Evonik Industries AG (EVK) Earnings Call Transcript & Summary

Mr. Tönjes, dear shareholders, ladies and gentlemen. I'm very happy about the nomination by the Supervisory Board for election at today's general meeting. Most of you will not know me, therefore I'd like to briefly introduce myself. My name is Cedrik Neike. I'm 48 years old and have 4 children. I was born in Berlin and I'm half French. Following training at Siemens, and my studies at London, I started my professional career in 1997 at Siemens. About 20 years ago, I moved to Cisco, a U.S. company in the IT industry. In my time at Cisco, I worked a few years in the United States and got to know Silicon Valley and was responsible for research, development, service and marketing. 4 years ago, I joined Siemens and was appointed to the Executive Board; first for energy management in Asia, and later on for infrastructure. Last year, I became CEO of the business unit Digital Industries. Moreover, I'm responsible for IT, cybersecurity and our IoT branch. All these are units that are very well connected to the transformation and digitalization, and this is very close to my heart. I'm sure that I will be able to supplement the competence profile of the Supervisory Board with my experience because Siemens and Evonik are leading industry companies, looking back on a tradition-steeped history. The predecessor of Evonik and one of the predecessors were both founded in 1847. That's a nice coincidence. I'm looking forward to being able to support Evonik and its development. Digitalization has to do with sustainability. The industry can become even more climate-friendly in its production. With the help of infinite data, we can conserve finite resources, and for this digital technologies are a suitable tool. I'm very looking forward to trust and cooperation with you and would like to thank you very much for your kind attention.

Yes. If you want to learn more about Mr. Fuhrmannn and Mr. Neike, just check the CVs that are included in the invitation on Pages 20 to 23. The invitation is available under www.evonik.de/hauptversammlung on Evonik Industries' AG website. The gentlemen Fuhrmannn and Neike are best suited to become members in our Board. Ladies and gentlemen, the minimum participation requirement obliges Evonik Industries AG by virtue of law to ensure that its Supervisory Board is composed of a minimum of 30% men and 30% women. Given the present composition and also the -- in view of the imminent changes within the Supervisory Board due to the resignation of Dr. Luther and Mr. Spuhler with effect of today, Evonik Industries AG is in compliance with this legal requirement. Further information on the minimum participation requirement is contained in the declaration of corporate governance on Page 89 of the financial report. Ladies and gentlemen, before I ask the CEO, Mr. Christian Kullmann, to report on the financial statements and the status of the company and present the management report. I would like to use the opportunity on behalf of the Health Supervisory Board to tell you, dear shareholders, that the Supervisory Board this morning in its virtual meeting decided to appoint Mr. Christian Kullmann, whose mandate would expire in 2021 to -- from May 24, 2022 until 23 May '27 as CEO of Evonik, again. Thus the work and the performance of Mr. Kullmann was honored and appreciated and his person as well. Christian Kullmann, as the CEO, does an excellent job internally and externally. He is the President of VCI and represents the interest of the chemical industry, is always committed and clear and determined. And as a human being, he is characterized by utmost integrity. The Supervisory Board as a whole is looking forward to the continuation of the cooperation. Let us now pass to the management report. You have the floor, Mr. Kullmann.

