Start Time: 08:00
End Time: 08:49
Evonik Industries AG (OTCPK:EVKIF)
Q4 2016 Earnings Conference Call
March 02, 2017, 08:00 AM ET
Ute Wolf - CFO
Tim Lange - Head of IR
Paul Walsh - Morgan Stanley
Gunther Zechmann - Sanford C. Bernstein
Martin Roediger - Kepler Cheuvreux
Andreas Heine - MainFirst
Andrew Benson - Citi
Andrew Heap - Berenberg
Thomas Swoboda - Société Générale
Laura Lopez - Baader Bank
James Knight - Exane BNP Paribas
Good day, and welcome to the Full Year 2016 Earnings Conference Call. Today’s conference is being recorded.
At this time, I would like to turn the conference over to Tim Lange. Please go ahead, sir.
Thank you. Good morning, ladies and gentlemen, and welcome to our Q4 earnings conference call. My name is Tim Lange, Head of Investor Relations at Evonik, and with me today is Ute Wolf, CFO of Evonik.
Let me hand over directly to Ute for her short presentation, which is as usual followed by the Q&A.
Thank you, Tim, and good afternoon to everyone. Thank you for taking time from your busy schedule to be on our call today. We highly appreciate your interest in Evonik. Let me start the presentation with a review of last year’s highlights both from a strategic and a financial perspective.
In 2016, we made significant progress in the execution of our strategies and we successfully delivered on our financial targets. I will detail our achievements on the next couple of slides. Two important strategic milestones in 2016 were the acquisitions of Air Products and Huber Silica.
They are good examples for our disciplined and thoughtful M&A approach. Both acquisitions with softer growth in resilient markets with high barriers to enter. They provide high margins and superior growth rates. This will help to further balance Evonik’s portfolio and financial profile.
As expected, we closed the Air Products deal at the turn of the year or be exact on January 3. It is fully earnings accretive in 2017. Also in the last quarter, this business showed good performance with significant volume growth in coating as well as polyurethane additives.
We had already prepared one diligently throughout 2016. Thus, we could start the integration immediately in early January. So far it is proceeding fully in line with our expectations. We can confirm the synergies of $80 million in total and expect to realize already 10 million to 20 million in 2017.
The first weeks with our new colleagues at Air Products have confirmed that we have a very similar culture. We share the same understanding of proximity to customers, innovation power and corporate responsibilities. And by joining forces, we will become even stronger in our markets.
Apart from the two acquisitions, we have successfully executed our differentiated segment strategy in several other areas as well. Let me give you just some examples. In our growth segment with growth efficiency, we are investing $100 million for a world-scale silica plant near Charleston, South Carolina close to our key customers. This is an important milestone to expand our position as a global partner for the automotive supplier industries.
With strength in our innovation power, we have redefined our innovation our innovation growth fields this year. We are now focusing on the growth fields which I expect to contribute over €1 billion in additional sales by the year 2025. Examples here include sustainable attrition, healthcare and cosmetic solutions.
This is accompanied by targeted venture capital investments. We expect that these investments into highly promising start-up technologies will further extend our innovative position.
One recent example is the investment in nanotech industrial resolution, a cutting-edge technology for the lubricant industry as part of our oil additives business. Performance materials successfully continued on its objective to be strictly committed to efficiencies and cash generation.
Turning now to Chart 7 on financials. I’m pleased to report that we have accomplished our targets for 2016. Q4 was another strong quarter above expectations. As a result, we reached the upper part of our initial EBITDA guidance.
Our ROCE of 40% is well above our cost of capital, showing that we have again created significant value for our shareholders. CapEx spending of €960 million shows the disciplined use of our funds. To build this amount ensures attractive growth prospects for all businesses. This is also reflected in the strong free cash flow again confirming our high cash conversion potential.
Let me give you some more details on our full year financials. Demand from our customers was healthy across the whole portfolio and resulted in positive volume growth across all three chemical segments.
Apart from the well-known headwind from methionine pricing, we achieved broad-based earnings growth. 17 out of our 22 business lines grew earnings last year. This resulted in strong growth rates, in resource efficiency and performance materials.
