Ladies and gentlemen, welcome to the Evonik Industries AG Q2 2025 Earnings Conference Call. I'm Costantinos, the Chorus Call operator. [Operator Instructions] And the conference is being recorded. [Operator Instructions] At this time, it's my pleasure to hand over to Christian Kullmann, CEO. Please go ahead.

Thanks a lot, and welcome to our Q2 Earnings Call, ladies and gentlemen. Last time we met in May. We had a quite solid April in our books, and we're expecting similar months ahead of us. Today, we all know that the last month of the second quarter got pretty tough across most industries. Still, we could deliver a decent second quarter and to stick to our full year guidance, admittedly at the low end of the range. Having said so, I know your main question for today will be, is this still a doable target? So let us give you first answer by taking a simplified look at the first half of the year before then turning to the months ahead. Our Group EBITDA decline in the first half of the year is more or less exclusively explained by 2 factors. First, the weakness in our C4 business; and second, the U.S. dollar exchange rate. Combined, they will stand for an EBITDA decline of more than EUR 100 million. Vice versa, this means a large part of our core chemicals portfolio could withstand the pressure in the first half of this year and showed quite some resilience. Our 2 Chemicals segments jointly even posted slightly higher earnings. Custom Solutions remained stable, thanks to our resilient Additives business and the expected recovery in Healthcare. Advanced Technologies was supported by strong volumes in our Animal Nutrition business. For the second half of the year, we do expect several factors to give us support. So the lower end of the guidance is achievable. However, for sure, not guaranteed. Maike will guide you through the main points.

Thank you, Christian, and good morning from my side as well. So what needs to materialize in the second half of the year to reach the low end of our guidance range. First, self-help measures from our optimization programs are fully in our hands and should support H2. Looking at our number of employees, we see them falling by more than 500 since end of last year. And there, there's more to come. For example, Silica will deliver additional savings from site closures with full effect in the second half of the year. Second, some Evonik specific business tailwinds should play in our favor. The methionine market will stay healthy into the start of Q4 at least. PA12 and crosslinkers linkers will have a better planned availability without the shutdowns seen in Q2. Higher volumes should also be visible for catalysts thanks to the ramp-up of our new alkoxides plant in Singapore. In health care, the operational improvement in the last quarters will bear fruit in the second half as well. And our already contracted sales will show the typical year-end recognition. But to be very clear, May and June were quite weak months for us, impacted by low consumer confidence and customer cautiousness. So for the next months ahead and in order to reach the low end of our guidance an improved macro environment is a premise. Coming to the free cash flow guidance, we have good confidence to again deliver our 40% cash conversion rate. This will be supported by both CapEx and net working capital in H2. First, we have cut our CapEx by EUR 100 million for the full year. This means around EUR 60 million lower CapEx year-on-year in the second half. Second, we will see a strong cash inflow from net working capital in H2, quite similar to the year 2023. We have intentionally finished the last year with a higher net working capital level. We will reduce this level in the course of the year. However, we have not yet been able to do that as intended. This was due to the slowdown in demand, especially during Q2. And and it was further enhanced by the maintenance shutdowns during Q2, where we had built inventories before the shutdown based on more optimistic demand assumptions. So net working capital to sales was still above 19% end of June. We will manage that much stricter in the second half, and we have proven in 2023 that we know how to do it. Our long-term average is around 16% at year-end. So that means that there is significant cash potential towards year-end. Back to Christian for some final work.

Thanks a lot, Maike. Well, looking at the second quarter across the chemicals industry, the short-term risks are quite imminent at the moment. For the mid- to long term, however, the opportunities outweigh these risks. We have described it in detail at our Capital Markets Day, and nothing of that has changed. Looking at the EU Chemicals action plan, for example, Evonik ticks all the boxes. Just to give you 2 examples, we will benefit from incentives through decarbonization projects and with our next-generation technology projects. We have quite a lot of them lowering our operating costs and emissions alike. Second, our innovation growth areas will be boosted by the European Union support and circular economy and bio-based solutions. With this quite optimistic view, ladies and gentlemen, into the future, we are now ready and happy to take your questions.

[Operator Instructions] The first question comes from the line of Georgina Fraser with Goldman Sachs.

The first is, if you could give us a run-through of what you're seeing in each of your key end market. Maike, you very clearly said that a bit of a pickup is needed in the second half to make the low end of your guidance? And then particularly in the home laundry or the Care Solutions business. And then my second question is a bit longer term. Has Evonik conducted any strategic assessments around raw material availability, just that we're starting to see a lot of European cracker closure announcements, and it feels like headlines suggest that, that's something we can expect to see more and more of in the year ahead. And so how is Evonik thinking about the security of its raw material supply in that context?

