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Edited Transcript of EVKn.DE earnings conference call or presentation 7-May-20 9:00am GMT

Q1 2020 Evonik Industries AG Earnings Call and Capital Markets Day

Essen Jun 17, 2020 (Thomson StreetEvents) -- Edited Transcript of Evonik Industries AG earnings conference call or presentation Thursday, May 7, 2020 at 9:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Christian Kullmann

Evonik Industries AG - CEO & Chairman of the Executive Board

* Claus Rettig;Evonik Resource Efficiency GmbH;Chairman of the Board of Management

* Johann-Caspar Gammelin;Evonik Nutrition & Care GmbH;Chairman of the Management Board

* Lauren Kjeldsen;Evonik Nutrition & Care GmbH;Member of the Board of Management

* Tim Lange

Evonik Industries AG - Head of IR

* Ute Wolf

Evonik Industries AG - CFO & Member of Executive Board

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Conference Call Participants

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* Andreas Heine

MainFirst Bank AG, Research Division - MD

* Charles L. Webb

Morgan Stanley, Research Division - Equity Analyst

* Chetan Udeshi

JP Morgan Chase & Co, Research Division - Research Analyst

* Gunther Zechmann

Sanford C. Bernstein & Co., LLC., Research Division - Research Analyst

* Martin Roediger

Kepler Cheuvreux, Research Division - Equity Research Analyst

* Michael Schäfer

Commerzbank AG, Research Division - Equity Analyst of Chemicals

* Mubasher Ahmed Chaudhry

Citigroup Inc, Research Division - VP

* Thomas Swoboda

Societe Generale Cross Asset Research - Research Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the Evonik Q1 2020 Earnings Conference Call and Strategy Update Conference Call. (Operator Instructions). I must advise you that this conference is being recorded today, Thursday, the 7th of May 2020.

I would now like to hand the conference over to your speaker today, Tim Lange. Please go ahead, sir.

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Tim Lange, Evonik Industries AG - Head of IR [2]

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Thank you very much, and welcome, everybody, to today's call. As announced in March, we certainly had to cancel our planned Capital Markets Day in London due to the corona situation. So we decided to combine the strategy update with today's call on the first quarter. We would like to proceed as follows: first part of the call will be on the Q1 reporting, as usual. Christian and Ute will start with a short introduction. And as always, we'll have the Q&A session afterwards. Please focus your question in this part -- in this first part on Q1 on the current trading and the outlook. After around 45 minutes, we will then end that first session, and we'll turn to the second part of the call, our strategy update. Again, Ute and Christian will start with the strategic and financial update. Harald Schwager, our Chief of Operations, unfortunately, cannot be with us today. No worries, he's in good health, and will be with us already next week for our virtual London road show. But we are very happy to have the designated heads of our 3 growth divisions with us for the second part of the call. Lauren, Caspar and Claus will introduce themselves and their new divisions to you in the second part. After these short presentations, we will have a second round of Q&A on the strategy update. There, I would ask you to focus more on the strategic picture and the new divisions. All question on the current tradings should by then be covered in the first part of the call. We plan to end the call after around 90 minutes, so around 12:30 our time.

With that, I hand on to Christian for the Q1 part.

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Christian Kullmann, Evonik Industries AG - CEO & Chairman of the Executive Board [3]

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Thanks a lot, Tim, and also very warm welcome from my side, and thanks a lot for being with us today. As Tim just said, it is special times and slightly different setup today. We plan to see you in London for our Capital Markets Day on 1st of April; however, given the travel restrictions and the volatile markets, we decided to push back to today and to turn it into this call format. So thanks a lot for your patience and good to meet you finally in this virtual format. Let's start with the first quarter and our outlook for the next quarter as well as the year 2020. Q1 was quite solid, especially Nutrition & Care and Resource Efficiency delivered very robust results. So corona effect on quarter 1 was broadly in line with our expectations of EUR 30 million. So in a nutshell, quarter 1 was a good quarter. Without the corona effect in the inventory devaluations in Performance Materials, the results are around the level of last year. In Nutrition & Care, the performance was very robust. Animal Nutrition delivered strong volumes and sequentially further rise in prices. Also the rest of the segment had year-on-year higher earnings. Only Baby Care had the expected weaker start and Care Solutions suffered a bit from the corona situation in Asia. In Resource Efficiency, we saw the expected corona impact in industries like auto and coatings, but the majority of the businesses held up very well. Good and resilient demand was visible, especially in Active Oxygens and Crosslinkers. Performance Materials suffered from the drastic oil price decline and the formula price based on naphtha, especially towards the end of the quarter. On top, they had to digest inventory devaluations of around EUR 10 million in the quarter. In terms of dividend for the year 2019, we are strongly committed to continue our reliable dividend policy. This is reflected in our decision to pay the first half of our dividend already at the beginning of June. We cannot pay the full dividend without a resolution from our AGM, which we had to postpone to the end of August, but we are allowed to distribute 50% in advance and we decided to do so. And we are committed to pay the second half, end of August.

Now ladies and gentlemen, let me share with you how we, as Evonik, have dealt with the corona challenges over the last weeks. This is a special, unprecedented situation for all of us. And first of all, I would like to express my deep thanks and respect for all of my colleagues at Evonik. They've worked hard to manage this crisis. Thanks to their relentless efforts, I can say today that we are very well prepared to successfully manage the crisis. The health and safety of our employees is our top priority. We've rolled out our pandemic plans globally already before the stricter official regulations were implemented. So far, we have only 50 corona cases at Evonik, most of them recovered and are already back to work. Since March, we've in place several task forces to monitor and coordinate our activities globally. Only 5 smaller of our more than 100 plants are currently out of operation. So far, all-in and outbound supply chains are operational. We managed smaller bottlenecks via securing new suppliers and raw material substitutions. Our flexible working model is a strong asset in these challenging times. Our employees have work time accounts, which can be used in times with less workload. Agreements with the unions for the theoretical implementation of short-term work are in place. But until today, it was -- until today, it wasn't necessary to use this tool on a broader level in our operational businesses. Now having said this, over to Ute for the financial perspective.

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Ute Wolf, Evonik Industries AG - CFO & Member of Executive Board [4]

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Thank you, Christian, and welcome from me as well. Let's start with a top priority from a financial perspective in such a situation, liquidity. In managing and securing liquidity, we strongly benefit from the experiences we made during the last financial crisis. I was heading the finance department at that time. The processes are proven and in place and many colleagues with long-dated experience are still with us today. The basis of our liquidity management is a centralized cash management system that we have continuously enhanced since then. We monitor the main KPIs like order intake, accounts receivable development and payment behavior on a daily basis. Clearly, we benefit today from the lessons learned more than 10 years ago. Based on that, I can say that our liquidity position is rock solid. We just repaid the maturing bond in April in cash. Even including the 2 dividend tranches later this year, there is still a comfortable liquidity level remaining. Additionally, we have a revolving credit facility in place secured by 18 banks for several years with no financial covenants and no material address change clause. Furthermore, we have full access to the corporate bond market, which is liquid and receptive these days. Also on the pension side, we are well positioned. Our long-term approach with a conservative pension asset allocation results in a solid and stable funding ratio of around 70%.

The next slide shows our strong track record in cost-saving initiatives. For several years now, we successfully pursued different efficiency initiatives like SG&A 2020 or the programs on business line level. This new culture of cost awareness and cash focus also helped when we implemented contingency measures in the second half of 2019. And with the same mindset, we are now implementing the necessary cash preservation measures as a response to the corona crisis. So what is in focus in such a situation? On the one hand, we tackle costs on all levels. We already screened all internal projects and initiatives to focus on what is really essential to manage the crisis. We are prepared to significantly cut fixed costs, if necessary. In a crisis scenario, short-term work is definitely a tool with a tangible effect. And as Christian just said, we are ready to take action if it's necessary.