Good morning, ladies and gentlemen, dear shareholders, dear guests. Today, I welcome you -- I welcoming you most warmly also on behalf of my colleagues on the Board to this year's Annual General Meeting, which is once again being held in a purely digital format. Regrettably, the coronavirus pandemic is still with us and continues to dominate our daily lives. We are now all too familiar with the related restrictions. Health always has top priority for us, especially the health of our employees and naturally the health of our shareholders. That is why I'm speaking to you today by video only, though that does not make it any less personal. You're right. And the dialogue with you are very important to us. Even in this special format, we will do our best to answer your questions, albeit virtually. It is said that true character is revealed in a crisis. Our employees have shown real character over the past year. They have demonstrated impressively what we at Evonik stand for. Reliability, trust, quality and progress. We have stood up to this global crisis. We have rolled up our sleeves and steered our course despite the uncertainty and instability of the global economic environment. What is more, Evonik has continued to develop in these difficult times. I and all of us are very grateful to our employees for that. I'm also grateful that I will stay at the helm of Evonik as Chairman of the Executive Board for another 5 years, surrounded and assisted by my valued crew. So I will have the privilege of continuing to steer our successful course. Allow me to use the next few minutes to give you a quick review of 2020 and show you why this success is not due to coincidence. First and foremost, it is attributable to our carefully thought out and systematically implemented strategy. 2020 was dominated by a pandemic that brought both personal tragedies and the most severe economic crisis since the Second World War. I am pleased to report rightly that so far, Evonik has been able to respond well to the pandemic, to the coronavirus. Protecting our employees has been and remains our top priority at all times. We were able to ensure this and provide a reliable and functioning digital infrastructure at short notice, thanks to our pandemic plans and extensive precautionary measures. Allow me to give you some figures. At times, we had 16,000 employees working from home. So far, we have distributed more than 190 masks to members of our workforce, sent 220,000 rapid tests to people and started to vaccinate staff at our Hanau site. Our aim is to vaccinate all our employees and their families as quickly as possible. At present, we are waiting for sufficient amounts of vaccine and the necessary permits. Logistics and supply chains were most important in the crisis. And here, we were also able to respond in a robust manner. Thanks to our global network of reliable partners, we coped well with the challenges, and were able to maintain production and deliveries throughout the world. Ladies and gentlemen, we are aware of our special social responsibility, especially during periods of crisis. We rapidly increased production capacities for disinfectants to meet rising demand. And we supported and supplied institutions in communities close to our sites and supplied them with these materials. Together with our customers, we donated our high-performance polymer PA12 for the manufacturer of protective medical equipment. And recently, we reported that we are driving forward production of vaccines against COVID-19 by setting up the production and supply of special lipids exceptionally fast. What would normally take at least a year or rather much longer has been achieved in less than 6 months. We received the first request from vaccine producer BioNTech in Mainz in November 2020. To transport its novel mRNA vaccine safely to cells in the human body the long-chained molecules are encapsulated in a lipid particle. As well as protecting the sensitive mRNA, this custom-tailored shell helps transport it to the cells. BioNTech awarded us a contract to produce these essential lipids. In response, production at our sites in Hanau and Dossenheim was ramped up in record time, with the support in the form of precursors and knowledge coming from the entire Evonik Group, from Marl to Mapleton. This is our modest contribution, effective contribution to combating this pandemic. Ladies and gentlemen, our financial performance and the ongoing strategic development of the group also go to show that Evonik proved resilient in the crisis. Above all, they are ample proof that we once again walked the talk and delivered what we promised, despite the extreme situation. We were one of the few companies that had the courage to issue earnings guidance in May 2020, shortly after the outbreak of the crisis. And we achieved that forecast almost exactly to the euro during the year. In fact, our free cash flow was even exceeded. Adjusted earnings before financial result, taxes, depreciation and amortization came in at EUR 1.9 billion, exactly in the middle of the range we forecast in May 2020. Sales were EUR 12.2 billion, around 7% lower than in the previous year. However, that was a respectable result in the context of the most serious economic crisis since the Second World War. Our free cash flow was really good at EUR 780 million. It was well above the prior year level. Our adjusted net income was, therefore, EUR 640 million giving adjusted earnings per share of EUR 1.37. Achieving our goals was only possible thanks to improved quality and the resulting increase in the robustness of our portfolio, which we have steadily restructured in recent years. Our 3 growth divisions, which are at the heart of our