Executives: Tim Lange - Head, IR Ute Wolf - Chief Financial

Officer
Analysts: Andreas Heine - MainFirst Bank Geoffrey Robert Haire - UBS Investment Bank Gunther Zechmann - Sanford Bernstein & Co. Martin Roediger - Kepler Cheuvreux Michael Schäfer - Commerzbank Paul Richard Walsh - Morgan Stanley Thomas Wrigglesworth - Citigroup Thomas Swoboda - Societe Generale

Tim Lange: Yes. Thank you very much, and good morning, ladies and gentlemen, and welcome to our Q1 earnings conference call. My name is Tim Lange, Head of Investor Relations and with me today is Ute Wolf, CFO of Evonik. With that, I'll hand directly over to Ute for our short presentation, followed, as usual, by the Q&A session.

Ute Wolf: Thank you, Tim. And also, a warm welcome from me. Thanks for taking the time to be with us today. Our first quarter results sends a steady progress on our Agenda for 2018. Strategy execution and earnings growth are and will remain key for us.

In the execution of our strategy, the announced divestment of our Methacrylate business is an important step forward. The divestment process is well on track. The same applies to our SG&A efficiency program. We are working out the details and we’ll give the next update by end of June. Another element in our move to build a more balanced and more focused specialty portfolio is the investment into our new Polyamide 12 plant.

This project strengthened our growth engine, Smart Materials in market segments with resilient growth and profitability. With these high-performance polymers, we are serving fast-growing market trends like 3D printing, Biocompatible Heart Catheters or Highly Flexible Sheathing for optical cables. Our four growth engines are essential building blocks of our specialty portfolio, serving highly attractive markets with above-average growth rate. Recent market developments prove that we are building on and benefiting from the right needs. Just to give you some examples.

Besides PA12, Silica for the same green tire is another growth driver in Smart Materials. Here, we are now also serving fuel-saving large SUVs and all season tires. With our Specialty Additives, we deliver performance-enhancing solutions for energy-efficient housing. In our growth engine Animal Nutrition, we are strengthening our leading role in the view to sustainable and antibiotic-free lifestyle management. Our drug delivery technologies in Health & Care, turns drugs into high-performance medicines to heal severe diseases or to prevent addiction.

Overall, our growth engines will guarantee GDP plus growth rates across our specialty portfolio. Now let's take a look into the numbers on Slide 5. We had a good start to the year with earnings well above the prior year quarter. This is a quite remarkable achievement as we faced notable headwinds from FX and raw materials. Given the headwinds, we are pleased that our EBITDA margin of 18.5% is within our target range of 18% to 20%.

Apart from the unchanged healthy trends in our market, support from synergies and the first benefits from cost savings are becoming more and more visible. Volumes are positive in the quarter, however, the 1% increase is below our ambition. A modest rise is explained two-fold: firstly, by the strong prior year level when volumes grew 8% for the Group, driven by restocking at the start of 2017. And secondly, by planned maintenance shutdowns in this quarter. Just two larger shutdowns in resource efficiency impacted volumes on Group level by more than one percentage point.

Now let's take a closer look into our earnings development. For the first time since the third quarter of 2015, we have seen earnings growth in all three segments. This is remarkable as earnings growth overcompensated the pretty pronounced impact from a weaker U.S. dollar and headwind from higher raw materials. EBITDA margins in all segments improved significantly year-on-year.

Ongoing healthy underlying trends in most of our business supported this development. Additionally, the positive contribution from synergies and the first benefits from our initiated cost savings in SG&A and operational businesses are becoming visible. Ladies and gentlemen, let's now move to cash flow on Slide 8. Good progress is also visible on the free cash flow. Our free cash flow of €84 million is above the prior year quarter.

Cash-out for CapEx is lower than in the first quarter of last year, in line with our full-year guidance and another proof of our CapEx discipline. Operating cash flow is exactly on prior year level. Not unusual for the first quarter, we have seen a quite significant cash outflow for net working capital. The rest of the year should provide some relief in this matter. So from a full year perspective, the cash outflow from net working capital should be less pronounced than in Q1.