On the CapEx side, we already screened all projects in the budgeting process for 2020. With EUR 200 million cash outflows for the new polyamide 12 plant this year, we have canceled and postponed what was possible and came out with a very tight budget of around EUR 850 million. This is EUR 100 million below our depreciation level. In other words, there is only limited room to cut further. Some compliance investments are nearly required and stopping the larger ongoing projects would only lead to higher costs and cash out. If the current crisis should last longer as one is expecting today and if it should result in potential lower demand, we would have a different scenario. Then, of course, we would revisit our measures taken, and I'm sure that there would be potential to -- for further cuts. However, this is not a situation that we are currently anticipating. As of today, plants are running and utilization rates are still okay. So we do not want to limit our growth potential coming out of this crisis. That's it from my side. Back to Christian for the outlook

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Christian Kullmann, Evonik Industries AG - CEO & Chairman of the Executive Board [5]

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Thanks a lot, Ute. Let me give you now an indication of what we expect for the coming quarter as well as the full year 2020. As you know, visibility is, of course, lower than usual. So we have based our outlook on 3 potential scenarios to provide as much transparency as possible. First, on quarter 2. We do expect an EBITDA of around EUR 400 million. Looking at the sequential development segment by segment, that means Nutrition & Care will grow earnings. The defensive nature of the businesses and the positive development in Animal Nutrition gives us enough confidence for the second quarter and even beyond that. In Resource Efficiency, we expect a clear impact in the auto- and coating-related businesses. Nevertheless, there are also some pockets of relative resilience. Especially our Active Oxygens business, which we even further strengthened by the PeroxyChem acquisition, should perform well in the hygiene and disinfectant sectors, also Catalysts and Crosslinkers as well as Silica for Oral Care and Specialties should show some stability. Overall, our base case for the second quarter assumes a sequential decline of up to EUR 100 million for Resource Efficiency.

In Performance Materials, the low naphtha price paired with weak demand will lead to unchanged low spreads and contribution margins. March was already around breakeven for the segment. So I'm afraid. We have to expect 0 EBITDA for the second quarter here. For the year 2020, our outlook -- our new outlook range is from EUR 1.7 billion to EUR 2.1 billion. We are aware that this is broader than usual in line, but also the circumstances are far from normal. We try to help you to build your own assumptions by giving 3 scenarios from L- to V-shape recovery and the respective impact on the segments. Our base case, the middle of the range is the U-shaped recovery, a slow but steady recovery from quarter 3 onwards. Quarter 3 would still be below prior year's level. Quarter 4 would then see some catch-up and come close to the very strong prior year quarter 4. In any case, our Nutrition & Care segment, with more defensive end markets, should show strength and resilience throughout the year. A persistently dynamic development of methionine, have I mentioned that we'd expect a persistently dynamic development of methionine prices and volumes would bring us closer to the upper part of the range. The same would be true for a faster recovery or a less pronounced downturn in Resource Efficiency. This could then even bring us to the lower end of our previous guidance range. Regarding cash flow, we expect a solid contribution in the first half. Quarter 1 was clearly positive. And with our initiated cash preservation measures, quarter 2 cash flow should be above last year's level. For the full year, we expect to secure our cash conversion around the 30% level. CapEx discipline, tight net working capital management and lower bonus payments will provide some support.

And now ladies and gentlemen, thanks for your attention, and we are happy to take your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Gunther Zechmann from Bernstein.

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Gunther Zechmann, Sanford C. Bernstein & Co., LLC., Research Division - Research Analyst [2]

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The first one is on the order book and on April, quite a few companies giving more granular color, what you've seen in terms of trends. And at the beginning of Q2, are you prepared to give us a number for sales in April and what the order book looks like in May? And if you have that visibility maybe into June as well? And the second one is on raw material costs. You mentioned the drop in naphtha prices, impacting Performance Materials. But more broadly on a group level, what do you expect for the full year in terms of raw material costs?

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Ute Wolf, Evonik Industries AG - CFO & Member of Executive Board [3]

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Gunther, thank you for the questions. Yes, regarding the order book, I think we see very well the trends we described. So we see Nutrition & Care, a solid development in orders in comparison also to last year. In Resource Efficiency, by end of April, the situation is still okay. But of course, we see some cancellations here and there or rescheduling of orders and this is specifically in those businesses that deliver in the automotive industry and are coatings related. On the other side, we also have positive developments in our Resource Efficiency, as Christian mentioned, in Active Oxygens, but also Crosslinkers and oil additives. So it's really a mix there. Raw material costs, I think we've had a very sharp drop in the oil price, which more or less distorted the profit and loss statement of Performance Materials. Of course, in other businesses like, for instance, in Animal Nutrition, that helps. We are expecting a gradual recovery in the oil price. I think you have seen the first step already in the last days. So we are more or less seeing an average oil price between EUR 36 and EUR 42 for the remainder of the year. And I think from today's point of view, maybe that's not an inconsistent assumption. In Q2 itself, we will benefit from year-on-year, of course, lower raw material prices. I described it for Nutrition & Care, especially propylene, acrylic acids. But as you know, Baby Care will pass that on later on. And for Resource Efficiency, it's acetone prices sequentially stable on low levels. But again, against pre year somewhat lower and also silicon metal prices are expected to decline further.

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Gunther Zechmann, Sanford C. Bernstein & Co., LLC., Research Division - Research Analyst [4]

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Can I just ask, following up on the raw material point? In the new guidance range for the full year EBITDA, do, therefore, not include any lower raw material costs as you say that you expect some recovery in oil price?

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Ute Wolf, Evonik Industries AG - CFO & Member of Executive Board [5]

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Yes, we are talking about the base case. No, as Christian described, our range more or less covers 3 scenarios: L-shaped on the pessimistic side, V-shaped on the optimistic side and, of course, an L-shaped recovery has different raw material scenario like V-shaped. So what we discuss now is more or less the base case, which is backed by a U-shaped recovery assumption.

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Operator [6]

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Your next question comes from the line of Michael Schäfer from Commerzbank.

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Michael Schäfer, Commerzbank AG, Research Division - Equity Analyst of Chemicals [7]

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Two questions from my side. First, coming back to your second quarter bridge you provided. By the way, much appreciated to get this kind of granularity here these days. But nevertheless, from the EUR 400 million, and indeed, Christian, I think you pointed to the EUR 100 million you see as a headwind in Resource Efficiency in the quarter-over-quarter. So I'm just still puzzled by this statement on the light of the record -- almost record margin you recorded in the first quarter in Resource Efficiency and then all of a sudden -- and the comments we just got on April being still fairly okay. So I wonder how conservative is this view on the EUR 400 million, which you have baked in primarily on the Resource Efficiency side? This would be my first question and maybe related to this one, on the full year basis, the outlook you presented and primarily the V-shaped scenario on the methionine pricing side, you talked about further acceleration of prices, which you have assumed at the upper end. Can you just clarify what you mean with further acceleration of prices, assuming if you compare this with the current spot price level we can see in the markets? Or any kind of hint, whether you've baked this already in or whether there's still some upside to current price -- spot pricing would be helpful? And then maybe my last question would be on Baby Care. You talked about the expected weakness materializing in the first quarter; however, I wonder whether -- how this is progressing basically in the quarters to come with Asia potentially recovering with a pass-through on the cost side, as you mentioned, Ute. So have we seen the worse in margins in Baby Care and, sequentially, we should expect a recovery there? This would be helpful.

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Christian Kullmann, Evonik Industries AG - CEO & Chairman of the Executive Board [8]

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Thanks a lot for your questions. Maybe before going into the details, let's keep it like this. We here in Essen, we here from Evonik, we do not believe that in such a situation, in such a corona crisis situation, it would be prudent to give a bold statement. And therefore, we do believe that it is, let me say, serious to stay cautious and to be conservative. That means, in other words, to be on the safe side. Having said this, maybe let me start with methionine. Yes, of course, it was a good start into 2020 with ongoing high volumes and further rising prices. Yes, of course, as of today, there is no impact on demand or our supply chains we've seen in the first quarter. And the positive trends are going to continue in quarter 2. So to give you a little bit more color about this, for the second quarter, we do see for the first time since a long, long, long time, price is definitely above EUR 2. And that is really helpful in this respect and for the whole company. Maybe some more about it. Those price increases we have talked about, they are because of good demand. They are because of the good demand and the high utilization rates are, here for us, pretty helpful. For quarter 2, as I've mentioned, we do see -- and that's relatively predictable, we do see higher earnings and the good volume growth will stay put. That may be about methionine, and then I hand over to Ute for your next questions.