Yes. Thank you, Georgina. I would suggest, Maike starts with the first question on the outlook for Q3 and the second half by segment, and then Christian can continue raw material availability.

Yes. Let's do that. Georgina, thanks for your questions regarding key end markets. So let me go through customer solutions and also advanced technologies, especially what we expect here is that for custom solutions, of course, we aim for slightly higher earnings in full year 2025 versus 24. So therefore, we need a small uptick in Q3. And then we obviously will see a usual seasonality in Q4. So on the one hand side, additives I think that's -- we see that it's solid. It had a solid performance in H1 and also in the second half of the year, we see it continually on a very solid level. Additional support should come on the one hand side from oil additives. Of course, we see that there should be a path on on higher raw materials because of the pricing formula. And we also expect additional volume. And I mentioned that before, from a catalyst perspective, we see the alkoxides plant in Singapore. We see the ramp up there with the new capacities and we expect also a recovery of the weak demand in Europe and in North America. So this is one of the parts where we see we need further macro to see the catalyst other than in the new capacities of the alkoxides. Care should improve in H2. So Health care, we see this usual seasonality. Usually, the customer contracts are secured earlier, but then we see the typical year-end recognition of the revenues. Also, the improvements of the operational execution, which has been implemented in the first half year. And from a care solutions perspective, we expect an overall demand increase on the one hand side, RNA, lipids from the new plant in Slovakia, there should be a pickup, but again, in Care Solutions, we definitely need some further macro improvements as well. Coming to Advanced Technology we see slightly lower earnings year-over-year. Of course, there macro hits us really hard. So the weak macro end markets, if that remains on the one hand side, we have Q3 probably slightly below Q2. On the one hand side, the Animal Nutrition and methionine still is holding up very, very nicely. We might see or we will see another maintenance shutdown, and we also will not see any further license -- benefits from the license sales in the hypogene peroxide business. But on a positive perspective, we see a further ramp-up in the PA12 with a growing market. And with the maintenance shutdowns, PA12 and crosslinkers, we see better availability and of course, lower cost also for these 2 businesses, methionine, as I said, prices are holding better up than expected. And also with silica, we should see some cost savings due to site closures of Waterford and Leverkusen and cost optimization measures in the various businesses. So that was a relatively long answer. Hope I've answered all of your questions, Georgina,and I hand over to the raw material topic and Christian.

Thanks a lot, Maike, and good to have you, Georgina. I try to keep my answer a little bit shorter in respect of the raw material question you convey to us first. As of today, we have a pretty good raw material availability overall. So in other words, there are no shortages. But I guess you have asked the question in respect of a longer-term perspective longer-term view. And here, let me provide you with the following. Our aim is to create supply and value chain system in each and every growth region, that is because it will help us to stay independent from, let me say, political turmoils oils, political intervening like we do see it in these current days. And here, to provide you with the current example, as you know, we do sell 80% of the goods and products we produce in the United States of America in the United States, which means we are here. Also on the supply side, pretty safe because the raw materials we do need to use in the United States, we do buy in the United States. So we have somewhat like inner circle of supply, sustainability in the respective regions, which gives us good comfort even to weather, if I may say so, to whether the political turmoil. So yes, we do assess these implications each and every quarter. Aim is to become more independent by a regional approach in this respect here. I -- just saying, even -- just saying that we are on the safe side, and that is my a little bit shorter answer to your question.

The next question comes from the line of David Symonds with BNP Paribas.

Is there any quantification you can give around some of the supportive second half elements that you've mentioned. So are you able to say how big the savings are in silica, for example. Is the year-end recognition in the health care business, any bigger than usual? Or is that just sort of normal seasonal patterns? And then secondly, if you were to drop below the lower end of your guidance and you didn't quite hit the 40% free cash flow conversion, how much bonus provision would be unwound in the second half to support earnings.

Yes. Thank you very much, David. I think both questions go to Maike.