Additionally, we had a shift of cash-out for bonus payments. They usually, and still predominantly occur in the second quarter. This year, we already had some part of that around €40 million in the first quarter. So on a like-for-like basis, the operating cash flow and the free cash flow would have been another €40 million higher in the first quarter. To bring it to the point, free cash flow generation in the first quarter was promising and remains on the top of our priority list.

We are fully committed to grow our free cash flow in 2018 and beyond. Let me now give you some more details on the individual segments, starting with Resource Efficiency. Thanks to the successful management of raw material prices and the contribution of Huber Silica, Resource Efficiency was able to offset the impact from FX and lower volumes in Q1. Volumes were as mentioned, negatively affected by scheduled plant shutdowns in Active Oxygens and Coating & Adhesive Resins. Most of the other businesses delivered a solid performance in Q1.

For example, Coating Additives benefited from our strong position in waterborne low VOC coating formulations, as awareness for more environmental-friendly coating systems is increasing, especially in China. Capacities in silica and high-performance polymers are running at high utilization rates to meet the ongoing strong customer demand. Looking into Q2, we are confident of delivering a sequential earnings increase in this segment. Nutrition & Care showed a pleasing and improving operational performance, virtually, all underlying businesses have grown earnings year-on-year. We are particularly pleased by the ongoing successful performance at our growth engine Health & Care.

Health Care continued its strong growth, which is based on the expanded portfolio of solutions for advanced direct formulations and medical devices. In Personal Care, we have seen growing business and margin expansion in Q1 due to our active ingredients and especially the acquired preservatives business from Dr. Straetmans. In Animal Nutrition, volumes in Q1 were on a good level, supported by healthy market growth and demand pick up after the Chinese New Year. Our average price was as expected and guided stable in local currency.

For Q2, we expect sequentially stable earnings for this segment. Concluding with Performance Materials. The segment delivered another strong quarter, mostly driven by Methacrylates, where the market environment remains strong. Margins in Q1 continued on attractive levels and, in some region and products, even saw a sequential uptick. With tight markets in Methacrylates to persist and a slight sequential improvement in the C4 business, we expect Performance Materials to report another strong second quarter.

On the back of this good start into the year, we are confirming our full-year outlook, despite more adverse FX effects for 2018. In the light of the weaker U.S. dollar in the first month of the year, we have changed our assumption for the full-year from $1.2 to now $1.26 per euro. Keeping in mind our earnings sensitivity to the dollar, that means that we are compensating for an additional €50 million headwind in 2018. We remain committed to our agenda of consistent strategy execution and earnings growth.

For the second quarter specifically, we expected an adjusted EBITDA on the good levels of the first quarter. That closes our pre-presentation. Thank you for your attention so far, and we are now happy to discuss your questions.

Operator: Thank you. [Operator Instructions] We shall take our first question from Michael Schäfer of Commerzbank.

Please go ahead.

Michael Schäfer: Yes, thanks for taking my questions, Tim. Two questions from my side. First one is on EBITDA growth you have shown in the first quarter. You mentioned that synergies and cost savings are contributing to this one.

I wonder whether you can quantify the impact from synergies and the initial part of the cost-savings program? This would be my first question. The second is, on your cash flow outlook now into the second quarter. You mentioned the advanced bonus payment, but also the working capital expansion ahead of the planned shutdowns and outflow for the second quarter. So typically, the second quarter is the weakest when it comes to free cash flow. So I wonder whether this pattern may change in 2018, given, let's say, the reversal of those factors, I – just looking as a drag in the first quarter.

Any color would be helpful.

Ute Wolf: Yes, Michael. Good morning. Thank you very much for your questions. The gradual effect in EBITDA growth, €50 million from SG&A, €50 million in improvement in Baby Care from the dissolution of the joint venture for acrylic assets, then we have some first benefits of the adjust 2020 program in Animal Nutrition, around €10 million for this year.