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Ute Wolf, Evonik Industries AG - CFO & Member of Executive Board [9]

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Yes, Mike, on Q2. So Baby Care, you asked that. Baby Care, we assume will be stable on very low levels. So the demand is healthy all the time, but we see there is price competition in that market. Maybe there is an uptick. We would all look very much forward to that, but I think that would not be our base case assumptions from today's point of view. Yes, when we look at Q2, I expect the development, Christian I think very, in much detail, described methionine. Health care will also be very solid. Baby Care, as said, stable on those levels. The industry-related businesses like Comfort & Insulation and Interface & Performance, they might face some headwind as they also deliver into automotive and white goods. But overall, I think Nutrition & Care will be above prior year in almost any scenario in Q2. So I think that's relatively visible from today's point of view. For Resource Efficiency, we see at least a potential stronger decline. As described, Active Oxygens are solid. We have the benefits here from the PeroxyChem integration, Crosslinkers, as I said, holds up very well. Catalysts, also very stable business. In Silica, we have quite a number of very stable end markets, but everything that goes into tires, of course, faces headwinds. Other businesses like high-performance polymers, coating additives and maybe then in Q2, also oil additives, they have order exposure, and they are expected clearly to be weaker in Q2. It's a little bit hard to say how much it will be in the second quarter, but it will be definitely more than EUR 50 million, maybe up to EUR 100 million, depending how bad it gets.

And then we come to Performance Materials. Here, I think we have to face the reality that Performance Materials as the full segment might be more or less EBITDA 0 in Q2 when we see the price effect, when we see also demand drops we have. So I think that is at least a scenario we have to face. And if you take that all together, then I think our indication of around EUR 400 million very well adds up and sums up. And I think it's really more demand driven than price driven. So you asked about the margin. So we do not see -- in our specialty and growth business, we do not see margin erosion. But if the whole market demand goes down, of course, we will feel that here and there. But as of today, very specifically in very specific sectors.

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Operator [10]

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Your next question comes from the line of Mubasher Chaudhry from Citi.

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Mubasher Ahmed Chaudhry, Citigroup Inc, Research Division - VP [11]

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Just to go back to the methionine prices, how should we think about the contract prices being reflected for Evonik, given that the spot prices have moved up fairly quickly? And I understand that the spread between the contract and spot prices at the moment is fairly wide. So just wanted to get an understanding of how long we should expect before the spot prices start getting reflected in contract pricing? And then just a quick second question on with regards to your workforce, are you furloughing any employees or relying on any government support to do so through this COVID-19?

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Christian Kullmann, Evonik Industries AG - CEO & Chairman of the Executive Board [12]

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Good to hear you. First question about methionine. I've taken well. The second question, I would ask you to repeat because it was a little bit difficult for us to get it here in Essen. But maybe about methionine. For quarter 2, we definitely see year-on-year up that means talking about the first half of this year, our assumption is that having given you the numbers of quarter 1. And in addition, quarter 2, that it will be on a good level, and we are confident on seeing this recovery in methionine also in the second quarter and let's see how it will come. But as of today, key message is, we will see a definitely higher price, definitely higher than EUR 2 in the second quarter. And now I would ask you to repeat your second question because we've got it here only in pieces. Would you please be so kind?

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Mubasher Ahmed Chaudhry, Citigroup Inc, Research Division - VP [13]

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Sure. The second question was on furloughing any of your workforce as part of the COVID-19 measures. Are there any number of employees who've been off to stay at home due to lack of demand or lack of operation utilization? And if that is the case, are you relying on any government support to pay for these employees?

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Christian Kullmann, Evonik Industries AG - CEO & Chairman of the Executive Board [14]

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Okay. Now I've got it. Thanks a lot for your second question. First of all, the short-time work is a very well-established instrument here in Germany to buffer the impact of the crisis, and that is what we are going to make use of. That means, in other words, as of today, we have around roughly 300 employees, which are in short-time work. For example, in the areas of event management or in the areas of our catering services, but not in our operating functions. Here, it seems that everything is running pretty well. And so we are confident that we could manage it without any more actions in this respect.

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Operator [15]

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Your next question comes from the line of Charlie Webb from Morgan Stanley.

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Charles L. Webb, Morgan Stanley, Research Division - Equity Analyst [16]

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Just 2 for me. First, just thinking about the portfolio strategy, big picture, how does COVID-19 changed that in terms of time frame for you to be able to execute on that portfolio change story over the next coming 12 months? Do you expect delays to that in these uncertain times? How does it change your view on assets you have today, assets you would like perhaps in the future? Just understanding how you're thinking about that in the context of the current situation, is the first question. And then just secondly, on kind of the cost savings, contingency measures, ongoing efficiencies, what should we be expecting in terms of incremental contribution from those this year? And how does that compare to, I guess, the balance of perhaps some logistic costs going up, raw materials coming down? Just trying to understand what that should contribute this year in terms of incremental efficiencies, cost measures that you are taking?

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Christian Kullmann, Evonik Industries AG - CEO & Chairman of the Executive Board [17]

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Thanks a lot. Taking your question, let's keep it like this, I do strongly believe that the second quarter will be something like proof of the pudding for our strategy approach. In other words, that means we do stay put to our strategy and to executing our strategy as fast and as quick as we could in respect of creating the new -- and implementing and establishing the new organization structure, that is what we'll give you; therefore, we'll give you a little bit more about during our Capital Markets Day presentation. In respect of, let me keep it like this, M&A, that means for the time being, any kind of larger M&A is definitely ruled out. I'm talking about smaller deals, if at all, if at all. We could -- we would, could -- we would or could talk about this exclusively with a clear -- definitely clear maybe a tremendous valuation discount. Because as of today, we have to focus on maintaining our strong liquidity. And on our balance sheet positions, and as Ute has conveyed to you, they are proper, they are good, and that is what we have to protect in this particular time.

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Ute Wolf, Evonik Industries AG - CFO & Member of Executive Board [18]

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Yes. On the cost savings, what we had already included in our full year guidance back in March was around EUR 80 million contribution from the SG&A project. Then we have short-term contingency measures implemented back then. They were also in a remarkable double-digit range. On the business line level, we have, of course, efficiency programs in Animal Nutrition, Adjust 2020. It's in Care Solutions and others, they also contribute on the cost side. So that is what is ongoing, what is executed. Of course, in the current situation, travel costs virtually dropped to 0. So that, of course, will be a double-digit amount for the year. We are now prepared really to install all preconditions to use flexibility for the workforce. As Christian said, so far, it's really 300 people that are in the short-term working scheme. But we have everything in place. Should we see a drop in demand, should we then decide or have to decide to run down facilities to stop production in one or the other facility, we could use these schemes, and that, of course, would bring a dramatic drop in personnel costs because it's like an insurance here in the German social system. We pay every month, we pay to unemployment insurance and then the short-term work is one, let me say, insurance case that is happening. We are, of course, revisiting all other costs step-by-step, and everybody is very aware that we only execute what is necessary, what is strategically meaningful. I think it's also important to keep strategic initiatives because what we also learned back in 2009, in the crisis, you have to prepare for the day when you get out of it. And some things are comparable on the business line level as well as on the administrative finance level. We have these experiences and we employ these.

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Operator [19]

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Your next question comes from the line of Andreas Heine from MainFirst.

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Andreas Heine, MainFirst Bank AG, Research Division - MD [20]

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Three questions, if I may. The first is on methionine, I would like to understand a little bit more how the trends are if it comes to utilization rates across the industry sold on your peers. Is the current situation only so good because of technical difficulties among the one or the other plant or is the utilization rate going up nicely on the underlying demand? That is first question. The second in Performance Materials is being at 0 in the second quarter. I guess that it's a combination of the lower margins those are spread over naphtha, the operational leverage of lower volume and the EUR 10 million of inventory devaluation. So assuming that at least 2 of these is, lest the case in the second half, it should be somewhat better, I would guess. And the last one on Resource Efficiency, going to your new reporting, do you have any flavor you can give? Whether the additives or the specialty materials behave differently in this second quarter? So is one of the other more resilient or is it roughly the same if it comes to the decline of EUR 50 million to EUR 100 million quarter-on-quarter?

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Christian Kullmann, Evonik Industries AG - CEO & Chairman of the Executive Board [21]

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Andreas, I will give you the answer to your question about methionine. The supply chain from methionine, however, was definitely pretty well intact throughout the quarter. And the price increase is rather a factor of pretty good demand and high utilization rates than temporary supply issues. So I want to underpin, once again, it is a factor if it is a good sign, which gives us a lot of confidence here because it is based on good demand and high utilization rates, therefore. For the second quarter, the outlook remains positive because of this. And we could really relatively predictable, give you here an announcement talking about the Animal Nutrition business. So once again, the price level in the second quarter will definitely be above the mark of EUR 2. And it is what we see that there is an ongoing good demand, and that will help us to lift up the prices over the year, maybe once more. That is about methionine. And now I hand over to Ute.

