May 4, 2021

Epoxy Comments from Olin Investors Call

Scott Sutton

Yes. Thanks, Steve, and hello to everyone. Look, I’m super proud of the Olin team for their passion, results and for their optimism for our future. Because of their optimism and success, I had the opportunity to pull forward our value creation formula story. First of all, Olin is on track to deliver more than $1.8 billion of adjusted EBITDA this year. One proof point to that track is that second quarter adjusted EBITDA is expected to exceed first quarter adjusted EBITDA, excluding Uri onetime impacts, even though we have significant turnarounds in the second quarter. The third quarter adjusted EBITDA should also exceed the second quarter. So it is time to start projecting toward a higher adjusted EBITDA of $2.5 billion and above in future years, the emphasis really being on the above. For clarity, 2022 is expected to be a positive stepping stone toward that direction. Some key activities to bridge that gap to $2.5 billion are shown on Slide number 4. But maybe Slide number 5 tells a more comprehensive story to that $2.5 billion and above.

Olin is quickly moving through four phases of evolution. We have already discussed the first two with you on prior earnings calls, and we are currently in Phase 2, the leading phase as we enhance our unique model of optimizing value first across the whole ECU. Think of leading as solving the ECU co-production conundrum by setting our participation to the weak side of the ECU, anticipating potential value inflection points and then activating to achieve a desired response. Shortly, we’ll be looking to take our innovative model and apply it across multiple millions of tons of similar molecules and parlay the model into a much larger business. All kinds of commercial strategies will be employed in this Phase 2 of parlaying including bartering, sophisticated trading and differentiated alliances to better serve customers. Simultaneously, Olin will be preparing for Phase 4, structuring as we look to take proceeds from our cash flow machine and invest them in a smart way to expand our beneficial footprint. Please don’t miss our internal equity price target in the lower corner of that slide.

Okay. Let me pull back to today a bit and fill in some key activities and results. Slide number 6 shows that in the first quarter, we matched our market participation to the weak side of the ECU.

In other words, we sold less caustic, which not only allowed us to hold up caustic value relative to the fourth quarter but more importantly, allowed us to significantly expand value throughout our chlorine and chlorine derivatives chain. I think the lift in the ECU PCI shown on Slide number 7 clearly shows the positive results. That value impact was also significantly expanded by the innovative actions taken by our epoxy team, as shown on Slide number 8. Olin is the world’s leader in epoxy and our wins continue to stack up as we place our offering with key customers and into key applications. Look, I would also like to highlight the updates made to our Olin ESG scorecard in the appendix slides. We are generally delivering to many of the commitments made in our sustainability report that we still have a lot of work to get fully on track here. Again, this demonstrates the team’s comprehensive passion for Olin’s broader contribution.

So before opening this call up to Q&A, let me wrap it all up into contemporary value on Slide number 9. Our team’s shared success in leading and running toward parlaying is forecasted to generate roughly $1.1 billion of levered free cash flow this year, which at the current stock price represents a yield of roughly 16%, really attractive, considering we’re just in the early stages of our push for shareholder value delivery.

Alex Yefremov

Scott, you were talking about epoxy margins moving towards 30% in the medium to long term. If margins are this high, I assume part of this equation is the price. How do you think competitors and industry in general would respond to this? What level of reinvestment economics are we in this position ad you just see more capacity amount?

Scott Sutton

I’ll turn it over to Pat here in just a moment. We probably won’t go into the competitor action there. But I would just start Pat’s comments by saying that we actually have a long way to go to get to that 30% adjusted EBITDA, but it’s totally within our scope and range. So Pat?

Pat Dawson

Alex, I would say why not 30% because I think if you look at the performance properties of epoxy and the fact that there’s really not any clear substitutes for epoxy in terms of its performance and the value that it brings to customers, it should be able to command these kind of returns. I think also, you look at our leadership position and the space that we occupy, vis-a-vis competitors that’s more of an upstream, midstream space and the way we can monetize our Epicor hydrant in the form of liquid epoxy resin, I think those leadership positions are very strong. I think also, we have a number of opportunities to parlay that you see on Slide 8. That upstream position into opportunities that, quite frankly, are already in motion, whether we have the option to toll produce, the option to make versus buy, the option to produce more if we can get the value for that. I think we have a lot of optionality there. So that’s the way we look at it. And we’re really working to accelerate those parlaying activities as we move early into the game here towards that 30%.

Alex Yefremov

And just as a follow-up, Scott, you mentioned you expect third quarter EBITDA to continue improving sequentially. We had a lot of disruptions in the US Gulf Coast, as you well know. How do you expect ECU PCI to behave in the back half? Do you think we’ll start coming down at some point in the third to fourth quarter from Q2 level?

Scott Sutton

Well, I mean, I would say our improved EBITDA performance is going to be a reflection of an improved ECU PCI as well. But what I would say, there are going to be points in our future that perhaps we exist through a quarter where we have to make some adjustments in how we’re set up as we’re running our model and that can lead to potential declines in the ECU PCI. But they’re going to be short lived because what they do is position us for the next phase of growth that we have in that ECU PCI and in our EBITDA.