portfolio, generated 95% of earnings from our operating business in 2020. I presented our new divisional structure to you last year already. Despite the difficult situation, it was launched on schedule during the year. The former operating chemicals segments have been transferred to 4 divisions, which are more balanced in terms of size and type of business. Moreover, they can be managed better, thanks to clear strategic roles, shared end markets and a clear allocation to technology platforms. The Specialty Additives, Nutrition & Care and Smart Materials divisions are clearly aligned to growth. Performance Materials is particularly lean and efficient. We are reaping the benefits of this accomplishment, and this is reflected also in our financial figures. As already mentioned, our adjusted EBITDA was EUR 1.9 billion, that was a decline of 11% at group level. However, earnings from our 3 growth divisions, Specialty Additives, Nutrition & Care and Smart Materials, were only 3% lower. The growth and resilience of these 3 new divisions are actually driven by two factors -- by 2 elements -- key elements. First, the high proportion of environment-friendly and sustainable solutions. Second, our innovative capability, and that's our innovative new products and innovative solutions. These 2 elements make us stand out clearly in the market and in what we offer to our customers. Allow me to present some examples from our 3 growth divisions. Specialty Additives brings together our broad spectrum of Specialty Additives. Sometimes it's difficult to speak and I have a dry throat when I talk about our impressive divisions. Specialty Additives brings together our broad spectrum of Specialty Additives, which enhance the quality of our customers' products, save energy and quite simply, in many respects, make them better. An impressive example is the self-adhesive labels without a backing material that we developed at Evonik. Normally, self adhesive labels generate a great deal of waste because they require a release liner until they are actually applied. Evonik's technology prevents such waste being generated in the first place, because our silicones eliminate the need for an additional liner. As well as reducing the total weight by 40% and cutting down the related material costs, that saves resources as well. The Nutrition & Care division is focused on people's well-being. In other words, their health and quality of life. Earlier on, I already mentioned that we had set up production of lipids for BioNTech in record time. That is probably the best example of innovation and speed. Another project focused on sustainable innovation that is very close to our heart, actually, is the development of biosurfactants that are 100% biodegradable. The first industrial-scale production facility for these products, scheduled for 2023, will be a real milestone. We have already received initial recognition for this. Our partner, Unilever, has opted for the collaboration with Evonik as a key element in its Clean Future initiative to drive forward the decarbonization of its products. The Smart Materials division pools our business with innovative materials that enable resource-saving solutions and replace conventional materials. We are the global leader in PA12 powders for 3D printing. Just recently, we launched a new generation of powders for 3D printing. About 80% of the product can be recycled in the printing process, making a strong contribution to tomorrow's circular economy. Another perfect and nice example, maybe really perfect example of innovation driven by sustainability, is a new anode material for lithium-ion batteries. We recently launched this product under the trade name Siridion Black. It improves the performance of batteries by increasing their energy density and improving their fast-charging capability and energy efficiency. As you can no doubt imagine, I could easily talk for far longer about Evonik's impressive projects. However, I also want to look at the progress with our strategy, without which these successes I've just highlighted would not have been possible. These innovations would have been inconceivable without this progress of our strategy. Ladies and gentlemen, although we are still a long way from our goal, we have made considerable progress in implementing our strategy in recent years. We continued this process in 2020 despite all the hindrances that surrounded us during this period of time. 4 years ago, that was back in 2017, we embarked on a transformation process at Evonik. If you think of this process as a 100-meter sprint, we are currently about halfway. We've achieved a number of successes over the past 4 years, and we intend to do a lot in the future. And this involves great potential. Let us first look at corporate culture. We've established a strong culture that rewards above-average performance, supports diversity, encourages innovation and focuses on sustainability. We've also taken the next steps in a systematic integration of sustainability into our business strategy. I'm convinced that in the long term, only those companies that operate responsibly and create value for society will be successful. We are committed to this principle, and we are convinced of the correctness of this principle. And we are guided by this principle. Against this backdrop, ladies and gentlemen, we have been able to achieve a major milestone. Over the past few years, we've conducted the first sustainability analysis of all our businesses. To put it in a nutshell, every product line has been examined to establish what value it creates for society and the environment, and its footprint; in other words, the emissions released during production. In 2020, we completed