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Ute Wolf, Evonik Industries AG - CFO & Member of Executive Board [22]

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Yes, Andreas. Thanks, Andreas, thank you very much for your questions. Yes, Performance Materials. I think the main driver is really the demand. You know maybe the effects better than we do. The global lockdown really impacted the demand for butadiene, mileage-driven MTBE and all these. The oil price shock, of course, makes it very, very difficult to get the price formulas right. And we had an even sharper decline in the NAFTA quotations in May -- March and April. So we'll see how that, in the end, then shakes out maybe with some recovery in the oil price. The pricing framework gets a little bit more consistent and more stable. Inventory devaluations played a role in Q1, but I think we also have to be prepared that we might see some in Q2, especially when the oil price drops by 50% and then regains the next day, that can have an effect. So I would not rule out inventory effects in Q2 as well. You asked about the business lines that are today in Nutrition & Care and will be in Specialty Additives. From 1st of July onwards, this is Interface & Performance and Comfort & Insulation, both had a good development in the first quarter, good volumes, good earnings. Interface & Performance is a very widespread niche-oriented specialty business, so it should be rather resilient. For Comfort & Insulation, as I mentioned before, as they deliver into automotive and white goods, it could be that they see some effects in Q2 and onwards. But again, it's a broad portfolio. And as I said, Q1, they were delivering and performing very good.

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Operator [23]

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Your next question comes from the line of Chetan Udeshi from JPMorgan.

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Chetan Udeshi, JP Morgan Chase & Co, Research Division - Research Analyst [24]

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Just one question. I just want -- maybe I did not catch the response to the previous question was, just around the volume trends in Resource Efficiency in April, did I hear that April was still okay, but the assumption is that it might worsen in May and June? And if so, maybe it will be just useful to just get some feel of (technical difficulty)

Yes. The first question was just to understand the dynamics better in Resource Efficiency because I wasn't very clear. I heard April was still okay, but the expectation is that May and June demand might worsen significantly. So any color on what you guys think about the potential, say, volume change in Resource Efficiency in second quarter will be useful? And the last -- second question is actually just thinking about the low end of the guidance for full year '20. Does that already assume the benefit from additional furlough that you might do if you were in that scenario?

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Ute Wolf, Evonik Industries AG - CFO & Member of Executive Board [25]

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Okay, Chetan. As described, what we see that April volumes are quite okay in Resource Efficiency. But again, in all the businesses that deliver into auto and coatings, we see some decline, of course, in orders and then in sales, respectively. The businesses that hold up very well in Resource Efficiency are Active Oxygens, Crosslinkers, Oil Additives to a certain extent, Catalysts, although it's small. So this is what we see and what we can say regarding Q2.

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Christian Kullmann, Evonik Industries AG - CEO & Chairman of the Executive Board [26]

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So to your first question, we do not expect that we would come out at the lower end because that is a very pessimistic scenario. That is what we do definitely not expect. We do see that there is a good reason, good ground to say that the so-called U-recovery scenario is a realistic one, and there's still some upside, and that is what I can say about your first question. Thanks a lot.

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Presentation

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Operator [1]

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In the interest of time, I would like to hand the conference back to Tim Lange for the strategy update.

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Tim Lange, Evonik Industries AG - Head of IR [2]

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Thank you very much. So that ends the first part of our call today. We now turn to the strategy update, starting with Ute and Christian again for the strategic and financial update, followed then by Lauren, Caspar and Claus for the new divisions. And afterwards, the usual Q&A session. Christian, the floor is yours.

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Christian Kullmann, Evonik Industries AG - CEO & Chairman of the Executive Board [3]

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Thanks a lot, Tim. Ladies and gentlemen, this was the first part of today's call. We are facing challenging times. Yes, of course. But I'm convinced that we'll successfully master the challenges ahead. And while we are currently very focused on short-term measures and navigating through the crisis, it is nonetheless or maybe even more so important to keep the long view, the long view on our strategic agenda and on our strategic targets. That is, what we will now cover the second part of our call. I will start with a strategic update. Ute then will give you an update on our financial targets. Harald was, as Tim has mentioned, really looking forward to meeting you at the event scheduled 1st of April in London. But unfortunately, he cannot be with us today, but no worries. He is in good health, and you will already have the opportunity to meet him next week for our virtual London road show. But on the other hand, I'm really excited to present you instead, the new heads of our 3 growth divisions. Lauren, Caspar and Claus. They will support us to introduce the new divisions to you, and you will now meet them more often on road shows or investor conferences.

Having said this, let me start with a short glance into the rear mirror, in all modesty. And while we are still at the beginning of our transformation story, we've made very good progress since redefining our strategy back in 2017. Over the last 3 years, we've made a track record of delivery. We've delivered on what we promised, in terms of free cash flow improvement, in terms of cost-saving programs and also in terms of portfolio transformation. We've established a strong culture, which rewards outperformance, embraces diversity, fosters innovation and focuses on sustainability. These are the key pillars towards delivering superior growth and return rates and will be reflected in a superior capital market performance. In terms of innovation, we are very well on track. We are targeting EUR 1 billion of additional sales by 2025. We started from virtually 0 in 2015 and have already generated EUR 300 million of new sales around all of our 6 innovation growth fields. Projects like Veramaris get a lot of attention, but to be honest, we are a lot more excited about the opportunities we see, for example, in 3D printing or from our latest innovation blockbuster, the world's first green biosurfactants, which is now ready for large-scale production and rollout. In terms of portfolio management, over the last 3 years, we divested cyclical businesses with sales of EUR 2 billion. At the same time, we've strengthened our portfolio with higher quality and more resilient specialty businesses of similar size. The divestments have been transacted at attractive multiples and at a peak cyclical earnings, while the acquisitions have strengthened the resilience of our business, reduced our overall capital intensity and realized total annual synergies of EUR 70 million. With the portfolio actions we've taken as well as with the underlying growth in our specialty businesses, we now have 80% of our earnings in clear specialty businesses. They have delivered an average organic earnings growth of 6% over the last 5 years, and these were not the easiest years for the chemicals industry, as you know.

Yes, of course, fair point. This is not yet visible on group level. But we also should not forget that we have lost EUR 1 billion of EBITDA only from the price decline in the methionine price. With methionine now at historic lows and with a higher transparency from our new divisional structure, the earnings quality of our portfolio will become more visible in the years ahead. Talking about our growth ambitions going forward, sustainability will be a major driver. We experienced an increasing customer pool for our green products and applications to make sure that our portfolio is aligned with this trend. We have conducted a sustainability analysis of our entire portfolio. This helps us better. This helps us to better understand the sustainability performance of our products. As a result of this analysis, 90% of our portfolio today has a positive sustainability benefit at or above market reference, and more than 30% deliver clearly superior sustainability benefits to our customers. These products, we call them Next Generation Solutions, are the sustainability winners of tomorrow, and we will further extend their sales share over the next years. We do this by integrating our sustainability analysis into our regular strategy dialogues with the operating businesses and into our strategic decisions like growth investments, innovations or M&A. Already today, these assets have been recognized by leading ESG rating agencies. We are amongst the leaders in all relevant sustainability ratings. And yes, we have set ourselves ambitious climate targets. They're amongst the most ambitious targets in the chemicals industry globally. So in a nutshell, sustainability is part of our DNA, and continues to be more important guiding factor in all of our portfolio and strategic decision-making.

Let me now briefly explain the rationale for the new divisions on Pages 9 and 10. First, the clear differentiation between growth and efficiency businesses helps us to manage our businesses with a clear strategic direction and focus. Second, we've recognized -- sorry, second, we have reorganized functions and responsibilities between the corporate center, the divisions and the business lines. The divisions are as lean as possible. Only the necessary overarching functions are provided on divisional level. The remaining functions are either provided on corporate or on business line level, but not on both. And the new divisions are no longer legally separate entities. This results in less overhead, leaner admin processes and fewer internal Boards and committees. Overall, this will reduce headcount by 150 employees. Third, and operationally, technology platforms, which so far was split across our segments are now clearly allocated to the new divisions. This will make steering and production planning far easier. Fourth, the now more differentiated end markets offer a more targeted customer approach.