Sure, David. Regarding the indication on what is impacted on which level and what I just discussed on a very, very high detail. I think on the one hand side, the health care seasonal recognition and the silica -- that's both the -- on the one hand side, the seasonal recognition of health care is the usual pattern we see. So if you look into the 2024 or the 2023 guidance, this is, yes, I would say, low double-digit million euro silica savings is definitely a bit lower than double digit. So that should be in the one single digit million, which is supported here. So altogether, it is here and there, bits and pieces coming together, and you can do the math. What we need from macro. So it's a little difficult to answer this question on that detail. The bonus provision that is needed. We mentioned before that bonus has not been -- so we have been so far -- we have been just in the low double-digit benefit for the Q2 results because, obviously, we keep our guidance. And so it will be of course, below of 100% in 2025. So weaker results, of course, clearly lead to a tailwind from the lower bonus. We use that to support in difficult times. So we would -- if we go lower than the EUR 2 billion, we would definitely see another double-digit million support. As I said, so far, we are in the low double-digit support of bonus, and there could be more to come.

Understood. If I maybe squeeze one more in. It's unusual in this result season to hear the company relying on macro for the second half. I think a lot of others have chosen not to bake that into their view. So is there anything that you're seeing in July, which is maybe a glimmer of hope at all for the second half? Or is this sort of just speculative at this point?

Yes, I can answer this one as well. So in July, I think there, we are -- like all of our peers, our visibility is super low. So I know we are August 1, but it's still difficult to make precise statements on July, not even talking about August before we have seen the actual numbers. It is, however, fair to say that we have not seen a major pickup in volumes and sentiment in July.

The next question comes from the line of Thomas Wrigglesworth with Morgan Stanley.

Thomas P. Wrigglesworth: Two questions, if I may. The first is how you're positioning the business in the context of your change in accounts payable because it's quite an unseasonable decline in accounts payable. So is this purely just price, lower costs rolling through accounts payable? Or actually, are you taking a wait-and-see approach on your inventories, i.e., you're purchasing less because you're not confident on the volume picture as it goes forward. I'm just intrigued to unpack that a little further. Second question, if I may, on our all favorite methionine, just your view on 2026. We've obviously got -- we've had some outages from competitors, we've had delayed ramp-ups from competitors and you yourselves have put through a large amount of maintenance in '25. So I'm just kind of intrigued to see as all of those elements kind of reverse the other way, how you think the market performs and how you'll look to behave in '26 on the signing.

All right. So I assume I take this accounting question, but I hand over to Christian. So the payables, Tom, you absolutely rightly mentioned that we see a decline here, the decline in liabilities that is due to the fact that the payments were still made for still higher raw material purchase volumes in the previous quarters, and now we should see a kind of more leveled out payable ratio again in Q3 to follow. And with that, I hand over to Christian.

Yes. Thanks a lot, Maike. What is a good conference call -- or what is the conference call good for not tackling the methionine aspect. So I'm happy to give you here some more color about how we think about the future of the methionine business. Maybe let's start with the expectations. We do see, we do have in the third quarter. Here, we do think that the markets across all regions will definitely stay tight. So that means, in other words, also in the third quarter, we will have a good chance to do our business here in a pretty nice and well way. And I guess the same holds true for sure, for the first half of the fourth quarter. And having said so, that means also the incoming capacities from NHU, they have since June, they have started to bring the first product into the market. These incoming additional products or this incoming additional volume is already, let me say, well digested from the market. So that means, in other words, despite these new capacities, the industry utilization rate will stay high, maybe even really high until mid of the fourth quarter. And now let's have a look, let me say, first testing of the water for the next year. In a nutshell, we do not have any kind of indication that the supply demand, as I've tried to convey to you will change in the next year. So that gives us some confidence that we will have a chance in 2026, also in 2026, to benefit from our methionine business as we do in 2025.

The next question comes from the line of Chetan Udeshi with JPMorgan.

Maybe this is for both Christian and Maike both can chime in. But one of the key things you guys talked about at the Capital Markets Day was the focus on cost delivery. And I'm just wondering where do I see that in your numbers in H1 because if I look at your EBITDA, it is down $30 million to $40 million year-on-year in H1 versus H1 last year. And I think from memory, you guys were talking about $150 million of net cost savings for 2025. So can you just remind us how much of these savings have you actually seen in H1 and whether the target is still achievable for '25?