So if you take this altogether, these are €75 million in this year, which more or less are evenly spread over the quarters. Synergies, another €25 million in 2018, they are a little bit more skewed toward Q2 and Q3, so we have not a pro rata distribution for the synergies. Cash flow, yes, the net working capital build-up in the first quarter was relatively high as we have these planned shutdowns. So, especially inventories went up. If we look to Q2, of course, the inventories build-up for the shutdowns will step-by-step reduce.

The overall bonus sum does not change, but we have just some – yes, some push from Q2 to Q1, that's more and more a timing effect. So from that point of view, Q2 is a quarter where you have the bonus payments, the biggest part of the bonus payments and, of course, the dividend. But that's not relevant for the free cash flow. So from that point of view, this general pattern will not change. But as I said, we are working very consistently on this issue.

I think, Q1 has shown the right results here. And we will do the same for Q2, although, of course, there are some payouts, which are there. And for the full year, that's what you also asked, for the full year, I think that does not changed so much the needle. We just made a good step into the right direction. Keep in mind, that our cash flow outlook is true for the whole EBITDA range and so, as we keep the outlook stable, I think we also keep the cash flow outlook for this time stable.

Operator: Thank you. Our next question is from Paul Walsh of Morgan Stanley. Please go ahead.

Paul Walsh: Yes, morning, Ute. Thanks very much for taking my questions.

I wondered if you could just give us an update on where we are on the Methacrylates disposal, whatever you can say on that front? Secondly, just in terms of the guidance for the second quarter. You talk about Q2 on a level with Q1. But I guess, if you add up the divisionals, you are expecting a sequential improvement, maybe more modest seasonally than we've seen before. But, again, any comments around that would be helpful. Thank you.

Ute Wolf: Yes, Paul. Good morning. Thank you for the question. On Methacrylates, the project is on track. So the usual M&A work streams have, of course, kicked off.

The investment bank had been mandated. Usually, I've seen that. So we are preparing for structured sales process. I think, especially important, is to structure the NewCo, as we call it, in a way that we have an attractive structure and a good product portfolio for the potential buyers. It is a large business, 18 sites are affected.

So it is complex, really to carve out that business. So it will take the usual time. Let's speak to the usual procedure you have seen in other case. How long this may take. So we still need one or the other months to go until we can come back with more detail.

Guidance will do, you're right, if you add the single indications, if you add them up, maybe you get to more than just the good level of Q1. But please keep in mind, if we look at Nutrition & Care, they already had strong volumes in the timing after Chinese New Year. So, we are – we have to see, if there was some pre-buying or not, now for the second quarter, because normally there is a volume pickup, Q2 versus Q1. So we have to see how pronounced that will be this year. The remaining business should continue on strong levels.

On the other side, Nutrition & Care is the segment with a most pronounced FX headwinds. So the FX effect is significantly higher in Nutrition & Care, if you compare it to the other two segments. Resource Efficiency, I think we described that. They should, all the businesses should continue on the good level, show some growth as we know it from the segment. For PM, I think we can have some confidence on the Methacrylates business that is running at very good levels.

We expect also some or there might be some improvements in the Butadiene spreads. So that still has to be confirmed here in the next weeks and months. So from that point of view, there is also some support and some maybe tailwind for PM. On the other side, in services, we expect somewhat lower earnings in Q2 than in Q1, more seasonal effect with waste and energy utilities business. So if you take that all together, I think you can really make up your own calculations.

Operator: Thank you. Our next question is from Gunther Zechmann of Bernstein. Please go ahead .

Gunther Zechmann: Hi, good morning, Ute. Good morning, Tim.

Thanks for taking my questions. You left your full year EBITDA guidance unchanged. But you had quite a strong start to the year. Can you help us understand what brings you to the high-end, lower-end of that guidance range? And, as a bolt-on question, you mentioned adversely effects earlier, but you now assume a dollar-euro level or euro-dollar level, I should say of 1.26, which we haven't seen since 2014. So, what's driving that please?

