Evonik Industries AG

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6 SEPTEMBER 21, 2010 GLOBAL CORPORATE FINANCE To assess EI, Moody’s has applied its Global Chemical Industry Rating Methodology, published in December 2009. The methodology contains five key rating factors (Business Profile, Size and Stability, Cost Position, Management Strategy and Financial Strength), incorporating several sub-factors or metrics, against which we assign a score to the company. EI’s performance against these factors and sub-factors is detailed under “Business Risk Factors” and “Financial Risk Factors”, as follows: Business Risk Factors The strong business profile of EI is largely supported by its world-leading chemicals franchise EI’s chemicals business segment, which accounts for 76% of group revenues and 79% of group EBITDA, is one of the largest and most profitable European specialty chemicals companies, with around 100 production sites in 28 countries. The products of the chemicals franchise hold marketleading positions, including in silicas, polyamide 12, super absorbants, Dl-methionine to name a few. EI is active across the entire value chain of the chemicals industry, with some exposure to commodity type chemicals (mainly centred around the group’s C4 chemistry expertise), but mainly to specialty chemicals applications in its consumer specialties and health & nutrition business units (conditioners, super absorbants, skin cleanser), which carry higher margins. Importantly, EI benefits from Verbund structures in several of its chemicals product lines (silicon, C4, isophorone and MMA), which enables the group to control the entire value chain, a key competitive advantage over non-integrated players. EI’s chemicals franchise is also widely diversified in terms of end markets, with exposure to the food, pharmaceuticals, healthcare, automotive and aerospace industries among others. FIGURE 4 Sales by end market for Chemicals (2009) Source: Evonik Industries AG Home / Personal Care 18% Other 17% Automotive 16% Pharma 4% Oil & Gas 5% Construction 7% Coating 10% EI’s chemicals business uses raw materials ranging from petrochemicals to some natural oil-based oleochemicals. Despite the group’s transformation in the past five years to a more specialty-end chemicals company, approximately 70% of its raw materials are still sensitive to oil prices, albeit to varying degrees. The chemical division’s main raw materials include C4-crack, carbon black feedstock, propylene, methanol and acetone. Food 12% Plastic 11% ANALYSIS: EVONIK INDUSTRIES AG
7 SEPTEMBER 21, 2010 GLOBAL CORPORATE FINANCE Raw material costs represent more than 40% of the division’s sales. In 2009, EI benefitted from the significant decrease in raw material costs which only partly had to be passed on to the customers (sales price -6%); During H1, the increase in raw material costs (compared to H1 2009) could be successfully passed on to the customers (sales price +7%) Energy and real estate businesses offer some level of earnings diversification but have lower, or more volatile, returns on capital employed The earnings diversification stemming from EI’s energy and real estate businesses, accounting for 20% and 3% of group revenues, respectively, is only valid to a certain extent. The group’s energy division is focused on power generation and has no retail integration. Moody’s notes that most of EI’s power generation is sold under long-term contracts to other utilities or industrial customers, which means that it is a more stable business and is relatively less exposed to normal economic cycles. The real estate business offers very stable earnings and operating cash flows but its contribution to the group’s overall earnings is relatively limited, with only 9% of group EBITDA generated from this business. Given the above, EI’s strategy to focus its efforts and resources on its chemicals franchise in future is sensible, in Moody’s view. This view is supported by our analysis of the group’s returns on capital employed (ROCE). As illustrated in Figure 5, below, the chemicals division generated ROCE well in excess of that of the real estate business over the past four years. In addition, ROCE at the group’s energy business has proven much more volatile than that at the chemicals division. FIGURE 5 Return on Capital employed by division ROCE 2006 2007 2008 2009 Chemicals 8.5% 10.1% 9.9% 10.3% Energy 13.8% 15.3% 13.2% 9.7% Real Estate 6.6% 8.3% 9.2% 7.3% The group generates around 61% of sales and has more than 80% of its assets (see Figure 6) in its traditional European markets. EI’s overweight position in the high-cost regions of Europe and North America is a disadvantage, particularly in certain sub-sectors of the chemicals industry, in which lowcost players based in China and India have exacerbated the competitiveness. FIGURE 6 Geographical breakdown of sales and assets (FYE 2009) Sales Segment Assets Germany Europe excl. Germany North America Asia Central & South America Other 0% Source: Company reports 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% ANALYSIS: EVONIK INDUSTRIES AG
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Evonik Industries AG

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