Jumping to Page 12 in our strategic agenda going forward. Not surprisingly, it is not a revolution, but more an evolution of our 2017 strategy. We will continue to invest in our 3 growth divisions through R&D, organic growth projects and targeted M&A. We will run our Performance Materials division with an efficiency mindset, which means focus on cash and constant process optimization. For our Animal Nutrition business, our agenda is dual strategy. In methionine, we see an ongoing strong market growth. We, as market leader, will further strengthen our already strong position. We'll extend our cost leadership with our 3 global world-scale hubs in Europe, the U.S. and Asia. By doing so, we will secure today's EBITDA margin of 20% in that business, well in line with our group EBITDA margin target. At the same time, we will utilize our strong amino acid footprint and our unparalleled customer access to build a system house for sustainable, healthy nutrition.

So coming to the end of my short presentation, we've made good progress in the execution of our strategy agenda. But where do we go from here? What are our strategic targets for the next years? The clear target is to have a specialty portfolio with 100% growth businesses. That is, of course, what will not happen overnight. But the direction is clear and defined. We'll continue to actively shape our portfolio towards higher resilience, higher returns on capital and higher cash conversion. Our innovation and sustainability targets play a very important role in this transformation as to further targeted acquisitions and divestments. So far, ladies and gentlemen, on the bigger strategic picture. Ute will now give you more color on the financial targets as guidelines for our strategic transformation process. Thanks a lot.

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Ute Wolf, Evonik Industries AG - CFO & Member of Executive Board [4]

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Yes. Thank you, Christian. As part of our strategic update today, we are also reviewing and updating our financial targets and providing our path for the next years on how to achieve them. Since setting the targets back in 2017, we have been establishing a clear track record of promise and deliver. We have been able to demonstrate progress on most of them. We achieved volume growth of 3% to 4% in our growth divisions. We were able to improve our EBITDA margin on the group level, despite an increasingly challenging macro environment. And probably most important, we made significant progress in our free cash flow generations. Consequently, we have returned funds to shareholders via our attractive dividend in a very sustainable and reliable manner. Last but not least, we have secured a solid investment-grade rating to maintain a high level of financial flexibility for our company. Despite the challenging macro environment, we stick to our financial targets and even specify them further today. Given the current environment, it might take 1 or 2 years longer to reach them. We simply have to adjust our businesses to challenges we are facing by the pandemic crisis as everyone else. But we stay committed to delivering on our targets over the medium term, that means over the next 3 to 5 years. I will touch on each of them in the following slides.

So let me start with our top line growth targets. We were able to achieve above-average volume growth in our growth divisions. Despite the macro environment conditions today and expected in the near term, we reaffirm and clarify our objective of an over-the-cycle growth rate of more than 3% for each of our growth divisions. On EBITDA margin, we clearly must admit that we have not reached our target range yet. There are many reasons for that, and we discussed them on an individual basis in our conference calls in the past years. In a nutshell, we were not supported by much tailwind. We were hindered by headwind from macro perspective and also from adverse effects in some of the businesses. However, we made progress and steered the group EBITDA into the right direction. Going forward, the 3 main drivers will lift our margin into the target range over the next years. We expect an EBITDA margin improvement of more than 100 basis points from our portfolio transformation. This includes larger internal growth projects like PA12 capacity expansion. But we will also and more gradually shift our product portfolios towards more specialty solutions and applications. Care Solutions or Silica are good examples and role models here. Larger scale M&A is not part of that calculation. So divestments of lower-margin businesses would further improve the margin profile. From our cost-saving measures as well as from our innovation projects, we are expecting another 50 basis points each. Summing up all the 3 levers, we are expecting a margin improvement of around 200 basis points over time. On the cost savings side, we have well-established a couple of ongoing programs, running smooth and successful, you know them very well. But there is more to come, like the EUR 25 million saving that stems from the divisional reorganization. Worth to mention is our continuous factor cost compensation in corporate and administration beyond our SG&A program. On a bit more midterm horizon, we tackled the optimization of our supply chain, resulting in lower supply chain costs and in reduced capital employed.

Moving on to free cash flow. We have significantly improved our cash generation over the last 3 years. Now is a good time to set a new and more ambitious target. We aim to increase our cash conversion rate to above 40% from 33% of -- as of last year. This will be driven by an ongoing strict net working capital as well as strict CapEx management. The entire allocation framework will be focused on free cash flow generation. Our efficiency measures will have a double positive effect here. Cash outs for our programs will fade out while the savings will continue to ramp up. Additionally, we expect a high cash conversion from our internal growth projects like the PA12 investment as well from our bolt-on acquisitions like PeroxyChem. With regards to ROCE, we still have some homework to do. Currently, ROCE is slightly below our cost of capital. Our organic growth projects like the new methionine plant, the new Silica plant in the U.S. or the new PA12 investment are already in our fixed cost asset base and are capitalized on our balance sheet with around EUR 1 billion in total of capital employed. The benefits resulting from rising EBIT will now ramp up over the next years. Also for our acquisitions like APD or Huber, we have focused on the realization of cost synergies over the last 2 years. Now for the combined businesses, combined sales forces and combined R&D pipelines, they will have to deliver sales synergies due to an accelerated growth in the post-corona era. And I already mentioned, our supply chain project. This will also result in lower net working capital and, thus, lower capital employed. These measures will lead to the structural improvement of ROCE well above our cost of capital. With the current 9% cost of capital, the target for ROCE is to reach 11%. We all know that ROCE is a rather slow-moving KPI, hence, improvement will not come overnight. But return on capital stays of high relevance and importance for our decision-making in capital allocation.

Speaking about capital allocation, what are our priorities for the next years? Again, we are looking beyond the current corona crisis where securing our strong balance sheet and liquidity is our utmost importance -- is of utmost importance. First priority, efficient CapEx allocation via clearly defined investment guidelines and return criteria. We will keep CapEx at the lower level of EUR 850 million for the time being. With further top line growth, this will gradually move to a CapEx to sales ratio of about 6% going forward. Growth CapEx will be allocated mainly to our 3 growth divisions. Maintenance CapEx was already lowered over the last years; however, we do see some more efficiency potential, like from the harmonization of maintenance projects or from a holistic asset life cycle management process. Second priority for capital allocation is shareholder return, mainly via an attractive and steadily growing dividend. Thirdly, targeted M&A. M&A is and will be part of our growth strategy. Our main focus are bolt-on acquisitions to selectively strengthen our 3 growth divisions. Here we have strict strategic and financial criteria in place. Any acquisition has to deliver a clear contribution to our financial targets, that means accelerated growth, high-margin level and cash conversion and thus returns well above our cost of capital.

So let me summarize the financial objectives in one sentence. With our upgraded financial targets, we are well prepared to generate attractive shareholder returns by executing our growth strategy. So far on the group perspective, and I'm now very happy to hand over to our designated division heads, starting with Lauren for Specialty Additives.

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Lauren Kjeldsen;Evonik Nutrition & Care GmbH;Member of the Board of Management, [5]

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Thank you, Ute. It's my pleasure to be able to talk to you today about Specialty Additives. However, first, a brief introduction of myself. I started with Evonik in 2002 in Parsippany, New Jersey. I grew up in the U.S. and my educational background is BS in Chemical Engineering and an MBA from Lehigh University. In most recent position, I've been a Member of the Board of Management of Evonik Nutrition & Care. Prior to this role, I've held several leadership positions in our Catalysts; Personal Care, now Care Solutions; and Comfort & Insulation business lines. I've enjoyed an international career so far that has taken me from the U.S. to China and in Germany. As of July 1, I will take over my new role as the head of our newly formed division of Specialty Additives.

So what is Specialty Additives division about? The businesses in this division can be defined by a few criteria. We provide small quantities of additives to our customers to enable maximum performance in their formulations. So one criteria, small volume additives making a key difference. Second criteria, unique formulation knowhow. Built on decades of leadership in our applications and trustful relationships with our customer and partners. I see this as our main competency, offering broad solutions and deep formulation know-how. As of July, Specialty Additives comprises all of Evonik's additive solutions for industrial applications in one team. In the past, these businesses were split between Nutrition & Care and Resource Efficiency segments. Having all activities under one roof brings clear advantages, namely in R&D and in managing our technology platforms. For example, the expertise from these business lines coming together, we see synergies in between the technologies. An example of textiles, where there's epoxy adhesives, coating layers and foam layers in a combined application. Having all the leaders at one table will make finding and delivering new solutions to our customers even better than before. In addition, we work on optimizing our asset footprint having all parts of a given technology platform, for example, silicone under one roof will make decisions more effective.

