Evonik Q2 results impacted by persistently weak demand in specialty chemicals

12 Jul 2023 --- Evonik has published preliminary figures for the second quarter. The German specialty chemicals supplier expects adjusted EBITDA of between €430 and 450 million (US$474 and 496 million), a slight improvement compared with the first quarter’s €409 million (US$451 million). However, the company struggled with persistently “very weak” demand across all end markets.

The lack of an economic recovery means that earnings fell short of Evonik’s expectations. Compared with the prior-year period, adjusted EBITDA fell by around 40%.

“During the first quarter, there were signs of a business recovery for the remainder of the year,” says Christian Kullmann, chairman of the executive board. “Unfortunately, the recovery turned out to be much weaker in May and June than we had expected.”

“Our contingency measures prevented a more significant earnings decline, but we are feeling the effects of a slowing global economy.”

In the second quarter, Evonik’s demand remained “very weak” across all end markets and customer destocking continued.Weak demand across end markets
In the second quarter, Evonik’s demand remained “very weak” across all end markets and customer destocking continued. Volumes sold remained at the very low level of the previous quarter.

Nevertheless, Evonik succeeded in keeping prices stable for the most part, particularly in its specialty chemicals businesses. Group sales reflected the weak economic trend as well and are expected to hit €4 billion (US$4.4 billion) at the second quarter close.

Already in the second half of 2022, Evonik began to implement contingency measures to safeguard earnings. The company aims it will save €250 million (US$275.6 million) in the current year by not filling vacant positions, limiting external service providers and restricting travel. 

The effects of these measures will continue to ramp-up in the second half of the year, anticipates the company.

“We also need additional efforts for free cash flow. We will reduce capital expenditure and net working capital even further,” comments Maike Schuh, CFO. “Evonik postponed or canceled smaller capacity expansions and projects in light of persistently weak demand and now expects capital expenditures of around €850 million (US$937 million) for 2023.”

At the start of the year, Evonik had already cut its investment budget from €975 to 900 million (US$1 billion to US$992 million).

“We haven’t seen such persistently weak sales volumes in a long time, perhaps never before over such a long period,” says Kullmann. “We outlined contingency measures at an early stage and are now implementing those measures rigorously. Nevertheless, we will no longer be able to meet our previous guidance.”

Evonik now assumes continued weakness in demand without any recovery throughout the second half of the year. Accordingly, adjusted EBITDA for the full year 2023 will be in the range of €1.6 to 1.8 billion (US$1.8 to 2 billion). 

Previously, Evonik had expected adjusted EBITDA in the range between €2.1 to 2.4 billion (US$2.3 to 2.6 billion), with the company recently targeting only the lower end.

Evonik now assumes continued weakness in demand without any recovery throughout the second half of the year.Sales are now expected between €14 and 16 billion (US$15 and 18 billion) (previously: €17 to 19 billion; US$19 to 21 billion). Evonik holds firm to develop its cash conversion rate toward the target of around 40% this year (2022: 32%). 

“However, the initially targeted absolute increase in free cash flow is no longer achievable with the lower operating result,” details the company.

Development in the divisions
Compared to the first quarter of 2023, Evonik’s Specialty Additives division posted a slight increase of adjusted EBITDA in the second quarter (adj. EBITDA expected for Q2 2023: around €200 million/US$220 million). 

Although end-customer demand remained weak, the strong destocking at customers, particularly in the coatings industry, “eased somewhat” in the second quarter.

Performance Materials also saw a slight sequential increase in earnings thanks to improved earnings in methyl tertiary butyl ether and superabsorbents (adjusted EBITDA Q2 2023: around €45 million/US$50 million).

Nutrition & Care again recorded lower earnings compared with the previous quarter (adjusted EBITDA Q2 2023: around €70 million/US$77 million). 

Price of methionine falls
While demand picked up, the price of antioxidant methionine again fell slightly. A stabilization is now visible for the third quarter.

At the start of the year, Evonik had already cut its investment budget from €975 to 900 million (US$1 billion to US$992 million).

Smart Materials results (adjusted EBITDA Q2 2023: around €120 million) were negatively impacted by a planned maintenance shutdown for the high-performance polymer Polyamide 12. 

The costs of the plant overhaul as well as the shortfall in volumes due to the shutdown had a negative effect of €40 million (US$44 million) compared with the first quarter. With the successful completion of the maintenance work, both the first as well as the new, second plant are now available for further ramp-up as of July.

Technology & Infrastructure/Other reported significantly improved earnings compared with the previous quarter (adjusted EBITDA Q2 2023: around €5 million/US$5.5 million). These areas have the largest number of employees, thus contingency measures as well as the reversal of bonus provisions had the biggest effect here.

Business activity highlights
Among recent key company developments, Evonik inked a cooperation agreement with Guangdong Marubi Biotechnology in Shanghai, China, last week. The partnership will enable consumers in the local cosmetics industry to “benefit from both companies’ complementary capabilities in raw materials, R&D and production.”

In the same week, Evonik acquired Argentinian sustainable cosmetic actives innovator Novachem. The move is described as the “next logical step for the Care Solutions business line” as it aims to be the sustainable specialties partner for the personal care industry.

Last May, pioneering biotech specialist Modern Meadow partnered with Evonik to innovate a host of clean beauty products, including those based on animal-free collagen, using Modern Meadow’s precision fermentation technology Bio-Coll@gen.

Evonik also joined forces with Intrapore to expand the reach of remediation technologies, which are designed to remove traces of toxic per- and polyfluorinated surfactants (PFAS) in soil and groundwater. This is underway in light of growing awareness about high levels of micropollutants in the environment.

Evonik will publish final results for the second quarter on August 10.

By Benjamin Ferrer