The pleasing operating performance and the strong cash generation allows us to propose a stable dividend of €1.15 per share. This is another proof of our reliable and predictable dividend policy even in times of declining earnings.
Let us take now a closer look at the development in the fourth quarter. It was another successful quarter for Evonik. We delivered strong volume growth of 5% similarly strong across all the three chemical segments.
And the price trend has started to ease. With the positive development in performance materials, price change has just resulted in minus 6% for this quarter after minus 10% in the two previous quarters.
Our net financial position stood at €1.1 billion. Please be reminded that we have paid the purchase price for the acquired Air Products business of around €3.5 billion in early January 2017.
Turning now to Page 11. I already mentioned the strong free cash flow generation not far from the outstanding levels of the year 2015. Apart from strong operating performance, this was driven by our consistent net working capital management throughout the whole year.
We generated close to €400 million of cash inflow from net working capital. Of course, this extraordinary cash inflow will not be repeatable in 2017. We rather expect slight cash outflow from net working capital in 2017 following expected higher sales and raw material costs. On the other hand, we expect a less negative cash out for taxes in this year.
Cash outflow investments was more or less at prior year levels. Looking just at Q4, cash out increased mainly due to the METEX acquisition. We bought a technology package for fermentative methionine production. This transaction is treated as an investment cash flow.
Overall, we have achieved an excellent free cash flow of €810 million for 2016. This is a stunning number and it matches the high cash conversion level of around 40% similar to the outstanding year 2015.
For 2017, we again expect clearly positive free cash flow although considerably below the strong level of 2016. This is partly explained by the already mentioned effect from net working capital.
Let me now move on to the performance of our operating segments, starting with Nutrition & Care on Page 12. Looking at the Nutrition & Care segment, we are especially satisfied with the performance of our healthcare and comfort and insulation businesses. Both are two strong pillars of this segment.
In healthcare, we have seen strong development across all product lines, for example, in pharma polymers with its successful drug delivery system. Our exclusive synthesis business shows a sustainably positive trend due to new customer projects.
Also in comfort and insulation we had a strong performance across all regions, particularly in China. This business is now additionally strengthened by the Air Products acquisition.
In Q4, methionine was the main factor behind the strong volume growth of the segment. Actually as we have some lower growth businesses like baby care segment, volume growth in animal nutrition was even above segment average. This was driven by inter-growth trends especially in Asia, a temporary outage of a competitor in Asia and some customer restocking. Prices were lower than expected.
Going in Q1, we expect continued strong development in the majority of our Nutrition & Care businesses. It is worth mentioning the usual seasonality on healthcare. As in 2016, sales and earnings are backend loaded in this business. With intermediate production in the first half and trailing in the second half. So Q1 will be sequentially slightly lower here.
For methionine, we also expect sequentially slightly lower volumes in Q1 after this strong Q4. Overall, we are convinced that the underlying growth drivers and the supply-demand trends of the industry are well in check.
Prices would still require some time to stabilize. Consequently, we expect gradual price declines in the first half compared to the year-end 2016. However, the pace of the sequential price decline will gradually decelerate.
In Resource Efficiency, we delivered earnings growth and margin expansion for the third year in a row now. This is yet another proof of the resilient character of this growth segment.
In Q4, we saw the usual seasonality combined with a fading raw material tailwind. Additionally, we had some extraordinary effects like maintenance shutdowns and more pronounced year-end effects.
Coating additives, silicone and high-performance polymers all delivered ongoing strong performance. The segment also made significant progress in supply chain and working capital management.
In the crosslinkers business, we finished a very successful year 2016 with demand especially in the construction and coatings markets was additionally supported by positive raw material effects.
Going forward, we expect a more balanced market also due to the ramp up of a new competitor plant in Asia. In this context, I would like to highlight that Resource Efficiency, our most profitable and stable segment, will have an earnings share of around 50% of our group earnings in 2017.
Turning now to Page 14 for Performance Materials. In Performance Materials, the positive trend already seen in Q3 has further accelerated. Despite the usual seasonality, EBITDA in Q4 was nearly at Q3 levels driven by good volume and further improving spreads.
C4 and especially methacrylates delivered a strong quarter. We expect this momentum to further accelerate into 2017. The Q1 EBITDA will not only be way above the prior year quarter but also clearly exceed Q4.