What drives the growth going forward? I see the growth drivers defining our purpose. Support our customers to find solutions that enable less energy, less maintenance, more protection and more durability in various end markets, like mobility, infrastructure and durable consumer goods, making the world a little better. For example, additive packages that help our customers improve their composite formulations against rust, increasing insulation performance to reduce energy bills and emissions, and paint systems that protect railcar surfaces extending intervals for repair. These systems meet the rising demand for more sophisticated additive effects and the need for more environmentally-friendly solutions.

Financially, the division has delivered a strong and resilient track record, 5% top and bottom line growth and a very attractive and stable margin, around 26%, and a ROCE of 18%. Going forward, we will further expand our leading additives portfolio. To do so, we will continue a CapEx-light approach with ongoing expansions and debottlenecking and continue to have an open eye on acquiring new technologies where we see gaps in our portfolio. In terms of innovations, I'd like to highlight 2, I'm very excited about. COATINO, this is our first digital laboratory assistant that Evonik is launching in June, especially for the coatings industry. With this voice-activated laboratory assistant, we are providing a faster, more tailored, comprehensive response to customers' needs in the coating industry than before. We utilize modern methods from big data science and machine learning to ensure that COATINO always suggests the most suitable additive to work in a targeted way and achieve success more quickly. Another project I'm excited about is in our textile auxiliary, where we have additives to prevent dirt and water repellency. TEGO checks for functional textiles will start commercialization soon. We've already received first customer approvals in India, Taiwan and China. These repellencies will be much more suitable compared to the current solutions on the market. With that, I thank you for the time to give you insight into Specialty Additives and hand it over to Caspar.

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Johann-Caspar Gammelin;Evonik Nutrition & Care GmbH;Chairman of the Management Board, [6]

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Yes, Lauren, thank you very much. Caspar Gammelin is speaking. A short introduction of myself. My background is economist. I'm 30 years with Evonik. My last 10 years' track is, I was setting corporate strategies, setting up site services, a set of those units. Next stop was setting Performance Materials, restructuring and carve out methacrylate business. And since 12 months, I'm heading Nutrition & Care segment. So far the history. Coming to the future. My future assessment will be and I'm very proud of that, heading the new N&C, the new Nutrition & Care division that will be the home of 3 business lines: Care Solutions, Health Care and Animal Nutrition. These are think tanks, where we are working differentiation solutions for our life science markets. When you look at our products, technologies and services, one thing becomes clear, we are about functional actives and not materials. All our products are used either in or on humans or animals directly. We are bundling 3 businesses that are close to end consumers. These markets are robust and less cyclical. Due to the long-term megatrends, each market is showing resilient and healthy growth rates north of 3%. We are bundling 3 businesses for which innovation is crucial. 4 out of 6 innovation growth fields of Evonik are currently within the new division of Nutrition & Care.

Proof point 1, biotechnology. Nutrition & Care is and will be the home of biotechnology at Evonik. We have launched some exciting new biotech products, and that is just a start. Proof point 2, market needs. We have built a broad portfolio of advanced technology and health care space, which is paying off more and more. The COVID-19 pandemic has further amplified the focus of many pharmaceutical companies to have European and U.S.-based manufacturing sites for reliable supply to regional health care markets, and the trend will strongly benefit us due to our leading facilities in that region. Proof point 3, sustainability. There are a few issues that are crucial to our future success, and that is sustainability. Why? Because sustainability is changing our end markets. That is why we need to understand the impact it has to our value chains. Biosurfactants are a good example and potentially the next innovation blockbuster. The first market launch was very successful and Evonik will be the first company to produce 100% bio-based surfactants on an industrial scale. Based on this success, we have just started the basic engineering for the new plant at our biotech hub in Slovakia. But if you will ask me whether we, as Nutrition & Care, are living up to the full potential yet? My honest answer would be, no. The Health & Care business have delivered very consistent and steady growth, 5% top line growth and an outstanding 20% EBITDA growth over the last 4 years. And they will continue to deliver double-digit earnings growth. Our innovation pipeline is well filled and we will continue with our very successful M&A track record for smaller technology acquisitions.

For Animal Nutrition, the way is twofold. We want to strengthen our market and cost position in methionine, which will include further efficiency measures. And in the more medium term, we strive to transform from an amino acid producer into a system house for sustainable solution. These measures in Health & Care and in Animal Nutrition should bring back our level -- our margin level into the range of 18% to 20%. To sum it up, Nutrition & Care today is the smallest division of each of the three. But it is a very exciting one. It's a very important one for growth and value driver within Evonik beyond chemicals to improve life. With that, over to Claus.

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Claus Rettig;Evonik Resource Efficiency GmbH;Chairman of the Board of Management, [7]

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Yes. Thank you, Caspar. So good afternoon. This is Claus Rettig speaking. I believe some of you know me already, that's why I keep my introduction short and sweet. I'm a chemist by education and had many different positions and international assignments in Evonik and predecessor companies. In the last 5.5 years, I was heading the segment Resource Efficiency and from July, I will be heading the division Smart Materials. So how we define Smart Materials? Basically, Smart Materials is equal to Resource Efficiency, minus Specialty Additives plus optimized management structure. Smart Materials is based on strong technology platforms in inorganic materials like silica and silanes, Active Oxygen and Specialty Catalysts and in high-tech polymer materials like polyamide 12, polyimides, special polybutadienes and polyesters. In the last 5 years, we developed the segment, Resource Efficiency, very successfully. We did grow our segment during this time by some 50% from EUR 4 billion sales in 2014 to almost EUR 6 billion in 2019. And at the same time, we improved the EBITDA margin by 2 percentage points from 20.7% to 22.7%. Most of the elements we used to achieve this successful development stay fully intact for the new division, Smart Materials. And now we can put more specific focus on the materials business. This means we will develop our leading Smart Materials' positions further by continuing to shift our portfolio to more specialty products, and smart add-on services as well as a more balanced global footprint.

We will deliver on the Evonik claim leading beyond chemicals. Examples are our broad range of tailor-made products for specific customer needs across all of our business lines or the development of ready-to-use formulation for additive manufacturing or our wastewater disinfection services, to name just a few. An important success factor was and will continue to be our innovation strength and our increasing focus on resource-efficient products and environmentally-friendly solutions. We serve many different markets. However, main end markets are environmental, mobility and the construction sector. The full utilization of the opportunities from the Huber silica and especially the PeroxyChem acquisition will also contribute further to our growth. So you can expect from Smart Materials, a continuation of the profitable development of the last years, similar to Resource Efficiency in the past. Thank you very much for listening.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Martin Roediger from Kepler Cheuvreux.

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Martin Roediger, Kepler Cheuvreux, Research Division - Equity Research Analyst [2]

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I have 2 questions, please. Firstly, on -- yes, on strategy itself. In the past, you had shown charts about your segments and especially on Resource Efficiency, when you have shown that one piece of Resource Efficiency was not core, 20% in sales or so. Is that still the case? And if so, can you mention the business lines, which are not core? And how to -- where do they show up in Smart Materials or in Specialty Additives going forward? And the second question is on ROCE. First of all, I see that Nutrition & Care has a rather low ROCE of 8% and thus is dilutive to your 11% target. When do you think to earn the cost of capital in Nutrition & Care? And in this context with ROCE, in general, the target, you say this 11% is the time line. What is the time line? Is that midterm? And what does it mean midterm, is it 3 years or 5 years? Or is it over the cycle as it is for your growth or sales growth targets? And then I would be keen to understand what means over the cycle, does this over the cycle also include the year 2020 when you make this math?

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Tim Lange, Evonik Industries AG - Head of IR [3]

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Thank you, Martin. I'd suggest the first question goes to Claus on the core business in Resource Efficiency, now it's Smart Materials, Specialty Additives. Caspar will elaborate on the improvements going forward in Nutrition & Care, the improvement potential. And the third question, I would suggest go to Ute.

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Claus Rettig;Evonik Resource Efficiency GmbH;Chairman of the Board of Management, [4]

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Yes, thank you. Thank you for the question. If I understand it correctly, you said we defined some noncore BLs in the past. I really cannot remember that we did this. And it's certainly not the case in the future as well. So all the BLs we have are core to us. Nevertheless, and that's maybe what you're referring to is, within our business spectrum, we still have some businesses that are not, let's say, defined clearly as a specialty as we would like to see them. That's why we are shifting from these materials to more specialties. Some of you discussed and asked in the past always sometimes why don't we see more volume growth? And that was especially the case because we shifted from, let's say, more nonspecialty products to specialty products, and we don't see that then on the volume side. This will continue to be the case. So -- but to keep it short, what we have in our portfolio is certainly all of the business lines and the businesses we have are core business.