Ute Wolf: Yes, the dollar has not been so far away from that level just a few weeks ago, no? So, I think we nearly had seen that this year already.

If you look at the consensus for the dollar, it ranges from 1.15 to 1.4. So I think our 1.26 is more or less the median and the middle of this. If you look at the full-year guidance, I think not much has changed fundamentally. We see a slight increase in EBITDA in Nutrition & Care driven by the normalization in Methionine combined with good volume growth, then the underlying growth in the other businesses, which I think performed quite well. Baby Care would stay at low levels.

So that's more or less the same, the same view on the segment like by the end of this year. Resource Efficiency, as we said, good volume growth, good earnings growth expected. So no change here as well. Performance Materials, we have now one good quarter in Methacrylates in our pockets. The second looks good.

We still don't know how the second half of the year will go. There are assumptions that it might stay full tied. But there are also other views. So from that point of view to look at PM and see that it might maybe not reach the good levels of 017, I think is still a reasonable approach.

Gunther Zechmann: That’s very helpful.

Thank you, yes.

Ute Wolf: The weaker dollar, I think the guidance is now somewhat tougher in comparison to some months ago.

Gunther Zechmann: Thank you.

Operator: Our next question is from Thomas Wigglesworth of Citibank.

Thomas Wrigglesworth: Good morning, Ute.

Good morning, Tim. Yes, couple of questions, if I may. The first on Resource Efficiency. So just a point of clarification, if – but did you say more than 1% volume growth in Resource Efficiency, if we take out these shutdowns in Active Oxygens and Coatings & Adhesive Resins? Secondly, on Resource Efficiency, if I took out the other effects, either the Huber acquisition, what would have been the margin development in the quarter? And I guess, thirdly, on Performance Materials, the 8% price increase that we see, is that all from MMA, coming through there? Or is there – are there offsetting positives and negatives or it's not all MMA in the price effects for Performance Materials? Thank you.

Ute Wolf: Okay, Thomas, thank you for the questions.

So the one percentage point is on Group level. So the lower effect on the volumes is on Group level. So for Resource Efficiency, that translates into something like 3% to 4%.

Tim Lange: The question was on Huber.

Ute Wolf: Yes, Huber, the margin, I think Huber has more or less comparable margins to the overall Resource Efficiency segment.

So, I don't see so much uptick from there for the segment. And for the volume, the price development in Performance Materials, I think if you compare Q1 2017 to 2018, of course, in C4, the price development is negative as we had outstanding price levels in Q1 of 2017. So, for the overall segment, MMA is the main driver. On the other side, there are also some price effects on the smaller business lines, but that's only marginal.

Thomas Wrigglesworth: Could I just ask, could you quantify that C4 negative from the Butadiene price? Is that possible?

Ute Wolf: As we do not really discuss effects on single product level, I can only give you maybe the overall data.

Last year, we had Butadiene/Naphtha spread of 1,000 and this year, it was around 350, 400. So maybe that gives you a little bit of an idea what the change might be.

Thomas Wrigglesworth: Excellent. That’s very helpful. Thank you very much.

Operator: Our next question is from Martin Roediger of Kepler Cheuvreux. Please go ahead.

Martin Roediger: Good morning and thanks for taking my questions. First, on the utilization rates, you mentioned several times in the quarterly report that utilization rates are quite high, especially in higher-performance polymers and silica, obviously, in Healthcare, as well as MMA and PMMA. Do you see limitations for volume growth going forward? Second question is, again on the shutdowns in Active Oxygens and Coating & Adhesive Resins, which might have resulted to an absence of sales by roundabout €50 million when I put all these bits and pieces together.

Can you quantify the related earnings effects in Resource Efficiency from these shutdowns? And do you see any other maintenance shutdowns to come in the rest of the year having any meaningful impacts on earnings? And the final question is on crosslinkers. You mentioned the high demand in IPDI products. So the Isophorone chain. And I know that raw materials are for some Isocyanates. How successful have you been to pass on higher raw material costs to the customers? Or is there any time lag and thus we should expect some further price effects in crosslinkers to come? Thanks.