Kevin McCarthy

Scott, as I listen to the commentary and having read the slides, it seems to me that when we hear about alliances tolling agreements, bartering, et cetera, that you’re going to be looking for, what I would call, capital light solutions to growth as opposed to building, let’s say, new greenfield or brownfield capacity. Is that correct or am I overreading into the signals here?

Scott Sutton

No, I mean, that’s correct. I mean, we do have a next path to growth that is capital light. And in fact, we are already engaging in those activities. You heard when Pat had answered an earlier question that we’re doing things why tolling some of our shares upstream materials into liquid epoxy resin, for example, so that we can service our customer base. And there’s just a lot of opportunities to do that across our complete portfolio. So those are the things that we can pull forward the fastest to support growth. There’s other things we can do beyond that. I don’t really see greenfield expansion as part of our future. There could be limited brownfield expansion, depending on the alliance opportunity that we might have. But yes, it’s a low capital near term growth strategy that will complement with that Phase 4 structure.

Matthew Blair

And then I was hoping you could share any more details on just other chlorine derivatives that were especially strong in the quarter other than EDC, which has some pretty pretty transparent pricing. On our sources, it looks like HCL pricing was up more than 100% quarter-over-quarter. But could you just offer any more commentary on what you’re seeing on that chlorine envelope?

Scott Sutton

Well, I mean that chlorine envelope is most of our company. So I’m going to let Damian make a comment or two on something and then, Pat, might want to add on to as epoxy comments being a key chlorine derivative for us?

Damian Gumpel

Matt, I’ll refer you to a couple of slides. I’ll refer you to Slide 17. The appendix showing our heat map and then refer you to a slide also at the back, Slide 21. And both of those, when you put those together, you see pretty widespread interest in Olin, chlorine and chlorine derivative for very broad spectrum of end uses, you see a continued momentum and request from customers for Olin’s ability to supply. I’ll go back to the Scott’s comments, or questions at the beginning, he, about are we seeing things — question around maybe market share. I will just tell you that our customer forecasts are still for volume throughout the rest of the year that are higher than our forecasted ability to supply them. So that should give you an indication as to the robustness of the chlorine side, which of course, as going to my earlier comments, is still relatively stronger than the caustic side. So we’ll continue to manage the ECU around that. But across [CCO], ACL, bleach versus chlorine, it’s all those three legs in the heat map. And I’ll pass it over to you, Pat.

Pat Dawson

Matthew, I’d say from a epoxy standpoint, we do sell some of our upstream products into wastewater treatment and municipalities for water treatment. We’ve seen that really continue to improve on demand. And some from an epoxy and resin standpoint, you look at civil engineering, construction, automotive, even though there’s been semi chip shortage, we’ve seen improvement coming back there. Appliances, electronics, we’re starting to see maybe a little bit of life again, and oil and gas, which uses fusion bonded epoxy for pipelines and everything like that, machinery is coated with epoxy. So I think it’s back to what Scott said, we’ve seen good month over month improvement. But we think we’re still very much in the early innings of this demand recovery. We think there’s more coming based on some of these end use markets I just mentioned.

Eric Petrie

And then maybe a question for Pat. How much epoxy goes into higher value versus the low margin end markets, where do you want to get that down to? And then is there a difference in profitability between regions currently?

Pat Dawson

I think, if you look on Slide 8, we talk about where we’re increasing our supply and the high margin performance coatings, I mentioned civil engineering earlier, formulated type systems. And certainly that value over volume orientation that we have is putting more into those types of areas and applications. And there’s places where you have low margins in industrial coatings, wind energy, it’s been an area that’s been growing but we’ve pulled back from some of the low end of that business. And then some of our upstream base stocks, we’re definitely doing less business here because the value is not there. I think geographically speaking, one of our leadership advantages that we have is we have a lot of flexibility as to how we flex product between the regions. And that’s a pretty dynamic process that we use all the time around our activation. So I wouldn’t say anyone geographies, I don’t pay attention to that so much strategically as I do where the opportunities come up to create more value to juice up our return to the ECU.

Steve Byrne

With respect to this 30% EBITDA target in epoxy and the shifts more downstream and less of the upstream commodity sales. Do you have the commercial relationships in those downstream resins and/or the production capacity to move more of the feedstock material into those downstream products or will this require some acquisitions?

Pat Dawson

First of all, let me just course correct you here a little bit. Really, our sweet spot is in the up and the midstream part of the epoxy value chain. We don’t go nearly as far down in that chain as to say the questions that you were asking. We certainly have all the right channels to market in place today to monetize and to really exert our leadership in up and midstream. So I would just say just a little correction in how we view that chain and where our strengths are.