However, we expect a normalization of the currently very tight supply-demand situation both in C4 and methacrylates in the second half of the year and please be reminded that comparable in Q3 and especially Q4 are getting tougher as well.
It is also worth mentioning that methacrylates already delivered strong performance throughout the whole 2016.
With that, let’s turn to the outlook for this year. From a macroeconomic perspective, we expect slightly more positive dynamics with however increased uncertainties. This is not only due to specific challenges in various emerging countries.
Here we expect only Brazil and Russia to come out of recession in 2017 but also due to a higher political risk in North America and Europe. In this environment, we are nonetheless convinced that our businesses will continue on their successful paths.
We target solid earnings growth for 2017 and expect an adjusted EBITDA in the range of €2.2 billion to €2.4 billion. This range bear a significant upside potential. It reflects our strong confidence and the strength we are currently seeing in our markets and the strategic measures we accomplished in the previous year.
The next slide gives you some more details per segment. I don’t want to spend too much time here as I already described the major trends. In a nutshell, in our diversified portfolio, earnings growth in Resource Efficiency and Performance Materials will [Technical Difficulty] in Nutrition & Care.
So overall, we are strongly confident about achieving solid earnings growth in 2017. We had a good start into the first quarter with good demand in most of our businesses, also the ones strengthened by the Air Products acquisition.
Ladies and gentlemen, let me summarize my presentation. In 2016, we paved our way for profitable growth in 2017 and beyond. We continue to see the same positive structural growth trends across the majority of our portfolio. These should deliver continued positive volume growth plus GDP over the next year.
With our two acquisitions, we have further balanced the Evonik portfolio and earnings profile. This will already become visible in 2017. The successful integration of Air Products and the realization of the announced synergies are one of our main priorities for the next month. And also our innovation pipeline is well filled. We will keep you updated on some of our lighthouse projects over the next couple of weeks.
That concludes my presentation and I’m very happy to answer your questions.
Thank you. [Operator Instructions]. We are taking the first question from Paul Walsh from Morgan Stanley. Please go ahead.
Thanks very much. Good afternoon, Ute, Tim. Thanks for my questions. I just wanted to check some numbers with you on methionine and also on Performance Materials. I think you had guided towards prices in methionine being around 2.7 in Q4 of last year. Wondering if that turned out to be the case. And in terms of lower prices, are we talking something like 2.5 to 2.6 for the first couple of quarters and that’s the working assumption for the year. So that’s the first question on methionine.
The second question on Performance Materials. Did you say EBITDA year-on-year would be more than double in Q1 what it was last year? I’m not sure if that’s what you said or not. But that’s something I’d like to clarify. And what’s the rational for thinking the C4 chain normalizes in the second half? Is that because you see something or is it simply because historically it’s been a volatile market and we shouldn’t extrapolate current strength forever? Thanks every much.
Good afternoon, Paul. Thank you for your questions. With regards to methionine prices, we were a little bit better than the number you just cited in Q4 but I think that’s maybe more or less than the rounding difference. I think the price level you assumed for Q1 is appropriate, is reasonable. So from what we see, I think that’s a fair assumption.
The second question was about Performance Materials. As Q1 in last year was very, very weak, you might remember, oil were at 25 something like that, so I think they have a good chance to have double in EBITDA. It may be a little bit early now to really give a precise number for the first quarter. But what do we see in the markets? For MMA in the second half we have some start-up of big facilities in the Middle East and from everything that we see they are on time. So there is nothing to speculate about a delay here or so. So the positive MMA situation is something influenced by outages, some maintenance shutdowns in the first half but that will normalize in the second.
If you look at C4, it’s a similar situation for different reasons. We’ve had a little bit of a shortage in the market, so demand was relatively tight and stocks were not there. Some destocking took place in the last quarter, so that’s a little bit of a restocking effect as well. So from that point of view, we see quite high rises especially in butadiene prices now from everything we see in the market. It’s a fair assumption to assume that it will not last for the full year but normalize towards the middle of the year and the second half.
Okay. Just one last question for me, if I can. In terms of the guidance, I just want to make sure. J.M. Huber is not included in that guidance is it?
