The Urethane Blog
Everchem Updates
VOLUME XXI
September 14, 2023
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July 28, 2020
Huntsman Announces Second Quarter 2020 Earnings; Targets Total Annualized Cost Savings and Synergies of $100+ Million by End of 2021
THE WOODLANDS, Texas, July 28, 2020 /PRNewswire/ —
Second Quarter Highlights
- Second quarter 2020 net loss of $59 million compared to net income of $118 million in the prior year period; second quarter 2020 loss per share of $0.28 compared to diluted earnings per share of $0.47 in the prior year period.
- Second quarter 2020 adjusted net loss of $30 million compared to adjusted net income of $108 million in the prior year period; second quarter 2020 adjusted loss per share of $0.14 compared to diluted earnings per share of $0.47 in the prior year period.
- Second quarter 2020 adjusted EBITDA of $54 million compared to $245 million in the prior year period.
- Second quarter 2020 net cash provided by operating activities was $85 million. Free cash flow from continuing operations was $30 million for the second quarter 2020 and adjusted free cash flow from continuing operations was $38 million.
- Balance sheet remains strong with a net leverage of 1.5x and total liquidity is approximately $2.6 billion.
- The CVC Thermoset Specialties acquisition closed on May 18, 2020. The integration remains on track and the Company expects to achieve the targeted annualized synergies of approximately $15 million by the end of 2021.
- Including approximately $35 million of synergies relating to recent acquisitions, annualized savings in excess of $100 million are targeted by the end of 2021.
| Three months ended | Six months ended | |||||||
| June 30, | June 30, | |||||||
| In millions, except per share amounts | 2020 | 2019 | 2020 | 2019 | ||||
| Revenues | $ 1,247 | $ 1,784 | $ 2,840 | $ 3,453 | ||||
| Net (loss) income | $ (59) | $ 118 | $ 649 | $ 249 | ||||
| Adjusted net (loss) income(1) | $ (30) | $ 108 | $ 35 | $ 193 | ||||
| Diluted (loss) income per share | $ (0.28) | $ 0.47 | $ 2.90 | $ 0.98 | ||||
| Adjusted diluted (loss) income per share(1) | $ (0.14) | $ 0.47 | $ 0.16 | $ 0.83 | ||||
| Adjusted EBITDA(1) | $ 54 | $ 245 | $ 219 | $ 449 | ||||
| Net cash provided by operating activities from continuing operations | $ 85 | $ 217 | $ 45 | $ 177 | ||||
| Free cash flow from continuing operations(2) | $ 30 | $ 160 | $ (71) | $ 59 | ||||
| Adjusted free cash flow from continuing operations(6) | $ 38 | $ 160 | $ (61) | $ 59 | ||||
| See end of press release for footnote explanations and reconciliations of non-GAAP measures. |
Huntsman Corporation (NYSE: HUN) today reported second quarter 2020 results with revenues of $1,247 million, net loss of $59 million, adjusted net loss of $30 million and adjusted EBITDA of $54 million.
Peter R. Huntsman, Chairman, President and CEO, commented:
“We were fortunate to have been more prepared than ever as we entered the second quarter in an unprecedented global economic crisis, with little to no visibility. With our transformed balance sheet, there was no need to access capital markets and we completed the quarter with $2.6 billion of overall liquidity and generated positive free cash flow. We remain focused on what we can control and have accelerated and improved integration plans for our recent acquisitions, CVC Thermoset Specialties and Icynene-Lapolla. The total annualized targeted synergies for these acquisitions, to be achieved by the end of 2021, is now $35 million. Including these synergies, we have plans to achieve in excess of $100 million of targeted annualized savings by year end 2021. While the ongoing related global effects of COVID-19 remain uncertain and visibility continues to be poor, we see improving trends within most of our major markets and are optimistic that the worst of this economic slowdown is behind us.”