Steve Byrne

So you can get to 30% EBITDA margins by selling epi and cumene and BPA and so forth and not move downstream?

Pat Dawson

No, Steve, that’s — again, part of the equation is the strength and you have upstream, but that midstream, we have many channels as to how we monetize the epichlorohydrin and the bisphenol A. So that’s where we have a lot of channels, a lot of optionality, a lot of optionality to parlay. So that’s pretty broad reaching as you move down into that midstream.

Steve Byrne

And then just curious about the margin on epi. If you look about your broad platform of chlorine containing derivatives, where would you put epi in the ranking of all of those chlorine containing products? I mean if you look at the margin difference between your two segments, I’m just curious where that epi would fall in the ranking.

Pat Dawson

I don’t think we’re going to get into the rankings of epi versus derivatives of where we put that epi. Epi, make no mistake, is a strategic pillar to our upstream and it’s a strategic pillar as to how we parlay down through the midstream into those various end use markets where we’re prioritizing our value over volume. And I think the other thing to keep in mind, Steve, is when we had our investors presentation back in February 19th, one of the headlines on my slides read that epi and LER supply demand projected to be tight by 2021. And so we’re just entering this phase of what we’ve been saying for the last two years of what we saw coming in this sweet spot of ours around this up in the midstream and parlaying these things that we talked about on Slide 8. So I think those kind of fundamentals bode well for our ability to get to this 30% EBITDA in epoxy.

Angel Castillo

And then on the epoxy margins, you noted that you expect them to improve sequentially in the second quarter. I was just curious, does that contemplate, I guess, the meaningful pickup in benzene prices? And/or as you think about where raw materials are moving, how should we think about that within your guidance?

Todd Slater

We feel very confident in the fact that we’ve had good pricing momentum. We’ve seen that pricing momentum continue here in April. There’s publicly announced increases out there for May that are also getting good traction. So we feel very good about the sequential improvement in our margins and the sequential improvement in improved returns to the ECU.

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May 4, 2021

Epoxy Comments from Olin Investors Call

Scott Sutton

Yes. Thanks, Steve, and hello to everyone. Look, I’m super proud of the Olin team for their passion, results and for their optimism for our future. Because of their optimism and success, I had the opportunity to pull forward our value creation formula story. First of all, Olin is on track to deliver more than $1.8 billion of adjusted EBITDA this year. One proof point to that track is that second quarter adjusted EBITDA is expected to exceed first quarter adjusted EBITDA, excluding Uri onetime impacts, even though we have significant turnarounds in the second quarter. The third quarter adjusted EBITDA should also exceed the second quarter. So it is time to start projecting toward a higher adjusted EBITDA of $2.5 billion and above in future years, the emphasis really being on the above. For clarity, 2022 is expected to be a positive stepping stone toward that direction. Some key activities to bridge that gap to $2.5 billion are shown on Slide number 4. But maybe Slide number 5 tells a more comprehensive story to that $2.5 billion and above.

Olin is quickly moving through four phases of evolution. We have already discussed the first two with you on prior earnings calls, and we are currently in Phase 2, the leading phase as we enhance our unique model of optimizing value first across the whole ECU. Think of leading as solving the ECU co-production conundrum by setting our participation to the weak side of the ECU, anticipating potential value inflection points and then activating to achieve a desired response. Shortly, we’ll be looking to take our innovative model and apply it across multiple millions of tons of similar molecules and parlay the model into a much larger business. All kinds of commercial strategies will be employed in this Phase 2 of parlaying including bartering, sophisticated trading and differentiated alliances to better serve customers. Simultaneously, Olin will be preparing for Phase 4, structuring as we look to take proceeds from our cash flow machine and invest them in a smart way to expand our beneficial footprint. Please don’t miss our internal equity price target in the lower corner of that slide.

Okay. Let me pull back to today a bit and fill in some key activities and results. Slide number 6 shows that in the first quarter, we matched our market participation to the weak side of the ECU.

In other words, we sold less caustic, which not only allowed us to hold up caustic value relative to the fourth quarter but more importantly, allowed us to significantly expand value throughout our chlorine and chlorine derivatives chain. I think the lift in the ECU PCI shown on Slide number 7 clearly shows the positive results. That value impact was also significantly expanded by the innovative actions taken by our epoxy team, as shown on Slide number 8. Olin is the world’s leader in epoxy and our wins continue to stack up as we place our offering with key customers and into key applications. Look, I would also like to highlight the updates made to our Olin ESG scorecard in the appendix slides. We are generally delivering to many of the commitments made in our sustainability report that we still have a lot of work to get fully on track here. Again, this demonstrates the team’s comprehensive passion for Olin’s broader contribution.

So before opening this call up to Q&A, let me wrap it all up into contemporary value on Slide number 9. Our team’s shared success in leading and running toward parlaying is forecasted to generate roughly $1.1 billion of levered free cash flow this year, which at the current stock price represents a yield of roughly 16%, really attractive, considering we’re just in the early stages of our push for shareholder value delivery.