Okay. I think I'll start and then let see if Christian wants to add something. Both able, of course, to answer your question. So as you rightly said, we -- our goal is, was and will be to achieve the high double-digit net savings number in 2025. So it's -- we always mentioned high double digit, not triple. So we are still confident to achieve this goal. On the one hand side, I mentioned already that we see employees -- employee numbers falling since end of last year. So already from June 2025 to December -- versus December 2024 last year, end of last year, we have 660 FTE already reduced, and we see for the full year, a reduction of roughly 710 FTEs that are expected. So obviously, then the savings will build up over the course of the year. We -- it's a bit difficult to see that in our numbers because it is, let's say, supporting our EBITDA, you could also have a look into our administration costs we show you. And so we expect as I said, raising FTE or lower FTE numbers in the course of the year, and this is also why we expect higher savings in the course of the year. Looking into our admin costs, there is one clear line. But other than that, it really goes into all the lines of our P&L.

Chetan just to sum it up, first, we definitely need to be stable to what we have said that we will have -- as Maike has mentioned, high double-digit cost savings coming out of our efficiency programs in this year. Second, in respect of the reduction of headcount, Maike was so right. And being so it goes without saying that you will have the full impact of this headcount reduction becoming visible in our numbers and figures at year's end. So in this respect, we will meet definitely year's end, and that is what I could cordially and very politely add to Maike's prudent answer, she has conveyed to you.

And one last question I had was, as you look into your businesses now into third quarter, I mean do you see maybe any signs of incremental pricing pressure? Because it feels like all the chemical companies are seeing the same thing, which is even worsening of demand over second quarter and this is an industry which needs to fill the factory. So I'm just curious, in this low demand environment, is there sort of a sign of any incremental pressure you talked about Care Chemicals or maybe additives. I mean, is there something that sort of is coming across in your business now in Q3? Or is it now stable on pricing?

Chetan, what we currently see is despite, of course, on a relatively low level, but we see pricing relatively stable Q2 and going forward then quarter-over-quarter, Q2 to Q3.

The next question comes from the line of Martin Roediger with Kepler Cheuvreux.

Yes. My first question is primarily for Christian and it's on politics, twofold. A, there was recently an initiative made for Germany by 61 companies meeting Chancellor and investing EUR 631 billion until 2028. Do you expect any push from that initiative for the German economy and thus indirectly for you? And as a follow-up to that, you also mentioned your handout that you referred to the EU Chemical Industry action plan, what is your honest expectation about that? My second question is on tariffs. I know you produce to a large extent locally for your clients in the U.S. I hear this 80% ratio. But did you analyze what the tariffs mean for your active activities in Mexico and Canada and other regions? And did you look at what the indirect effects will be as you have some clients in Europe who export to the U.S., and they are expected from the 15% tariffs.

Martin, good to have you. 3 questions here, my 3 answers. First, do we expect concrete push of the -- our initiative, German companies have started and presented to the government. A concrete push we do not expect. But we have some hope that in this respect, we are confident that it might be something like on refreshing the psychological, let me say, view on Germany, in particular, for example, for investors and in particular, for the atmosphere that it is much too early to pull the flag of German industry down instead of to express a little bit more of confidence. Second, it was a question about the impact of the tariffs, the announced tariffs or the results as far as we are informed between the negotiations of the European Union and the government of the United States. We have -- let's keep it like this. First, it is inevitable. As you know, we have calculated that we would be that we would -- that there would be an impact of 10%. That is what we have calculated during the first days of this year, and this kind of impact would be translated into an EBITDA of -- given some approval, around EUR 20 million. So if it is is now EUR 15 million, it could be slightly more, but on the other side, they have already announced that there will be an exemption list. And as far as we are informed, those goods and products, which might be, which might be tackled by this tariff policy of the United States. A good amount of them are -- might be on this list of exemptions. And that includes already the potential impact in respect of our businesses we do in Mexico and in Canada. But and it is here worthwhile to talk about this but in a shiny and gloomy way. The global impact of the American trade policy is really severe because it is fostering, it is lifting up uncertainty all over the world and all over the market. So it is a global approach, and that is the severe one. And as you see, if you look to global economy, now we talk about GDP of around 2 -- maybe 2.1, 2.2 plus. And in first days of this year, it was around 2.6 to 2.7. So here, you can see globally somewhat like a decrease, and that is fair to say that goes without saying. Third, about the European Union initiatives, the so-called action plan. I was one of the CEOs of the chemicals industry having a chance to discuss the action plan with the President of the European Commission. And I'm really delighted because there's a change not only in the idea of how to bring growth back to Europe. But all the more, there are concrete measures and initiatives let me say, coming in place, which will support the growth of companies like Evonik Industries terrifically. Maybe think about energy, decarbonization in these areas, we would reap benefit from it. So here I am, let me say, confident that in the midterm, We, in Europe, and in particular in Germany, we'll have a good chance to benefit from this.