Ute Wolf: Okay, Martin. Thank you for your questions. So the high utilization, I think, for MMA, that clearly will present a reflection on volumes as we do not invest into growth year. For the other business, silica, we have a new facility, which will open this year in the U.S. For PA12, we are planning a new facility and we have opened up another facility last year for the 3D printing.

So I think we are well on track here. So maybe to give you some idea for the growth segment, of course, we have a long-term capacity planning, which underpins our volume growth ambitions. So I think that's pretty well on track for MMA. I think that's what you see in the market, demand growth with limited supply growth. So that's where we are there.

The earnings effects from the planned shutdowns is relatively small. It's like some €10 million or so, yes. But- it’s - we have shutdowns, maintenance shutdowns throughout the year. I think it does not really help so much if we discard single shutdowns in one quarter or the other as we have this over the year. And it is fully included in our guidance.

So I think, nothing to really what we need to take a look at specifically. Crosslinkers, normally, we pass on raw material prices with a certain time, sometimes, we manage to really do the price increases relatively early when we see the raw material price increase coming. So from that point of view, crosslinkers is absolutely positioned in a way that they can pass on the prices. Normally, you have between one and three months time. Like, it depends a little bit on the product, on the market, on the overall situation.

But that's what we normally see there.

Martin Roediger: Thank you very much.

Operator: Our next question is from Thomas Swoboda of Societe Generale. Please go ahead. Thomas Swoboda\: Yes, good morning.

Thank for you for taking two questions. Both are follow-ups. The first on the input cost increases. On a more general basis and I think it's mostly relevant to Resource Efficiency. Were you able to pass-through the input cost increases during the quarter? Or is the general lag effect not only for single businesses, but for the segment? That's the first question.

And the second question, if I may risk again, on the free cash flow guidance. Would you like to comment on how comfortable do you feel with the consensus expectation on free cash flow generation? I think it stands plus – at plus 25% year-over-year. The guidance you have given was the full year number, which is a slight increase. Any comment you could make here would be very helpful. Thank you.

Ute Wolf: Okay. Yes, I think generally, we were able to pass on the raw material cost increase. If you have a look how really the raw material prices were up or slightly across all segments. If you look at Nutrition & Care, it's some 2%, Resource Efficiency, 1%, PM, 3%. So it's not these big jumps.

So, normally, in our businesses, that is taken into account in the pricing a little bit in advance whenever possible. It's not always possible, but if and when they do it. On the free cash flow, I think we have given you the indication some 10% increase on three years level. That more or less leads already to the consensus. So, I think the difference is not so big.

We said, it holds true for the whole range. So that means, of course, if we have – we should end up in the higher part if free cash flow is of course, higher, if we should end up in the lower range, we have to work harder. And this is still how we see it. Thomas Swoboda\: This is helpful. Thank you very much.

Operator: Our next question is from Andreas Heine of MainFirst. Please go ahead. Q - Andreas Heine Yes, thanks for taking my question. I'd like to start with Resource Efficiency and the guidance for Q2. If I look back to the recent years, then I realize that it is the seasonal pattern basically that the second quarter is stronger than Q1.

Is that what you're referring to? And are there other trends which might lead to a more pronounced than the usual seasonal pattern from Q1 to Q2 for this segment? Second, in MMA, as far as I can see, the price trends for MMA during the first quarter it was consistently going up. So that means, you go out of the first quarter at a higher level than the average price was. Doesn't that mean that MMA shouldn't be quite a step up again in the second quarter? Or do you see any different from your incoming orders? Last but not least, could you update us on the total portfolio, what you expect to sell this MMA business? At the sales side, you said that that has still to be fixed. Is there something where you made progress and can be more explicit in what will really be for sale? Thank you.

Ute Wolf: Yes, Andreas.