Alex Yefremov

Scott, you were talking about epoxy margins moving towards 30% in the medium to long term. If margins are this high, I assume part of this equation is the price. How do you think competitors and industry in general would respond to this? What level of reinvestment economics are we in this position ad you just see more capacity amount?

Scott Sutton

I’ll turn it over to Pat here in just a moment. We probably won’t go into the competitor action there. But I would just start Pat’s comments by saying that we actually have a long way to go to get to that 30% adjusted EBITDA, but it’s totally within our scope and range. So Pat?

Pat Dawson

Alex, I would say why not 30% because I think if you look at the performance properties of epoxy and the fact that there’s really not any clear substitutes for epoxy in terms of its performance and the value that it brings to customers, it should be able to command these kind of returns. I think also, you look at our leadership position and the space that we occupy, vis-a-vis competitors that’s more of an upstream, midstream space and the way we can monetize our Epicor hydrant in the form of liquid epoxy resin, I think those leadership positions are very strong. I think also, we have a number of opportunities to parlay that you see on Slide 8. That upstream position into opportunities that, quite frankly, are already in motion, whether we have the option to toll produce, the option to make versus buy, the option to produce more if we can get the value for that. I think we have a lot of optionality there. So that’s the way we look at it. And we’re really working to accelerate those parlaying activities as we move early into the game here towards that 30%.

Alex Yefremov

And just as a follow-up, Scott, you mentioned you expect third quarter EBITDA to continue improving sequentially. We had a lot of disruptions in the US Gulf Coast, as you well know. How do you expect ECU PCI to behave in the back half? Do you think we’ll start coming down at some point in the third to fourth quarter from Q2 level?

Scott Sutton

Well, I mean, I would say our improved EBITDA performance is going to be a reflection of an improved ECU PCI as well. But what I would say, there are going to be points in our future that perhaps we exist through a quarter where we have to make some adjustments in how we’re set up as we’re running our model and that can lead to potential declines in the ECU PCI. But they’re going to be short lived because what they do is position us for the next phase of growth that we have in that ECU PCI and in our EBITDA.

Kevin McCarthy

Scott, as I listen to the commentary and having read the slides, it seems to me that when we hear about alliances tolling agreements, bartering, et cetera, that you’re going to be looking for, what I would call, capital light solutions to growth as opposed to building, let’s say, new greenfield or brownfield capacity. Is that correct or am I overreading into the signals here?

Scott Sutton

No, I mean, that’s correct. I mean, we do have a next path to growth that is capital light. And in fact, we are already engaging in those activities. You heard when Pat had answered an earlier question that we’re doing things why tolling some of our shares upstream materials into liquid epoxy resin, for example, so that we can service our customer base. And there’s just a lot of opportunities to do that across our complete portfolio. So those are the things that we can pull forward the fastest to support growth. There’s other things we can do beyond that. I don’t really see greenfield expansion as part of our future. There could be limited brownfield expansion, depending on the alliance opportunity that we might have. But yes, it’s a low capital near term growth strategy that will complement with that Phase 4 structure.

Matthew Blair

And then I was hoping you could share any more details on just other chlorine derivatives that were especially strong in the quarter other than EDC, which has some pretty pretty transparent pricing. On our sources, it looks like HCL pricing was up more than 100% quarter-over-quarter. But could you just offer any more commentary on what you’re seeing on that chlorine envelope?

Scott Sutton

Well, I mean that chlorine envelope is most of our company. So I’m going to let Damian make a comment or two on something and then, Pat, might want to add on to as epoxy comments being a key chlorine derivative for us?

Damian Gumpel

Matt, I’ll refer you to a couple of slides. I’ll refer you to Slide 17. The appendix showing our heat map and then refer you to a slide also at the back, Slide 21. And both of those, when you put those together, you see pretty widespread interest in Olin, chlorine and chlorine derivative for very broad spectrum of end uses, you see a continued momentum and request from customers for Olin’s ability to supply. I’ll go back to the Scott’s comments, or questions at the beginning, he, about are we seeing things — question around maybe market share. I will just tell you that our customer forecasts are still for volume throughout the rest of the year that are higher than our forecasted ability to supply them. So that should give you an indication as to the robustness of the chlorine side, which of course, as going to my earlier comments, is still relatively stronger than the caustic side. So we’ll continue to manage the ECU around that. But across [CCO], ACL, bleach versus chlorine, it’s all those three legs in the heat map. And I’ll pass it over to you, Pat.

Pat Dawson

Matthew, I’d say from a epoxy standpoint, we do sell some of our upstream products into wastewater treatment and municipalities for water treatment. We’ve seen that really continue to improve on demand. And some from an epoxy and resin standpoint, you look at civil engineering, construction, automotive, even though there’s been semi chip shortage, we’ve seen improvement coming back there. Appliances, electronics, we’re starting to see maybe a little bit of life again, and oil and gas, which uses fusion bonded epoxy for pipelines and everything like that, machinery is coated with epoxy. So I think it’s back to what Scott said, we’ve seen good month over month improvement. But we think we’re still very much in the early innings of this demand recovery. We think there’s more coming based on some of these end use markets I just mentioned.