this evaluation of our entire chemicals portfolio. A particularly positive finding of this analysis is that around 35% of our products already offer higher sustainability benefit than comparable competing products. Given this quality and given this superiority, these products show highly attractive growth rates. We call this group of products next generation solutions. Our ambitious goal is to steadily increase the proportion of this product category in the coming years, naturally with the help of our research and development. From our corporate purpose, leading beyond chemistry to improve life today and tomorrow, we derive the aspiration of being a global leader with our innovations on a global basis. With that in mind, we have restructured our organization and pooled our capabilities to bring our scientific expertise even closer to our markets and customers, and to speed up the development of new solutions and applications. We aim to generate additional sales of EUR 1 billion by 2025 with innovations from our 6 innovation growth fields. Here, we virtually started from scratch, from 0 virtually in 2015 and had already generated additional sales of EUR 350 million by the end of 2020. Turning to portfolio management. In the past 4 years, we have divested cyclical businesses with sales of EUR 2 billion. In the same period, we've strengthened our portfolio by adding higher value and less cyclical specialty businesses of similar size. All the disposals, all the divestments were made at attractive prices in favorable phases of the economic cycle. Rest assured that we will be continuing this policy. Since the fall of 2020, we have therefore been preparing to carve out the Baby Care business to pave the way for a realignment of these operations with a partner or new owner. The acquisitions have strengthened the growth and the resilience of our business, reduced our overall capital intensity and have so far leveraged cumulative annual synergies of EUR 70 million. In 2020, we continued to make rapid progress with the integration of our most recent investments. That included both the successful closing of the acquisition of the U.S. company, PeroxyChem, and the acquisition of catalyst specialist Porocel, which we successfully completed at the end of the year. At present, we are also driving growth through our largest investment in Germany. More than EUR 400 million have been invested in the PA12 complex at our largest site, Marl Chemical Park in North Rhine-Westphalia. This complex will come onstream in 2021. The investment is a perfect fit, actually, with our strategy of systematically focusing on specialty chemicals, because polyamide 12 is a high-performance polymer that is used in many demanding applications. For example, it is used as a substitute for steel in automotive engineering and lightweight structures, and for special solutions for medical technology and 3D-printing. Therefore it is an important and essential part of our Smart Materials growth engine. We are also focusing on growth and efficiency when it comes to the business with amino acids. Specifically, that means that in the future, Evonik will be concentrating its methionine production at 3 state-of-the-art sites in Asia, Europe and in the United States. At the end of March 2021, we closed our oldest and smallest production facility in Germany. That will generate economies of scale, cost savings and will, therefore, also strengthen our global cost leadership. And while we are on the subject of costs. In the past, cost discipline, well, was not one of our strengths. That is another thing that has changed, as 2020 proves. Cost discipline is firmly established and is now a firm part of our corporate DNA and is part of the self-perception of this group. We successfully completed our SG&A program last year. You will definitely remember that in 2018, we announced planned savings of EUR 200 million. And here again, we've kept our promise. If you look at our income statement today, you will see that we actually achieved more, that we actually exceeded our target with savings of EUR 230 million. We keep a close eye on cost trends in both our operating business and our administrative operations. We refer to this as ApEx and OpEx. ApEx means that we will be pursuing the continuous improvement of our administrative structures even after the completion of our SG&A program. If you will, we could say that this is the final touch in our profitable future growth alongside our growth divisions, which are driven by innovation and sustainability. Dear shareholders, of course we want to make sure that you, our shareholders, also benefit from Evonik's successful performance. Based on our stable results in 2020, the Executive and Supervisory Board are, therefore, proposing a stable and attractive dividend of EUR 1.15 per share. We focus on dividend continuity at a high level, even or rather precisely in challenging times when earnings are declining. That is one of our highest priorities. Based on the closing share price at year-end 2020, that represents and is equivalent to a dividend yield of 4.3%. Ladies and gentlemen, dear shareholders, this is further evidence once again that Evonik shares are very attractive. Let us now take a look at the current fiscal year, namely 2021. The pandemic will continue to influence the economy this year. We will, therefore, still have to live with a certain amount of uncertainty. However, our robust performance over the past year and our confidence in our strengths mean that we can look ahead with great confidence. Since the end of last year, we have noticed a clear recovery, and we also made a strong start to the year. The global economy should grow by at least 