Evonik Industries AG

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10 SEPTEMBER 21, 2010 GLOBAL CORPORATE FINANCE and real estate divisions posted a decline in EBITDA of 19% and 16%, respectively, notwithstanding that the real estate business benefited from a one-off gain on disposals in FY 2008. For H1 2010, EI reported a 24% year-on-year increase in sales to €7.8 billion, supported by a sharp improvement in the performance of the group’s chemicals business. The chemicals division posted a 34% increase in revenues, to €6.3 billion, driven by higher volumes (+25%) and prices (+7%). Currency effects and changes in the scope of consolidation were more or less neutral (+1% respectively), while the revenues of the energy and real estate businesses were flat to slightly down (-1% and -3%, respectively). EBITDA was sharply up (+83% to €1.5 billion), again mainly supported by the chemicals business (+91% to €1.2 billion). FIGURE 9 Revenues and profitability [1] € MILLION 2009 2008 2007 Turnover 13,076 15,873 14,444 Operating Profit 791 898 994 Operating Profit Margin 6.0% 5.7% 6.9% EBITDA [2] 1,814 1,893 2,083 EBITDA Margin [2] 13.9% 11.9% 14.4% EBITA/ Average Assets excl. cash [2] 5.4% 5.6% 6.6% [1] These figures are based on standard adjustments that Moody’s makes to enable global consistency for issuers reporting under IFRS. For details on these adjustments, please refer to our rating methodology document “Moody’s Approach to Global Standard Adjustments in the Analysis of Financial Statements of Non-Financial Corporations – Part II”, published in February 2006. [2] EBITDA/EBITA computed as defined in Moody’s Global Chemical Industry Rating Methodology, published in February 2006. ... and the management’s efforts to improve the group’s cost structure and cash flow generation EI rapidly adjusted to deteriorating market conditions at the end of FY 2008, as evidenced by the costcutting initiatives that the group launched to protects its earnings. The measures implemented were mainly centred on shortened working hours, reduced variable salary payments, reduction in external services and on the streamlining of administrative functions. EI achieved costs savings of more than €500 million during the course of 2009, of which more than one quarter was of a sustainable nature and will be retained. In addition to temporary measures to adjust to depressed market conditions EI has also launched a cost optimisation programme, “On Track” which aims to achieve annual sustainable cost savings of €500 million per annum by 2012. As referred to in the “Management Strategy” section, this programme will be focused on the entire value chain, with savings targeted in operations, corporate centre, administration, shared services, insurance and sourcing. The group’s various restructuring and cost-cutting measures led to a P&L charge of €103 million in 2009. Besides implementing short-term and sustainable cost-savings measures, EI has been focusing on protecting its cash flows through the increased control of working capital and capital expenditures (capex). EI managed to reduce its net working capital from €3.2 billion in December 2008 to around €2.3 billion in December 2009, and reduced its NWC/sales ratio, respectively the days of net working capital, significantly. The group has also reduced capex by 33%, to €834 million. In 2009, EI exhibited mixed results with regard to cash flow generation. EI’s funds from operations (FFO) and retained cash flow (RCF) were under pressure due to the group’s weaker operating performance, falling by 18% to €1.1 billion and by 21% to €760 million, respectively. The group’s ANALYSIS: EVONIK INDUSTRIES <strong>AG</strong>
11 SEPTEMBER 21, 2010 GLOBAL CORPORATE FINANCE cash flow from operations (CFO) and FCF improved year-on-year, reflecting both company-specific measures to reduce capex, working capital days and volumes, which resulted in material working capital inflows (€1,230 net working capital inflow in 2009). As a result, EI’s FCF/net debt ratio (10.9%) exceeded its RCF/net debt ratio (8.8%). Going forward, Moody’s expects EI’s debt and cash flow metrics to improve as a result of: (i) moderate organic de-leveraging (FCF is expected to be slightly positive in 2010); (ii) asset disposals (EI is in advanced negotiations on the sale of a stake in its energy business); and (iii) improved operating performance and cash flow generation (before working capital movements). While Moody’s anticipates some of the proceeds from assets disposals being reinvested in the business, we believe that the management of the group will apply discretion in the reallocation of proceeds to ensure that it further improves its balance sheet structure and achieves an investment-grade financial profile in the medium term. FIGURE 10 Cash flow and coverage ratios [1] € MILLION 2009 2008 2007 Funds from Operations (FFO) 1,101 1,338 1,369 Cash Flow from Operations 2,191 471 1,277 (FFO + Interest expense)/ Interest Expense 2.9x 2.5x 3.0x Retained Cash Flow (pre-WC) 760 958 1,073 Free Cash Flow 944 -1,157 -149 [1] These figures are based on standard adjustments that Moody’s makes to enable global consistency for issuers reporting under IFRS. For details on these adjustments, please refer to our rating methodology document “Moody’s Approach to Global Standard Adjustments in the Analysis of Financial Statements of Non-Financial Corporations – Part II”, published in February 2006. FIGURE 11 Leverage and liquidity [1] € MILLION 2009 2008 2007 Short-Term Debt 455 1,008 942 Long-Term Debt 4,040 4,394 3,752 Total Debt 4,495 5,402 4,694 Cash & Marketable Securities 885 542 349 Net Debt 3,610 4,860 4,345 Net Debt Adjustments: Underfunded Pensions 4,193 3,864 3,968 Operating leases 876 750 558 Contingent Liabilities/Other -26 -177 -181 Net Adjusted Debt 8,653 9,297 8,690 RCF 760 958 1,073 FCF 944 -1,157 -149 RCF/Net Adj. Debt 8.8% 10.3% 12.3% FCF/Net Adjusted Debt 10.9% -12.4% -1.7% [1] These figures are based on standard adjustments that Moody’s makes to enable global consistency for issuers reporting under IFRS. For details on these adjustments, please refer to the rating methodology document “Moody’s Approach to Global Standard Adjustments in the Analysis of Financial Statements of Non-Financial Corporations – Part II”, published in February 2006. ANALYSIS: EVONIK INDUSTRIES <strong>AG</strong>
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Evonik Industries AG

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