Eric Petrie

And then maybe a question for Pat. How much epoxy goes into higher value versus the low margin end markets, where do you want to get that down to? And then is there a difference in profitability between regions currently?

Pat Dawson

I think, if you look on Slide 8, we talk about where we’re increasing our supply and the high margin performance coatings, I mentioned civil engineering earlier, formulated type systems. And certainly that value over volume orientation that we have is putting more into those types of areas and applications. And there’s places where you have low margins in industrial coatings, wind energy, it’s been an area that’s been growing but we’ve pulled back from some of the low end of that business. And then some of our upstream base stocks, we’re definitely doing less business here because the value is not there. I think geographically speaking, one of our leadership advantages that we have is we have a lot of flexibility as to how we flex product between the regions. And that’s a pretty dynamic process that we use all the time around our activation. So I wouldn’t say anyone geographies, I don’t pay attention to that so much strategically as I do where the opportunities come up to create more value to juice up our return to the ECU.

Steve Byrne

With respect to this 30% EBITDA target in epoxy and the shifts more downstream and less of the upstream commodity sales. Do you have the commercial relationships in those downstream resins and/or the production capacity to move more of the feedstock material into those downstream products or will this require some acquisitions?

Pat Dawson

First of all, let me just course correct you here a little bit. Really, our sweet spot is in the up and the midstream part of the epoxy value chain. We don’t go nearly as far down in that chain as to say the questions that you were asking. We certainly have all the right channels to market in place today to monetize and to really exert our leadership in up and midstream. So I would just say just a little correction in how we view that chain and where our strengths are.

Steve Byrne

So you can get to 30% EBITDA margins by selling epi and cumene and BPA and so forth and not move downstream?

Pat Dawson

No, Steve, that’s — again, part of the equation is the strength and you have upstream, but that midstream, we have many channels as to how we monetize the epichlorohydrin and the bisphenol A. So that’s where we have a lot of channels, a lot of optionality, a lot of optionality to parlay. So that’s pretty broad reaching as you move down into that midstream.

Steve Byrne

And then just curious about the margin on epi. If you look about your broad platform of chlorine containing derivatives, where would you put epi in the ranking of all of those chlorine containing products? I mean if you look at the margin difference between your two segments, I’m just curious where that epi would fall in the ranking.

Pat Dawson

I don’t think we’re going to get into the rankings of epi versus derivatives of where we put that epi. Epi, make no mistake, is a strategic pillar to our upstream and it’s a strategic pillar as to how we parlay down through the midstream into those various end use markets where we’re prioritizing our value over volume. And I think the other thing to keep in mind, Steve, is when we had our investors presentation back in February 19th, one of the headlines on my slides read that epi and LER supply demand projected to be tight by 2021. And so we’re just entering this phase of what we’ve been saying for the last two years of what we saw coming in this sweet spot of ours around this up in the midstream and parlaying these things that we talked about on Slide 8. So I think those kind of fundamentals bode well for our ability to get to this 30% EBITDA in epoxy.

Angel Castillo

And then on the epoxy margins, you noted that you expect them to improve sequentially in the second quarter. I was just curious, does that contemplate, I guess, the meaningful pickup in benzene prices? And/or as you think about where raw materials are moving, how should we think about that within your guidance?

Todd Slater

We feel very confident in the fact that we’ve had good pricing momentum. We’ve seen that pricing momentum continue here in April. There’s publicly announced increases out there for May that are also getting good traction. So we feel very good about the sequential improvement in our margins and the sequential improvement in improved returns to the ECU.

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May 3, 2021

Urethane Comments from Covestro Analysts Call

Covestro AG (CVVTF) CEO Markus Steilemann on Q1 2021 Results – Earnings Call Transcript

Apr. 28, 2021 4:57 PM ETCovestro AG (CVVTF), COVTY

Covestro AG (OTCPK:CVVTF) Q1 2021 Earnings Conference Call April 28, 2021 9:00 AM ET

Company Participants

Ronald Köhler – Investor Relations

Markus Steilemann – CEO

Thomas Toepfer – CFO

Markus Steilemann

Thank you very much, Ronald and very good morning. Good day and good afternoon to everyone on the call. As you can see from Slide #2, our financial highlights for the first quarter 2021. The first quarter 2021 performance was well above previous year’s level. Also, the first quarter 2021 performance was well above pre-pandemic levels of 2019. The trend of dynamic demand recovery and increasing product margin starts in the second half of 2020 is continuing. This trend is also continuing for the first half of 2021. In total, the Q1 core volumes were 5.3% above previous year levels.