Thank you for the questions. First to Resource Efficiency in Q2, please keep in mind, they have FX headwinds. So that’s’ may be – they might even be more pronounced in Q2 than in Q1, depending where especially the dollar goes. So from that point of view, I would expect a normal growth rate here. So nothing specific from cyclicality in this respect.

MMA prices, yes, we've seen – we had seen good pricing levels. We all know that this has some structural reasons as new capacities are now ready to start up and just slowly get introduced into the market. As soon as this supply/demand balance is more balanced, we will see most probably other price levels. So it's a little bit hard to forecast when this exactly will happen. We, on our side, do not have the price level also there.

So I think we can only give you our assessment here. Q2 looks good and then for the second half, we have to see how the global market balances out in the end. On the specific shape of our Methacrylates business, I think it's a little bit too early to give you very much in detail, how it will look in the end. The biggest part is our MMA and PMMA business, representing €1.5 billion in sales in last year. We have then there around on this under size, some smaller businesses that are part of the same production chain or where it really makes sense from a product portfolio point of view.

To group them to this entity, we are just now looking into that. It's also a question of internal than a supply contract, delivery contract. So there, we need some work to do. But I think the maximum additional sales is something like €150 million, €200 million. So that's not really moved the needle too much.

Our thinking was more to really present, yes, from the industry point of view a logical production portfolio and a good product portfolio, which really makes sense then for the new owner. Q - Andreas Heine Thanks.

Operator: And your final question is from Geoff Haire of UBS. Please proceed.

Geoffrey Haire: Thank you, very much.

Just two questions both in Nutrition & Care. Just looking at Nutrition & Care, you had no sales growth at least on the reported number, but yet EBITDA was up 12%. So clearly, assuming there was good performance in some of your higher margin businesses. Just wonder if you could comment on what is driving that EBITDA growth with no sales growth. And also how sustainable that is? And then secondly, I think, Ute, you made a comment that the dissolution of the SAP JV with Dye Chemical has given you a €50 million uplift for the full year.

I may be wrong in this, but my memory was that it was a lower number than that it was around about €10 million. I just wonder if you could comment on what is driving that €50 million uplift?

Ute Wolf: Yes, okay. On the sales line, I want to reemphasize that the currency impact on Nutrition & Care is stronger than on the whole Group. So maybe that partially explains or answers your question, as well. If you look at the overall segment, we are pleased to see a good earnings growth and also margin progression.

This is not only driven by Methionine a little bit. We have seen higher earnings in Personal Care, Comfort & Insulation and Health Care. We have increased our prices successfully in Comfort & Insulation. Health Care had a strong quarter. With Health Care, there is, of course, some – they have a very own seasonal pattern.

So, some quarters are very strong, some are weaker. So, but this is a very good start into the year. We can have some fluctuations between the quarters. But overall, they have a very good pipeline. They acquired a lot of projects in the last years, which really now start-ups and get ramped up.

So I think that will also support the growth and the earnings for the full year in Health Care. In Personal Care, we have a strong business. We also are managing our product portfolio here in a more specialty way so that we have better margins, maybe not so much better sales that could partially explain your observation and also, the Dr. Straetmans acquisition helps a lot here. Then we have the cost savings in Animal Nutrition from our adjusted 2020 program and also from the dissolution of the Baby Care joint venture.

I do not exactly know what you referred to, but I think we always said some €10 million to €15 million. So we are now a little bit towards the upper-end of this range. From our point of view, we are now in a situation that Methionine is on a more normalized level. So the other business development, the good development of the other business becomes now visible and more relevant drivers for the performance of the segment.

Operator: Ladies and gentlemen, this concludes today's question-and-answer session.

At this time, I would like to turn the conference back to you for any additional or closing remarks.

Ute Wolf: Thank you very much. Ladies and gentlemen, before we come to the end of today's call, I would like to reiterate our invitation to our Capital Markets Day. It will take place in Essen on September 13 and 14. Further details and the invitation will follow shortly.

I am looking very much forward to seeing you there or before at our road shows in Frankfurt, London, Milan, Paris, and Zurich in the next weeks. Thank you for your attention today and goodbye.