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Johann-Caspar Gammelin;Evonik Nutrition & Care GmbH;Chairman of the Management Board, [5]

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To ROCE of Nutrition & Care. ROCE on Nutrition & Care so far what was mentioned is regards to the current segment, I have to say, no, which we're currently public in. To the future outlook of Nutrition & Care, I referred to 3 business lines belong to Health and Care and Animal Nutrition. As I pointed out, so main driver will be the improvement in our margin due to the new focus on specialty business in both areas, Care Solutions, separation of specialties and [gap] of the one more commodity products that will lead to a significant margin improvement within the next mid-time period. Health Care already elaborated on the margin improvement in that sector. And Animal Nutrition, I have to say, currently, we are still carrying the burden of the Methionine 6 investment, which we are now growing into that. There is no further big investment foreseen in the current setup, but more in productivity, efficiency and using efficiency measures within the current asset structure.

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Ute Wolf, Evonik Industries AG - CFO & Member of Executive Board [6]

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Okay. Then the third question, what does midterm mean? That means, from our point of view, for the next 3 to 5 years. I think with some of the KPIs, it will be maybe earlier in that framework; others might be a little bit more slow moving. As I said, the ROCE is, by nature, a KPI that moves slow. That means slowly up, but also slowly down. Of course, 2020 is a special situation. We gave our updated guidance with more or less 3 economic scenarios. We are working on the base case of the U-shaped recovery. And I think that is the basis for all discussions today. Should that migrate more towards L, W or whatever kind of form you might name, of course, that then changes the levels and might here and there change also the trajectory. But the 3 to 5 years is linked to the U-shaped recovery and the outlook for this year. That's the assumption as of today.

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Operator [7]

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Your next question comes from the line of Thomas from Swoboda (sic) [Thomas Swoboda].

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Thomas Swoboda, Societe Generale Cross Asset Research - Research Analyst [8]

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Yes, Thomas Swoboda from SocGen. I have 2 questions. I will ask you one by one, if I may. First question on earnings stability. I mean, I think we all acknowledge that you've made a very good progress on your strategic agenda. Great success. Congratulations. Free cash flow has improved, which is a big achievement. But looking at the current situation and the earnings stability in comparing that to 2009, 2012 where you had your bigger crises, earning stability hasn't changed that much. Hence, the question, what are your plans to change that going forward? And what is your timeline or should we basically assume that earnings stability won't change much going forward?

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Tim Lange, Evonik Industries AG - Head of IR [9]

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That was the first. The second you want to ask us afterwards or right away?

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Thomas Swoboda, Societe Generale Cross Asset Research - Research Analyst [10]

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If I can, I'll wait.

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Christian Kullmann, Evonik Industries AG - CEO & Chairman of the Executive Board [11]

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Christian here. I will take your question. Have a look. Taking helm in the summer of 2017, we have addressed, we have announced that we were right from scratch start something like a transformation process. And this transformation process is in respect to your question, definitely, also focused on the profitability, quality of our portfolio. That means if I look to our portfolio, it has changed in such that it has definitely become much more robust and much more resilient because those cyclical businesses, capital intensitive and cyclical business -- sorry, we have started to sell and doing so with MMA, I guess it was a pretty good dear -- a pretty good result. So talking about the quality of our portfolio, it has become since 2017 much better in respect of resilience and in respect of profitability. But please, you should keep in mind, we have started this transformation process in summer 2017. And it will take some time, and it will take some time to enhance it and to gain and to harvest maybe the fruits from this. So the proof of higher resilience is, what we have already gained and what is to prove once more in the future. So I think, please take in mind once again, proof of the pudding for us and for all of us will be the second quarter and full year 2020. I guess that is the answer to your first question.

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Thomas Swoboda, Societe Generale Cross Asset Research - Research Analyst [12]

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If I may sneak a follow-up. In 3 to 5 years' time, do you still see Performance Materials as part of your portfolio?

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Christian Kullmann, Evonik Industries AG - CEO & Chairman of the Executive Board [13]

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There's something I've learned and I've learned my lesson, and that means it is about -- it is all about timing. And as of today, I guess you would agree totally with me, if I would say, it is not the right point of time to start any kind of discussions about what will be in and what is going to leave us, and then at what point of time. But yes, of course, we have touched this a couple of months before together, talking about Baby Care. And maybe I hope I could give you sufficient answer, you could be satisfied a little bit with -- for today saying, it is not the right point of time to discuss it. But as of today, if you look, for example, to our C4 value chain and to the Performance Intermediates businesses where we do have a pretty good leading technology position, where we are with our -- the quality of our plants has a really high competitive level and where we are all in all, in comparison to our competitors, pretty good positioned. Now we want to work here on process innovation. We want to improve the efficiency, we want to improve our cost position and, therefore, we want to foster the position of this business, a strategic role as cash contributor. And if you take all this in consideration, maybe you will be able to contribute to it. It means, in other words, we do not feel under pressure talking about your question. Thanks a lot, and forgive me.

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Thomas Swoboda, Societe Generale Cross Asset Research - Research Analyst [14]

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That's fair enough, no problem. I guess my second question is to Ute and it's a small follow-up on the more short-term development, and it's on cash flow. In your base case scenario, the U-shape recovery, do you expect to cover the dividend from cash, please?

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Ute Wolf, Evonik Industries AG - CFO & Member of Executive Board [15]

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Yes, Thomas. I think that has to be the target also in tougher times that the cash flow covers dividend and leasing payments and interest payments, we outlined that several times. Maybe if you allow me 1 sentence towards earnings stability, we are one of the very few that dare or are able to give a forecast for the current year. And I think you can do that if you have enough visibility and at least perceived stability. If you don't have that, you don't give an outlook. So maybe that is also a way to look at earnings stability. Is the company able to give a forecast in very, very unsecured times or is the company not able to give a forecast.

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Operator [16]

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Your next question comes from the line of Andreas Heine from MainFirst.

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Andreas Heine, MainFirst Bank AG, Research Division - MD [17]

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Actually I have 4, 3 smaller ones and then a more general one. The first one on Lauren, on the additives margin, it was quite high last year. Looking into this year and going forward, do you see this margin level as sustainable? And then the second question is on methionine. And I hear you and the strategy to make this business more special about methionine, as methionine (inaudible) molecule like this in 5 years from now still. So there will be volatility and it is very important on the cost spend. I would like to know how you see your asset base. Is there something you would like to improve in that way? Or do you think everything is set here and cannot be improved? And then on inorganics, there are 2 smaller units, the silane business and the Catalyst business. Could you elaborate a little bit how you see those in terms of critical size? Do you have to have bolt-ons here to bring them in a better shape or can you live with this? And then the more general one, while I see that Nutrition & Care is now a little bit smaller with 2 parts moving into additives and the same is true for Resource Efficiencies by creating the new additive segment. But what is really new in driving now Nutrition & Care and the Smart Materials and then also additives? So obviously, I'm happy with the new reporting lines, but maybe you can spend some words on what -- how you will differently drive these businesses going forward?

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Tim Lange, Evonik Industries AG - Head of IR [18]

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Thank you, Andreas. I think the questions go to the -- mainly to the new divisional heads. You want to start us with the margins, especially additives?

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Ute Wolf, Evonik Industries AG - CFO & Member of Executive Board [19]

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Sure. Thank you for the questions. So as already described a bit, the Specialty Additives division has a really strong specialty character. And that there continues to be a lot of customer pull for more sustainable solutions, and we see that as a growth driver. We will continue to work on a couple of different levers to maintain that high percent margins. So one lever looking at how we service in with modern technologies, how we service our knowhow formulation to our customers. We will look at areas and synergies between applications and technology platforms and also on the cost basis and optimization basis of utilizing our asset management within our platform to be able to maintain and still grow in this Specialty Additives segment.

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Tim Lange, Evonik Industries AG - Head of IR [20]

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Caspar, you go ahead with the second one on the asset base in methionine?