EBITDA came in at €743 million in line with our Q1 guidance of €700 million to €780 million and as pre-announced on April the 13th. We saw very strong free operating cash flow of €380 million. The RFM acquisition was closed on April 1 and on closing day we welcomed 1,800 highly motivated new colleagues. We raised our earnings guidance for full year 2021 as announced on April 13th. And we see various short and long-term trends that are partly opposing each other. This leads to a rather low visibility.

Now let’s turn to Page #3. The core volumes as I mentioned before increased by 5.3%. Prior year basis was already impacted by the coronavirus pandemic, especially in Asia Pacific. The current quarter is burdened by unplanned outages, mid single-digit percentage reduction of global core volumes in Q1.

If you now look a little bit deeper into the regions. On low comparable figures, the volume rebound compared to prior year of 27.3% in APAC is very high. For another perspective, volume growth of 6% versus the first quarter of 2019, so pre-pandemic. China was clear driver and the demand rebound pushes volume growth in all key industries to rate of 50% to 80% year-on-year versus the low previous year basis.

We had a solid underlying demand in Europe. Actual volume growth was limited by constrained polyols availability. We also saw strong underlying demand in North America. Declining volumes were just the result of constrained availability in all product groups after the U.S winter storm Uri.

Now let’s turn the picture to an analysis by industries. The ranking is done by kilotons sold through specific industries. Furniture we saw a mixed picture. Overall a small decline, yet Asia Pacific 20% up year-on-year. On construction, up 3% year-on-year globally driven by good demand in the Europe, Middle East, Latin America region as well as Asia Pacific region and we saw a decline year-on-year in North America due to limited availability mainly of MDI and polyols. In automotive and transportation, plus 14% year-on-year globally, again, driven by Asia Pacific and slightly better than global auto production. America in diverse industries, small business but continued dynamic growth of 13% year-on-year.

Now let’s turn to Page#4. Longer term quarterly comparison underscores the performance is not only above previous year, but also above pre-pandemic levels of 2019. The first quarter 2001 sales were up plus 4.2% and volumes plus 1.0% compared to pre-pandemic levels of the first quarter 2019. The year-on-year top line comparisons benefits from low comparable figures in the first quarter 2020 impacted as mentioned earlier by the pandemic.

Operationally, we saw increasing earnings momentum that started in the second half of 2020 continued into the first half of 2021. Improving industry trading at the same time and industry trading conditions as well as industry margins allowed to increase selling prices over feedstock prices, especially in PUR. Compared to the first quarter 2020, EBITDA strongly benefited from positive pricing data as well as from higher volumes. Compensating provisions for variable compensation that increased in [indiscernible].

We delivered 22.5 percentage point in margin in the first quarter of 2021. And this is the highest EBITDA margin for 10 quarters, but still below historic margin peak of 21.8% in the first quarter of 2018.

Now let’s turn to the segments. Turn to Page #5 [technical difficulty] Polyurethanes. Core volume growth was only 2.5% year-on-year despite solid underlying demand. We continue to be sold out. Of all segments, PUR most burdened by the constrained availability — constrained availability after the U.S winter storm Uri. Higher prices, year-on-year drove sales up 36.1% and positive pricing data contributed vast majority of year-on-year EBITDA growth, compensating higher provisions for variable compensation.

Some remarks on the trading environment. The current demand is outstripping [technical difficulty] to deliver. Based on [indiscernible] evidence, finished goods inventory seemed very low in value chain, especially in North America and partly in Europe. The global prices continue to move up in North America and partly in Europe, but declining in Asia Pacific. Overall, we assume slightly declining prices during the second quarter.

Based on IHS data, current outage rate expected to decline during the second quarter or latest in the third quarter. Let me give you a few examples. First example on MDI global outage rate, we assume it is currently around 20% in the first quarter, and that is expected to decline to around 15% in the second quarter and 10% in the third quarter. On TDI, the global outage rate is around 15% in the first quarter, expected to be around 20% in the second quarter, but declined to around 10% in the third quarter. Future unplanned outages are for sure not considered.

Christian Faitz

Yes, thank you very much. Good afternoon, everybody. I have one question, please. It’s on cars. Can you please explain the volume weakness in cars in Europe? Is this luxury car industry related? And also maybe in that context, given the SME supply shortage in the car industry, Markus you alluded to that a little bit already. You can confirm that B2C pent up demand from automotive in the second half of this year, right.

Markus Steilemann

Yes. Hi, Christian. Thanks for your question. If we look at the — as you call it, volume weakness of cars in Europe, that was referring back to a labor plant force majeure that we had. And here particularly to give you a little bit more detail, we are cooling down some of the resulting product mix to a very low temperature. So we’re talking about minus 30 to minus 40 degrees, and one of the external third-party providers of this cooling device actually had to declare a technical failure. And that’s why we could only operate at very limited rates that has lowered our yield. And that also has therefore lower the output of final products. And that was the main reason for the — as you called it, volume weakness in Europe. So if you want to say so, force majeure demand was very healthy in this context, and we really struggled to fulfill all customer orders here. And we see also that the demand is continued to be very good in this area. I hope that answers your question.

