlook for the full year 2020. The company is now expecting sales between €11.5 billion and €13.0 billion and an adjusted EBITDA of between €1.7 billion and €2.1 billion. Previously Evonik was expecting stable sales of around €13.1 billion and adjusted EBITDA of between €2.1 billion and €2.3 billion. The executive board is sticking to its proposal to pay a dividend of €1.15 per share for the 2019 financial year. The amount of €0.57 per share will be paid on June 2, 2020 as an advance on the net profit. On September 3, 2020, the remaining €0.58 per share will be paid, subject to a corresponding resolution being passed at the planned annual shareholders’ meeting on August 31, 2020.
Resource Efficiency: Sales of €1.44 billion in the first quarter of 2020 reached the level of the previous year. The segment benefited from the first-time consolidation of PeroxyChem, the US producer of hydrogen peroxide and peracetic acid acquired at the beginning of February. The active oxygen products developed well overall, both classic applications and specialties such as disinfectants. Crosslinkers also developed positively. The economic slowdown in Asia as well as declining demand in the automotive and coatings sectors as a result of the corona pandemic affected the development of individual businesses. In particular, coating additives, silica for the tire industry and high-performance polymers posted slightly lower sales. Adjusted EBITDA at Resource Efficiency rose 4 percent to €344 million.
Nutrition & Care: Sales declined slightly by 1 percent to €1.13 billion in the first quarter. Essential amino acids for animal nutrition recorded significantly higher volume demand and were able to increase their sales with almost stable selling prices. The Health Care business also developed well in pharmaceuticals and food ingredients, posting higher sales. By contrast, sales at the Baby Care business were significantly lower, adversely affected by tougher competition for superabsorbers. Adjusted EBITDA fell 3 percent to €174 million.
Performance Materials: At the Performance Materials segment sales dropped 9 percent to €472 million in the first quarter. Sales at Performance Intermediates declined due to weak demand, particularly from the automotive and oil industries. Business was also negatively impacted by the massive drop in oil prices. Alcoholates at the Functional Solutions business posted a very pleasing performance. Adjusted EBITDA at the segment dropped 57 percent to €23 million due to impairments resulting from the significantly lower oil price.
New structure and updated financial targets to push forward transformation
The company is pushing forward with its transformation into a best-in-class specialty chemicals company and is reorganizing its divisional structure. This step reflects the ongoing strategic transformation of the company’s portfolio. On July 1, the current operating segments will be transferred into four divisions that are more balanced in their size and type of business. The divisions will be easier to manage because of their clear strategic roles – three oriented towards growth and one towards efficiency – and will be structured along separate technology platforms.
“The transformation of Evonik is becoming more and more visible,” said Christian Kullmann, chairman of the executive board. “We have been very successful in increasing the share of specialty businesses in our portfolio and will continue to push forward in this direction.” Specialty businesses currently make up 80 percent of the conpany´s portfolio, up from just 40 percent in 2010. These businesses have delivered annual organic earnings growth – not including growth from acquisitions – of 6 percent over the last five years.
The four new divisions – Specialty Additives, Nutrition & Care, Smart Materials and Performance Materials – will have a more streamlined administration. The new set-up means a reduction of 150 positions and annual savings of €25 million by the end of 2021, mainly in cross-segment and administrative functions in the operating segments. The new reporting structure will increase financial transparency. The company will disclose figures for four, instead of three divisions, shedding more light on the development of the different businesses. In addition, the company will disclose sales splits for four sub-divisions.
The company has also conducted a sustainability analysis across its portfolio to better integrate sustainability topics into the company’s portfolio and strategic management decisions. The results show that 90 percent of products have a positive sustainability benefit that is at or above market reference. More than 30 percent of the company’s portfolio deliver clearly superior sustainability benefits. These “Next Generation Solutions” address customers’ desire for sustainable products and offer above-average growth potential for the company.
“Our Next Generation Solutions are creating attractive growth opportunities,” said Kullmann. “We are seeing high demand and expect to further increase the share of sales from such sustainability winners.” To reflect its strategic transformation and growth expectations, Evonik has updated its medium-term financial targets. In the three growth divisions, sales volumes are expected to increase by more than 3 percent annually on average over the medium term. The company aims to create value by generating a return on capital employed of 11 percent – well above its cost of capital. Finally, the company is aiming for strong free cash flow generation in relation to profit, with a goal for a cash conversion ratio (defined as free cash flow / adjusted EBITDA) of more than 40 percent.