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Johann-Caspar Gammelin;Evonik Nutrition & Care GmbH;Chairman of the Management Board, [21]

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Methionine, you're asking what (inaudible). In methionine, we are market leader. We have the best cost position and we have, I think, the best-in-class technology. We are working very hard on our customer base. We have a program Adjust 2020, which is mentioned as well in the presentation of the Board, which will lower our cost base by EUR 50 million at the end of this year. So it's all about cost efficiency. We will concentrate on our international hubs in Antwerp, Mobile and in Singapore, where we really strengthened our position. Methionine, as just said, is not a specialty, but it's specialty due to our industrial leadership. And it gives us access to each and every farming. We have the strongest sales organization, which knows at least by name each and every broiler of this -- of the world. That gives us the possibility to leverage this possibility, this access to sustainable health-nutrition concepts to, gut health's diet concepts and to bring that holy business on a new margin level.

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Tim Lange, Evonik Industries AG - Head of IR [22]

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Then questions 3 and 4, Claus, to you on the more general divisional steering and the Smart Materials.

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Claus Rettig;Evonik Resource Efficiency GmbH;Chairman of the Board of Management, [23]

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Yes, Tim. Yes. Maybe first, the question regarding the inorganic silanes and Catalysts, you said are on the smaller side. And what's our idea about these 2 areas? Yes, it's true. They're on the smaller side. Silanes, however, and Catalysts, you have to view very differently in certain aspects. Silane is very much interlinked with our silica business and will continue to be very important in there on the technology platform for production, but as well as on the customer side because here we offer silane silica systems for the tire industry. So this is one of the major roles also for silanes. Catalyst is a little bit different. Catalyst is a very, very attractive area to have. We are a little bit sad that it is still small, to have more of this good stuff would be good. And that's also what we are aiming for and to grow this business, no doubt. With more general question about what is new, I think, Christian answered most of it very well already. He was elaborating about that we are looking for an evolution here, an evolution in terms of streamlining the organization, having less admin. Over the time, the segment structures have developed some duplication of tasks, especially between the segments and corporate, the corporate functions. So we are going to eliminate this again. This made us less efficient, let's say, like this and slower in certain aspects. So that's going to be removed. I think that's good.

Legal structures, Christian touched on this. All of the segments today have supervisory Boards and management Boards. So that's going to change as well. That also will relieve quite a bit of admin work in today's -- in the new world. And last but not least, because I can say out here from experience, when we started with Resource Efficiency, I think I said in the beginning, EUR 4 billion, now we are EUR 6 billion. And by nature, when you grow bigger and bigger, the top management has less time to concentrate on the business. And bringing the size back to a size, which I believe is the right one, EUR 3 billion, EUR 4 billion, you really, as the leader, can focus more -- more specific on the business, you have more interactions with your customers. That's very crucial in our specialty chemical world. And that's something the new structure will actually improve again. So that's, from my point of view, the basic differences to the past.

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Operator [24]

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In the interest of time, we will take a final question. This question comes from the line of Charlie Webb from Morgan Stanley.

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Charles L. Webb, Morgan Stanley, Research Division - Equity Analyst [25]

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I have a couple. Hopefully, we can get through both of them. First off, just around sustainability. Clearly, a little bit more emphasis this time around on your integration and sustainability than the last time, I think you said that in your medium-term plan. You identified 30% of your portfolio today that you think have superior sustainability. I was just wondering what you think this could be in the medium term? And also just to get a sense of how do you quantify that kind of superior sustainability angle? Is it based on the more recent EU taxonomy guidelines or what other internal measures do you do to calculate what you include there? So just an idea of what that is today and what that could be in the future would be helpful. And then just a second one around the amino acids. You talk about moving towards a system house rather than being just an amino acid producer. I just wanted to -- perhaps you could just flesh that out and give us a sense of what that means in terms of how that business will look and operate differently in the future? And whether there will be required investment to make that shift? That would be helpful.

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Tim Lange, Evonik Industries AG - Head of IR [26]

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That's only 2, Charlie, that's still okay. So Christian will take the first one on sustainability. And the second one goes to Caspar on the system house.

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Christian Kullmann, Evonik Industries AG - CEO & Chairman of the Executive Board [27]

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Sustainability is and will be key for the strategical development of our company, and it will become a strategic core pillar for us. Having said this, yes, we want to better, we want to enhance, we want to foster our positions here by future organic growth projects by innovation and, of course, by decent and disciplined M&A recorded bolt-on M&A. This will help to drive higher share out of our next-generation solution projects and processes. Maybe to give you a little bit more color about this, some -- let me give you some recent examples of what we have started to do and what we have already gained. For example, new membrane production facilities for biogas separation in Austria. That is really an exciting project or our additives for food packaging, like Lauren has mentioned during her short and fruitful presentation, that it's another wonderful point I want to underpin. Also the expansion of our platform for natural-based ingredients. What we have done here in the Care Solutions businesses by targeted M&A. And next steps will be, for example, talking about the very promising project pipelines for our protein fermentation in health care, but this is what goes to the Head of the Nutrition & Care business and division that goes to Caspar. And with this, I guess, I could hand over.

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Johann-Caspar Gammelin;Evonik Nutrition & Care GmbH;Chairman of the Management Board, [28]

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Yes, Charlie, thank you very much for the question. A very exciting one, indeed, because it's main driver for developing Animal Nutrition. Animal Nutrition currently based on 2 strong pillars already: Efficient nutrition and sustainable health and nutrition. Efficient nutrition that is focusing on methionine, elaborate on that to maintain our leading market position and even strengthen our global hubs in Europe, U.S. and Asia. Sustainable health and nutrition that is all about to leverage this market access and it's the future of Animal Nutrition business. We intend to broaden our portfolio even more for sustainable health and nutrition in addressing the holistic approach to a gut of the animal, for example, with our probiotics or with other feed supplements. We expand into other areas and species like aquaculture or pet food like we do with our joint venture, Veramaris. We are offering already and tried to -- and will expand even our offering of digital technologies to our existing customers to optimize their stage and their livestock farming by offering digital solutions. And our position is to -- our aim is to position ourselves not only as methionine producers, but as a sustainable healthy nutrition service provider. And this will be done via our internal innovation, organic growth and targeted small acquisitions.

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Charles L. Webb, Morgan Stanley, Research Division - Equity Analyst [29]

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That's very helpful. If I could just follow-up a little bit -- well, just one question on that. As we think about sustainability, is that now become a more important KPI for the group? Is it going to become a bigger part of how you guys are incentivized? And is it that kind of -- as you identified, superior sustainability is 30%. Is that the main focus that you're trying to get that up more broadly? Is that going to just become a bigger part as well? Are you going to report it more frequently, I guess is the question.

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Johann-Caspar Gammelin;Evonik Nutrition & Care GmbH;Chairman of the Management Board, [30]

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Sustainability is one of the main drivers for growth within Animal Nutrition. Due to adapting the diets of our customers, we are able to even reduce significantly the foot -- their carbon footprint by using our products, our amino acids and our solutions by offering even our digital solutions for farming. We even offer them the solutions to even get to more productivity increase and reduce carbon footprint even more. That is one of the main driver for the whole food industry, and we offer them these efficient levers. Yes.

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Christian Kullmann, Evonik Industries AG - CEO & Chairman of the Executive Board [31]

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Maybe to add something in short term. In addition to our financial KPIs like EBITDA growth and margin progression and free cash flow, there are -- you will find an excellent performance that are the things which are already part of our bonus system that underlines definitely that safety is top -- one of our top priorities in our agenda. And now, as mentioned, we are fully aware, and we are really strongly committed to sustainability. That means, in other words, that must be, it's not should or maybe, but it must be reflected in the direct incentive system and the bonus system for the top executives and for the members of the Executive Board. And let me inform you about this that we have started some currently discussions -- internally discussions with the member and with the Head of our Supervisory Board to discuss how to reflect on this and, therefore, to integrate it in our bonus system. But however, this needs to be approved by our Supervisory Board. But you can take it for granted that we work on this because we work for a good future and that means that we have to reflect on and concentrate on sustainability.

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Operator [32]

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I would like to hand the conference back to Christian Kullmann for closing remarks.

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Christian Kullmann, Evonik Industries AG - CEO & Chairman of the Executive Board [33]

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Yes. Here, I am once again. Ladies and gentlemen, it was a great pleasure for us having had you today. We've really enjoyed the discussions and it may give us a chance to give you a little bit more color about what we are up to and how we are planning our strategy and, therefore, having a better future for the company. Yes, we are facing challenging times. Yes, we are doing our homework, and yes, we are well prepared for the current year 2020. Thanks a lot for joining us and, ladies and gentlemen, take care of yourself and stay healthy. Goodbye.

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Operator [34]

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That does conclude our conference for today. Thank you for participating. You may all disconnect.