Charlie Webb

Thanks a lot. And thank you very much for taking the questions. Maybe just one around outage issues and force majeures. Could just update us on current situation for Covestro as it relates to force majeure outage issues, do you have any lingering issues kind of coming from the [indiscernible] now resolved. Just trying to understand that mid double-digit impact you see in Q1. Is there anything kind of lingering into Q2, anything that will curtail volumes? And then second question, I know it’s very early, perhaps, in terms of the integration of RFM. But any kind of update how that business is trading thus far this year? Anything surprised you? And are you still confident on the synergy delivery?

Markus Steilemann

Yes, thanks, Charlie, for the question. I will take the first one. Thomas then will give you, let’s say the trading update on RFM. The situation in the United States is and based on that we still all under force majeure, and all three product groups and the inventories given the very challenging situation, us as well as for customers and suppliers are still very low. And therefore we assume that the force majeure still might stay in Q2, and some just let me emphasize this, some might be even carry into the third quarter because we have to do really some repair work on our plants, but also something is very important. We’re talking here about an entire supply chain effect. That means not only us, but also our suppliers are affected. And if you think about the massive, let’s say, repair work that needs to be done almost in the entire region, you might understand that we are slowly and steadily recovering, but we are still recovering and that’s why we’re still in the force majeure. With that I would like to hand over to Thomas.

Thomas Toepfer

Yes, Charlie, and with respect to RFM, I can tell you we’re seeing very good demand. And in terms of the numbers and the business, I mean, the — [indiscernible] numbers for 2020, but also then the outlook for 2021 I would characterize this as slightly better than what we had expected in our due diligence business case. So therefore, no surprise, if any, on the positive side. And in terms of the closing and also the welcoming of the 1,800 new employees, I would say this went extremely smooth. So we do think that this is a great fit, not only from the business perspective, but also from the cultural perspective. And therefore, I would say the — what we experienced in terms of openness, and in terms of collaboration is absolutely great. And therefore, I would say very good start into the integration process, which will take place over the course of the year.

Charlie Webb

That’s very helpful. Maybe just one really quick follow-up on the first point around the force majeure. Am I right in thinking that when we kind of talked about the U.S prices lagging rest of the world, much that we can kind of put down to force majeure as you can’t really increase prices if you’re under force majeure conditions, and therefore, that is why the pricing is lagging a little bit in the U.S. Is that fair?

Markus Steilemann

Well, first and foremost, I think the United States market in general and that is a long-term experience that we have observed over many years. The price environment is anyhow less volatile. And that is, I think, significantly different for example, the markets in the Middle East, but also the markets in Asia Pacific and also partly that is due to the situation that you have described the force majeure situation. So there we have, at least, strictly limited opportunities. This is not totally excluded under specific, let’s say circumstances, take pricing formulas and things like that. But let’s say, if you don’t have any pricing formula in place, there is limited opportunities. So there’s partially, also the suggestions you made the reason for that.

Laurence Alexander

Hello. Could you give a little bit of perspective on pent up demand in the furniture markets, particularly looking at your kind of benchmark for the full year and market demand growth? Do you expect Covestro to be able to outgrow that market? And also as furniture demand recover, should you have a positive mix effect?

Markus Steilemann

Yes, Laurence. Very good morning to you. I assume you are here in the U.S. So let me give an answer. The pent up demand in furniture, the bottleneck why we haven’t seen that say that strong demand was not demand issue, but what it was a supply issue in terms of limitations for polyols. And if you take the chemistry into consideration to produce a soft form you need two parts of polyols and one part of TDI, just roughly speaking. That means whenever you’re short in polyols, that significantly hampers the opportunity to sell also that context TDI and therefore significantly drives down the opportunity as we go short in supply to really capture the still strong demand for respective applications in the market.

And if you now look further out, catching up will be difficult as we most likely will not be able to recover the lost production. But that demand that we have not caught up, or that we have not, let’s say, positively got into our books for the first quarter we’re not, let’s say, lead to higher sales in the second quarter, but we’ll just see them the normal amount of the second quarter. So in a sense, that losses of the first quarter are lost for the entire year.

Chetan Udeshi

Yes, hi. A slightly different question than usual. I was just trying to understand, can you maybe help us with any data or insights into what is the recyclability rate for polyurethanes and polycarbonate, in general. It seems for the whole plastic industry the recyclability is still pretty low 15% also. I mean, I was just trying to understand how much it is for polyurethane and polycarbs? Thanks.

Markus Steilemann

Chetan, thank you much for the question. And I would say it is — the recycling rate is still improvable, yes, so to put it that way. Honestly speaking, there’s very limited amount today of polyurethane components being recycled be it for rigid forms or be it for soft forms, simple reason is most of these materials are not accessible for classical so called mechanical recycling that you normally use, for example, for poly — for PET bottles. However, the entire industry is not only putting significant research and development efforts into this topic, but we see already first successes, where we could go for advanced recycling methodologies that would add up to the mechanical recycling opportunities and here particularly, so called chemical recycling.