4% this year. We expect Evonik to grow slightly faster. Based on our first quarter results, on May 6 we announced that we are not simply confirming our guidance, we are now more optimistic. We now expect adjusted EBITDA to be between EUR 2.1 billion and EUR 2.3 billion for the year as a whole. The signs are clearly pointing to growth. In 2021 already, we aim to exceed the pre pandemic performance reported in 2019. In the first quarter, sales grew 4% year-on-year to EUR 3.36 billion. Adjusted EBITDA compared with the year before was 15% higher at EUR 588 million. That was actually 9% more than in the first quarter of 2019. Our growth strategy is, therefore, successful. And again, our 3 growth divisions, Specialty Additives, Nutrition & Care and Smart Materials remain our drivers and are making an above-average contribution to this good performance. The free cash flow tripled to almost EUR 312 million in the first quarter, boosted by our improved business situation, the strict management of net working capital and lower taxes. This good start to the year makes us optimistic about this year, about 2021 and the future. Ladies and gentlemen, if we look at the stock market in 2020, we see that it was largely influenced by the impact of the coronavirus pandemic. Evonik shares started the year at around EUR 27 and reached their highest point very early on, at EUR 27.33 on January 2. The market went through many volatile phases during the year, mainly due to the global economic crisis and the virus-related information around the coronavirus. Our shares ended 2020 at EUR 26.38, which is a slight loss of around 2% over the year as a whole. Since the start of 2021, our share price performance has been far more pleasing. Fueled by more positive market sentiment and our more optimistic outlook, Evonik shares topped the EUR 30 mark with a year-to-date high of EUR 30.70 on April 6, 2021. In mid-May, on the 25th of May, the share price was EUR 29.27, which is equivalent to a rise of 9% since the beginning of the year. Evonik, therefore, outperformed the index, which rose by 6%. To enable our employees to participate in the increase in Evonik's value, a further tranche of our employee share program was launched in the Spring for employees in Germany, the United States, Belgium and Singapore. Worldwide, around 11,000 employees acquired shares in Evonik, which is equivalent to a take-up rate of nearly 41%. For this year's share program for employees, we purchased a total of 503,491 shares at an average price of EUR 29.75 and a theoretical share of the capital stock of EUR 1 per share. That was about 0.1% of our capital stock of EUR 466 million. For this, we used the authorization to purchase treasury stock granted at the Annual Shareholders' Meeting in 2020. All the shares have now been transferred to the eligible employees, and the surplus that was left has actually been sold on the market in the meantime. Ladies and gentlemen, as you have seen and heard, we have made very good progress in implementing our strategic agenda for the future. And as I have explained to you, there are further fascinating and interesting challenges ahead. Evonik's clear objective for the coming years is to continue its transformation into a specialty chemicals company with 100% growth businesses. That's not going to happen overnight, of course, but the direction is clearly defined. We will be continuing to actively manage our portfolio to make it more robust and increase the return on capital and cash generation. Our innovation and sustainability targets play a very important role in this transformation, along with further focused investment in growth, acquisitions, as well as the restructuring and divestment and disposal of the businesses. Thanks to my reappointment, I'm looking forward to continuing to shape and lead this strategic development with my colleagues on the Executive Board, our executives and our entire workforce. I would like to take this opportunity to thank the Supervisory Board, you, our shareholders, and of course, all Evonik employees for -- and also our partners in industry and among the employees for your continued trust and support. I hope that you, our esteemed shareholders, will continue to place your confidence in Evonik in the future. And would like to thank you all on behalf of myself and my colleagues on the Executive Board for your interest and kind attention. Thank you. Please stay safe and take care.

Dear Christian Kullmann, thank you very much for your report. And I would like to congratulate you and the whole Executive Board to this impressive performance, impressive also in 2020, again, especially in view of the extreme challenges posed by the COVID-19 pandemic. Let me point out that you can download Mr. Kullmann's report on the Internet. Ladies and gentlemen, I would not only thank the Management Board but all employees of the companies. Thank you very much for the work you performed in the past business year and all the achievements. I think I am allowed to do so on behalf of all the shareholders as well. So please, dear members of the Executive Board, transmit the words of thanks to all employees of the company. Ladies and gentlemen, the audience that attend our virtual meeting via the Internet should be aware of the fact that at this point, the public part of the live transmission comes to an end. Thank you very much for your interest. And with that, I bid you farewell. The further course of the AGM can now be attended by the shareholders of the company and the shareholders' representatives, all those who have connected via the online service. [Statements in English on this transcript were spoken by an interpreter present on the live call.]