That’s correct. It’s not included.
It’s not included. And any reason why you’re using a euro dollar rate of 1.1 instead of 1.05? Is it because you’ve hedge or locked in rates of 1.1 or it is just because you’re taking average of last year?
I think it’s very early in the year and we are not in a position to really guess the euro on cent basis. So if you look back last year, I think we’ve had fluctuations between 1.15 and 1.05. So we’ve had 1.10 keeping stable from last year is the most reasonable assumption for the outlook.
Brilliant. Thanks a lot, Ute.
We’re not moving to Gunther Zechmann from Bernstein. Please go ahead. Your line is open.
Hi. Thank you. Good morning, Ute. Can I just check what your intention is for the use of cash? Obviously you’ve guided for lower free cash flow compared to a strong 2016 but also you kept the dividend flat. So are you – big picture question, are you more on a digestion mode on the M&A side, are you still looking for bolt-on deals or are you looking to increase the dividend, so just trying to get a sense of how you want to allocate your capital this year? Thank you.
Yes, Gunther, good afternoon. Thank you for the questions. On the dividend, please be reminded we had quite an increase last year of 15%, so that was a substantial step. We have also a targeted payout ratio of 40% to 50% of adjusted net earnings, so we are a little bit above that. So from that point of view I think the dividend level makes a lot of sense. And from the distribution of earnings, we will still grow a little bit into our policy in this year.
Use of cash, we have still sizable CapEx amount. We have around 950 million in CapEx each year in a normalized status; 400 million of that is growth CapEx. If we look at the next two years that we have an extra spending for the new methionine plant in Singapore, so that of course create a little bit higher amount for this year and next year. So from that point of view, I think the good cash flow will also be needed to a certain extent for all our CapEx especially in the next two years.
With regard to acquisitions, it’s clearly our focus to integrate a product and Huber then in the second half when we can close the deal. It’s not about announcing the deals, it’s really making them work, integrating the businesses, to realize the synergies and make sure the earnings accretion arrives in our profits.
That’s very helpful. Thank you.
Your next call is from Martin Roediger from Kepler Cheuvreux. Please go ahead.
Thanks for taking my few questions. Firstly, again on Huber Silica business, are you able to give us a hint whether the consolidation will be more likely at the beginning or the end of the second half of 2017?
Secondly on efficiency, you have achieved On Track 2.0, you have achieved Admin Excellence. I wonder why you have not announced a new efficiency program. Is it because you keep your powder dry for your next Capital Markets Day or it is because your focus is on achieving the synergies with the integration of the acquired assets and thus there is no room for efficiency gains?
Then thirdly, two minor ones on methionine. Do you know whether the production problems with acetal [ph] in China have been solved in the meantime? And how serious do you see announcements from this newcomer NHU to increase their new 50 kt plant towards 300 kt? Thanks.
Good morning, Martin. Thank you very much for your questions. With Huber we are a little bit dependent here on the antitrust approvals and I really have to ask for your understanding that we are not able to give you the exact timing of these administrations. With efficiency programs, I would say the opposite is true. We have been working for nearly 10 years in these efficiency improvement mode. It’s more or less part of our DNA, it’s part of our routine. So every year we have to compensate sector cost increases in the amount of €110 million-€120 million. This is part of our budget process. This is part of our incentive schemes. So although there is no specific program name anymore, I think it’s more a proof of that we are now in a continuous improvement process and are delivering these efficiency gains as part of our normal business.
Methionine, I think we had a sale outage with already results last year. So from that point of view, everything as far as we can see is now back on track here. The announcement of NHU we have not seen any specific announcement to that; no timing, no location. It would be one of the biggest methionine plants in the world, which is maybe not the most natural step for a newcomer in the market. I think for us we just have to see how really successful they are now with their first plant which is according to their publication now mechanically completed. They have to see how the production runs, how the volume gets into the market and then I think it would be then the time to think about other steps. Does that answer your question?
The next question comes from Andreas Heine from MainFirst. Please go ahead. Your line is open.
Thank you a lot for taking my question. First, I would like to understand a little bit more what you mean with normalization in Performance Materials. The margin has looked over the last few years quite a bit from the peak in 2011, '12 to the trough in 2015. So I have no clue what normal is.