And what many companies are currently working on is, for example, soft foam mattresses, because every year a few 100 million soft foam mattresses are produced, and a few 100 soft foam mattresses are currently either disposed and landfill are mechanically recycled, but therefore downgraded for example, into carpets. But also an even larger part is currently used as an exchange for fossil fuels and being incinerated, for example, for concrete — for the production of concrete or other purposes, for example, to recover the energy and produce for example electricity. So long story short, currently, there is a super, super limited amount of soft foam as well as rigid forms being recovered.

However, we have recently made a breakthrough discovery, which is we can now extract the building blocks from soft foam mattresses, and use those building blocks to produce entirely new soft foam mattresses without any compromise on quality and hygiene standards for the end consumers. And we have successfully demonstrated that recyclability already in a pilot plant that is running since now 4 weeks at all operations in Leverkusen, Germany. That means we have not only lab scale, but also technical scales currently demonstrated that this works. And this has gained significant traction also with value chain partners in the industry. That means we see huge opportunities in closing the loop here on this very, very large, let’s say, consumer product market for soft furniture and soft mattresses. And that’s why we’re very confident that was in the next decade, we will see significantly ramping up recycling rates also for this respective application.

And what is the main difference for our, let’s say, recently developed and now in the lab scale and technical scale test the process that we not only can recover the respective polyols which many other current, let’s say, suggested approaches also can do, but we can also recover the precursor for TDI. And that is absolutely new and based on our knowledge currently in a continuous process, not possible. And that’s why we see huge opportunities here.

Chetan Udeshi

Thank you.

Operator

And the next question comes from Isha Sharma, Stifel. Please go ahead with your question.

Isha Sharma

Hi, good afternoon, gentlemen. Thank you for taking my questions. The first one is reference that I want to make the Dow CEO expect polyols tightness [ph] to continue and also mentioned that he expects good operating rates through the year at isocyanates mainly driven by demand in construction and automotive. He also mentioned that the inventory buildup might only be possible by Q4. Would you subscribe to that view? And the second one is for Markus. Markus, you mentioned at the start of the call some opposing trends, which gives you less visibility. Were you referring to the regional development or end markets? Could you elaborate on that please a little bit? And just the last one, on the Q2 guidance, what needs to happen for you to achieve the upper end of the guidance?

Thomas Toepfer

Yes, Isha, let me start with the last question, what has to happen to achieve the upper end of the guidance. Simply speaking nothing in the sense that the upper end of the guidance assumes that the prices will stay at the level where they currently are. The midpoint of the guidance very assumed a certain decline starting in June, which we currently don’t see yet just to be very clear, because our visibility only as into the April numbers which we have and then of course into May, but as also for the entire year guidance, we wanted to stay cautious also as for the second quarter.

With respect to the full year, it’s always good to hear that others are more optimistic. That is good. I think we are, maybe by nature and character a little bit more cautious. And therefore, I think for our guidance applies the thinking that I had described in the earlier question. So we do assume and factor in a decline in margin in the second half of the year. Full stop, which we currently however, don’t see and therefore there is a certain cautiousness built in.

Markus Steilemann

Yes, maybe, Isha, also hello from my side as [indiscernible] addressed, let’s say the question on the opposing trends to me. There is a bigger, let’s say, picture and a more specific picture. The bigger picture is if you look at the current development of the pandemic, we still have to say that some countries obviously are doing very well, some countries at least have seen the end of the light of the tunnel. But some countries are still in a catastrophic situation.

Many countries, for example, in South America, but also just mentioning the Indian subcontinent in this context. So therefore, we will maybe see a very mixed picture in terms of overall economic growth. I’m very positive about the development in the United States, positive about China. And let’s say cautiously optimistic about at least some countries in Europe. But other than that, we also will see countries and also respective economies where the overall situation in terms of demand will not improve and maybe not improved for a very long time. So that’s the overall picture, why we see this opposing trends.

And if you just now, particularly look at our respective industries, what we also have elaborated in our presentation when we talked about the so-called industry utilization, and here particularly the utilization based on available capacity due to many unplanned shutdowns or simply no availability for some players on raw materials. There is an opportunity for example, short-term more available capacity will come to the market, which will then bring us closer to the lower end of the guidance. However, it is also the midterm market trend, that those capacities will be quicker also slower being absorbed.

And, for example, we can also expect to get a short market in MDI, and also slightly better market over time in TDI. So it is basically another reason behind what Thomas has alluded to in terms of our limited visibility in the third and also in the fourth quarter. And therefore also our, let’s say, current challenge in terms of the full year guidance, and here in particular on the second half. So that is a little bit the full picture. It is all in the end of the day, the same phenomena what we’re describing.

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