The next question comes from the line of Matthew Yates with Bank of America.

A couple of questions, please. I'm struggling with some contradictions within the messaging or maybe it's just my confusion. But firstly, as it pertains to working capital and the inventory situation. So if I heard correctly, you built inventory expecting better demand ahead of your shutdowns. I'm not sure if this was focused on particular business lines or that was across the board. So when I think about your second half comments, on the one hand, you're saying profits can recover because you'll have more capacity available in certain lines. But then you're also saying from a cash flow perspective, you'll be able to reduce the inventory. Now I would assume part of the way you can reduce inventory is to scale back production and that then lends a risk around utilization rates and profitability. So can you help me reconcile the way you're running the business right now in terms of managing the balance sheet and the cash flow versus managing the P&L. And then I've got a follow-up.

Okay. I'll start, Matthew with your net working capital topic. On the one hand side, maybe allow me to mention that with the shutdowns, it was not -- there is not only a buildup of the inventories coming with, but also a very high cost, which is, from our perspective, of course, rated as operational, but if you do a shutdown, then there is high -- well, or not high, but mid-double-digit million euro are allocated also from a cost perspective to these shutdowns. On the other hand, you're, of course, right. If you have higher net working capital, so to say, higher inventories, there is a trade-off now for the second half of the year regarding selling of inventories and also the EBITDA and so profit and cash flow. I think it will, of course, be an additional constraint because we need to lower the inventories in the second half despite the fact that we will -- we expect to reach the guidance at the lower end. But this is why we said there are a couple of topics which support H2, and this is the lowering of the inventories is definitely one where we have headwinds regarding the profit.

Okay. And maybe the second one is particularly for Christian. The CMD you introduced this concept of being a super force in the industry, and I see again in the slide deck today. In your introductory remarks, you had to say that a large part of the earnings decline or volatility relates to the C4 business. And so far, there hasn't been any time line given on a strategic exit of the assets. Would you go as far as to commit to saying that you will be out of this before the end of your tenure? Or are we still in the situation where we're waiting for a cyclical upturn, which may or may not come?

Matthew, that's a very prudent kind of question. And here is what I have in mind about it. First, yes, of course, this business is for chain is suffering from the current economical environment, the current economical instant that is stating the obvious. Second, as you know, good, maybe 1/3 even. A good part of the revenues we do in this business belongs to the construction industry. And here, I have confidence because of the infrastructure program, the government of Germany has announced and the additional initiatives of the European Commission. I do think that these initiatives will lift up construction industries and the respective markets over the course of 2026. And that is what I expect. And therefore, it would be not very, let me say, smart from our side to start the sales process in these days. Here, it is to try to better the market, let me say, to wait until the market perspective -- until the cycle will turn into the better and in the meanwhile, we'll do our homework. We'll not steer away from initiatives to better the cost positions of our forward business, which will then in the long term or even in the midterm, already pay off.

The next question comes from the line of Anil Shenoy with Barclays.

So I had a couple of questions -- follow-up questions on methionine. Now it's good to hear that you've not seen any change in the supply-demand scenario so far, and you don't expect that to change in 2026 as well. But I'm trying to understand what kind of a demand growth have you factored in while calculating this for 2026? In other words, what would be the demand growth required in 2026, so that the supply/demand remains -- scenario remains similar to what it is right now? And secondly, on the shorter term in methionine, we've been hearing from industry sources that currently, the demand is weak and suppliers who are currently in maintenance have not been lowering prices. And this has resulted in a very low percentage of contracted volumes for Q4. Otherwise, the volumes for Q4 are at least partially contracted by now. So could this imply that customers are actually waiting for prices to fall before contracting the Q4 volumes. In other words, do you see a risk that the prices may decline in Q4? Or are you confident about prices holding up until the end of 2025.

The first question, you know me, I guess even quite well. So you know me as a quite conservative CEO and having said so, my assumption is that we will have a 3% to 4% growth, but that is what I would underpin saying it is a conservative assumption from a conservative man. Second I do not agree upon your -- the noise you've heard from the market that in the course of the fourth quarter, we could see -- we would see a decline of pricing we do, and that is here that our market intelligence, we do hear the opposite. From our sources that the demand and the pricing for 2025 is pretty okay, in other words, remains good. So ladies and gentlemen, having said so, this is -- that ends our call for today. Maike, the entire crew of our Investor Relations team and I do wish you a pretty good summer vacation, and thanks so far for your attention. Take care, and bye-bye.

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