In crosslinkers, the wordings seems to be a little bit more cautious with the slowdown of wind energy in China and additional capacity from competitors. Was that a boost you have seen in 2016 that you would also talk here about a normalization, so to speak? Materially lower earnings, how do you see the progress or the outlook for this very important earnings contributor in Resource Efficiency?
In methionine, I would like to understand how the customer behavior is? Do they have longer term contracts now, so are customers billing on the current price level to take the commitment to have also quarterly orders or is it still more kind of a spot business?
And last but not least, if it comes to bolt-on acquisitions, you have now levered the balance sheet with two acquisitions and should have also increased. What would you say if the headwind you have for your balance sheet to lever this more if it comes to further M&A? Thank you.
Thank you Andreas for quite a number of different questions. I’ll start with the margins of Performance Materials. Normalized margins are low to mid-teens, so I think we have a fair chance to be more or less at this level.
Crosslinkers, I want to remind you that they had an extraordinary good performance last year. They had very good volume development, had additional tailwind from the raw materials specifically here from the acetone which had very low prices in the first half of the year. So from that point of view that creates a high comparable for 2017. In the industry, we see a relatively good demand but we are also aware that the entrance of [indiscernible] will of course influence the whole market. So from that point of view I think some caution is appropriate here.
For methionine, what we have seen in the fourth quarter was really a very good volume growth. We had in fact growth drivers in Asia. Q4 of course was the most important quarter just ahead of the Chinese New Year. The temporary outage from the competitor was a little bit an extra booster but not the only one. We have also seen some customer restocking. The overall market has grown by around 5% last year, which is slightly below the long-term average but it’s also normal that one year might deviate a little bit from that long-term average. We have seen continued strong growth at Asia, also stable growth pattern in North America and Europe. And in Europe we also see prices stabilizing already, so that all points to step-by-step stabilizing normalizing prices.
With regard to the bolt-on acquisitions, we have a very good credit profile now from the financial policy. We said we want to have a good investment grade rating. With that, we would still have some hedge room for smaller bolt-on acquisitions. If we look back, we had some smaller acquisitions in the field of probiotics with NOREL or with advanced food ingredients with Med. So these are bolt-on I think which are doable more or less step-by-step but they are more really in new fields that we enter or in grower fields that we want to expand our business into. Does this answer all of your questions?
Mostly. Thank you for that. On methionine, I would like to came back to just behavior of the customers. Is it still that they look from the hand-to-mouth business or are they committing also volumes or orders per quarter? So it is still that they look for prices to be down and to do more bottle fishing [ph], or is there comfort in the current price level? So has the comfort in the current price level on the customer side increased?
So we have seen especially in Europe customers returning for the quarterly booking. So Q1 is covered now and we’ll see how that goes into Q2.
We’re now taking a question from Andrew Benson from Citi. Your line is open. Please go ahead.
Thanks very much. Can you just give us a bit of an update on the tax rate outlook as to all the acquisitions? Secondly just on cash flows again, I guess you’re going to have some sort over 1 billion of debt equivalent. I would imagine your debt reduction is going to be a high priority and I was wondering what sort of pace of debt reduction that you’re likely to target or do you want to continue to make acquisitions over the medium term?
And thirdly just on raw material costs, generally speaking they were very low and a bit falling for the fat end of four years. Many companies are now talking about the need to pass through raw material cost increases in order to achieve their full year growth objectives. I’m just wondering what you’re doing on that front and how confident you are? And then lastly, if you could perhaps give an update on the baby care business that would be great.
Okay, Andrew, thank you very much for the questions. I will start with cash flow then cover raw material and baby care and Tim will give you some guidance on the tax rate afterwards. Cash flow I think from our debt situation, a big portion of that is pension debt. We have funded our pensions in the last five years significantly. We have now two-thirds funding ratio which is good, which is also I think very comparable to our peers. The financial debt now stands at around €2.3 billion, which I think is okay. And with that debt we are fully in line with a very good investment grade rating. So from that point of view I think at this level we are fine. And as I said, we are also in the position to have some smaller bolt-on. But on the other side, we really have to focus on the integration of Air Products and later on Huber to really make sure that these acquisitions work and the synergies arrive in our profits.
For the raw material costs, I think the easiest one is Performance Materials. They have more or less to can pass on. You see that in the earnings already in Q4. If we look at Resource Efficiency, they also are in a position to pass on most of the raw material costs. Sometimes there is a time lack of one to two months. So from that point of view that might here and there give an effect in one or the other quarter but generally speaking they can pass on. In Nutrition & Care, it’s more or less the same case. On the other side, the raw material mix has been not only oil-based but it’s natural raw materials and so on. From that point of view it is included in our guidance. We have really for the overall raw material basket, we assume that it is substantially higher this year compared to last year, so that is all included but it’s really a different picture if you look at the several parts of the business and the segments.
Sorry, can I just before you could go onto baby care. So you’re saying there could be a one to two month lack. So within that forecast, is that the assumption that there is approximate a two month lag in passing on raw material costs to get to your – or does that – the raw material costs issue reflect the 2.2 to 2.4 range?
It’s fully included in the range.
Baby care, I think the situation has not changed much. Maybe on the volume side we can be now a little bit more positive than we were in the last quarters. So we have seen some shutdowns in the market. We also [indiscernible] of our capacities. We have seen that investments have been reduced. So from our point of view we see a track now for baby care it’s really on very low earnings levels and growth is stable on these levels. Maybe there is a little chance for an improvement but it’s a little bit too early to get optimistic here. But at least we really see the trough in earnings for baby care.
And on the tax rate, last question, as you know last year 2016 we had an adjusted tax rate on the P&L of 30.4%. We expect that to slightly increase in 2017 because of the higher sales and earnings share after the Air Products acquisition and potentially also the Huber acquisition in rather high techs areas like the U.S. So we estimate and guide for 31% tax rate for 2017.
On the P&L, it’s worth mentioning I guess the effect on the cash flow statement and you’ve also seen that cash out from taxes was relatively high in 2016. It was close to 500 million. The long-term average here is more the 350 million level. We expect that around that level also in 2017, so less pronounced cash out for taxes on the cash flow statement.
Thanks so much.
The next question comes from Andrew Heap from Berenberg. Please go ahead. Your line is open.
Hi. Thanks for taking my questions. First one on Air Products. Could you give a bit more flavor on the performance in Q4, because I think earnings were flat year-over-year? And looking at 2017, if you take the guidance and use a 1.10 exchange rate and the midpoint of your synergies, there’s pretty much no organic earnings growth you’re guiding for there. So could you give the reason behind that? That would be my first question.
Secondly, just on the size of the working capital swing you expect to see this year and at what level of a percentage of sales do you see as an appropriate amount? And then finally, I don’t know if you could give any guidance on Resource Efficiency earnings excluding the impact of the Air Products acquisition, because obviously you’re guiding for a considerably higher earnings but a lot of that will be due to the Air Products earnings in? Thanks.
Yes, Andrew, good afternoon. Thank you very much for your questions. I think with Air Products performance, it was very much in line also in the fourth quarter with what we had expected and we also had a chance to talk to the colleagues now on their internal projections and budget. So that’s all pretty much in line with what we had expected and what it is in our business case. So from that point of view, no discrepancies here. You have to keep in mind they had a ramp up of the Pasadena facility, so maybe that is something which influences earnings here and there. But from our point of view, everything like we have seen it in the due diligence that we build into our expectations and business case.
Net working capital, I want to remind you we had some quite strong net working capital increases in '14 and '15 as we had new facilities ramp up that always goes hand-in-hand with working capital increase. So we now more or less with one step went back to a more normal level. We were in 2016 around 16% and I think going forward that’s a reasonable number. Of course, we have the target to get better step-by-step but really more in gradual steps than in bigger ones. So this is what we expect here.
Resource Efficiency, it’s more or less 50-50 from the Air Products business so you can make up your own calculation how much that is. If you look at the other businesses of Resource Efficiency they really had over the last year a very stable, very reliable growth development, good margin development. So we are very confident this will be the case again this year. The only caveat I have to make is crosslinkers as they have been strong comparable, so they might be a little bit under the previous year. But I think for the rest we are very confident that they continue on their growth paths.
Okay, great. Thanks.
We’re now taking a question from Thomas Swoboda from Société Générale. Please go ahead. Your line is open.
Yes. Good afternoon. A lot of questions have been asked. Two small questions from my side. On the free cash flow outlook you have given, is there any effect from the integration from Air Products making you more cautious, inventory step-ups and so on, or is it really something like a normalization as you have been explaining before, just want to check?
And the second question is on the mix for your C4 value chain. Are you able to tweak the outlook of these streams between the different products in this value chain, or is it a fixed mix? Like I think you have 320,000 tons butadiene. So is this the annual capacity for this year or can you tweak it somehow as this product is in higher demand? Thank you.
Yes, Thomas, thank you very much for the questions. Cash flow, the influence of Air Products, we have integration cost. Of course that includes cash out. On the other side we have lower cash taxes. So that more or less compensates. The inventory step-up is a P&L funnel which does not influence the cash flow statement.
On the C4 value chain, as these are really – they’re more or less for ton [ph] production size, the capacities are more or less fixed. It depends to be honest not only on asset but also on the incoming raw material stream that we get. So there are also fluctuations; if it’s winter, if it’s summer, how the quicker stream is composed. So I think the capacities will give you more or less that.
Thank you very much.
We now have a question from Laura Lopez from Baader Bank. Please go ahead. Your line is open.
Hi. Good afternoon. And thanks for taking my questions. So I have two. In your animal nutrition business, you spoke about very good volumes. I just wanted to ask, how you felt any negative effect maybe at the beginning of this year caused by the bird flu outbreak we’re seeing in the news. And secondly, do you already have any plans to use the METEX technology? That’s all.
Yes, Laura, thank you very much. We have not seen a lot of impact on the bird flu. I think meanwhile really the authorities are very fast and very diligent in isolating the farms and really getting it under control very quickly. METEX, there was a real strategic thought behind it to be as leader in methionine to really have all production routes in our portfolio to be able to explore fermentative routes further. Today, we have to see that industrial route is by far the most competitive one.
Okay. Thank you.
We now have a question from James Knight from Exane. Please go ahead. Your line is open.
Hi. Good afternoon. Sorry, I missed the start of the process [indiscernible] being covered, so apologies if it has been. Is there anything you can say about the early change in CEO? And given that Dr. Kullmann has been responsible for strategy in the last few years already, it is reasonable to assume from that that there might be big strategic changes announced in your Capital Markets Day this year? I guess one subsidiary to that would be in the past, your own Performance Materials segment has been in question or at least put into question. Are these the source of questions that might come again in the future, near term or longer term? Thank you.
Yes, James, thank you very much for the questions. With regard to the CEO change I think that was a very long-term plan behind it to really have a continuous – more or less take over here in the Board. Christian Kullmann is with Evonik since 2003. He is a Board member since 2014. Last year he became Deputy CEO. So from that point of view, it was a very diligent and with a very long lead time I think organized a succession here with the CEO. I personally worked with him for many, many years and I’m personally looking very much forward to work with him also in the new role. But from our point of view it had really a long lead time already, so not a big surprise.
With regard to strategy, as he is now responsible for strategy, so he has really been making and influencing the strategy very, very much in the last year already. I think it’s on him to really explain what he wants to do once he is the CEO then from the end of May. We will have a Capital Markets Day which is already in planning most likely in early summer and then I think I think it’s time for him to really give the new outlook under his CEO role here for Evonik.
For Performance Materials we now really see that the earnings get back to more normalized levels. We see that the efficiency improvements work. So it’s on the right wave. On the other side, we still see some efficiency improvements and restructuring improvements that we can do. So no concrete plans today to sell or joint venture the business but like for any other part of our portfolio, of course we have to consider and monitor all the time what are the prospects, how can we develop the businesses and what is then the right decision.
Thank you very much.
There are no further questions. I would now like to turn the call back to our speakers today. Thank you.
Thank you. Ladies and gentlemen, that brings us to the end of today’s call. We will be on the road in the next week at the usual locations. We are looking forward to meeting you there. Thank you for your attention and goodbye.
This will conclude today’s conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.
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