Segment Analysis for 2Q20 Compared to 2Q19
Polyurethanes
The decrease in revenues in our Polyurethanes segment for the three months ended June 30, 2020 compared to the same period of 2019 was due to lower MDI average selling prices and lower overall polyurethanes sales volumes. MDI average selling prices decreased across most major markets in relation to the global economic slowdown resulting from the COVID-19 pandemic. Overall polyurethanes sales volumes decreased in primarily relation to the global economic slowdown and the resulting decrease in demand across most major markets, partially offset by growth in China during the second quarter of 2020 and additional sales volumes in connection with the Icynene-Lapolla acquisition. The decrease in segment adjusted EBITDA was primarily due to lower component and polymeric systems margins largely driven by lower MDI pricing and lower polyurethanes sales volumes.
July 28, 2020
Huntsman Announces Second Quarter 2020 Earnings; Targets Total Annualized Cost Savings and Synergies of $100+ Million by End of 2021
THE WOODLANDS, Texas, July 28, 2020 /PRNewswire/ —
Second Quarter Highlights
- Second quarter 2020 net loss of $59 million compared to net income of $118 million in the prior year period; second quarter 2020 loss per share of $0.28 compared to diluted earnings per share of $0.47 in the prior year period.
- Second quarter 2020 adjusted net loss of $30 million compared to adjusted net income of $108 million in the prior year period; second quarter 2020 adjusted loss per share of $0.14 compared to diluted earnings per share of $0.47 in the prior year period.
- Second quarter 2020 adjusted EBITDA of $54 million compared to $245 million in the prior year period.
- Second quarter 2020 net cash provided by operating activities was $85 million. Free cash flow from continuing operations was $30 million for the second quarter 2020 and adjusted free cash flow from continuing operations was $38 million.
- Balance sheet remains strong with a net leverage of 1.5x and total liquidity is approximately $2.6 billion.
- The CVC Thermoset Specialties acquisition closed on May 18, 2020. The integration remains on track and the Company expects to achieve the targeted annualized synergies of approximately $15 million by the end of 2021.
- Including approximately $35 million of synergies relating to recent acquisitions, annualized savings in excess of $100 million are targeted by the end of 2021.
| Three months ended | Six months ended | |||||||
| June 30, | June 30, | |||||||
| In millions, except per share amounts | 2020 | 2019 | 2020 | 2019 | ||||
| Revenues | $ 1,247 | $ 1,784 | $ 2,840 | $ 3,453 | ||||
| Net (loss) income | $ (59) | $ 118 | $ 649 | $ 249 | ||||
| Adjusted net (loss) income(1) | $ (30) | $ 108 | $ 35 | $ 193 | ||||
| Diluted (loss) income per share | $ (0.28) | $ 0.47 | $ 2.90 | $ 0.98 | ||||
| Adjusted diluted (loss) income per share(1) | $ (0.14) | $ 0.47 | $ 0.16 | $ 0.83 | ||||
| Adjusted EBITDA(1) | $ 54 | $ 245 | $ 219 | $ 449 | ||||
| Net cash provided by operating activities from continuing operations | $ 85 | $ 217 | $ 45 | $ 177 | ||||
| Free cash flow from continuing operations(2) | $ 30 | $ 160 | $ (71) | $ 59 | ||||
| Adjusted free cash flow from continuing operations(6) | $ 38 | $ 160 | $ (61) | $ 59 | ||||
| See end of press release for footnote explanations and reconciliations of non-GAAP measures. |
Huntsman Corporation (NYSE: HUN) today reported second quarter 2020 results with revenues of $1,247 million, net loss of $59 million, adjusted net loss of $30 million and adjusted EBITDA of $54 million.
Peter R. Huntsman, Chairman, President and CEO, commented:
“We were fortunate to have been more prepared than ever as we entered the second quarter in an unprecedented global economic crisis, with little to no visibility. With our transformed balance sheet, there was no need to access capital markets and we completed the quarter with $2.6 billion of overall liquidity and generated positive free cash flow. We remain focused on what we can control and have accelerated and improved integration plans for our recent acquisitions, CVC Thermoset Specialties and Icynene-Lapolla. The total annualized targeted synergies for these acquisitions, to be achieved by the end of 2021, is now $35 million. Including these synergies, we have plans to achieve in excess of $100 million of targeted annualized savings by year end 2021. While the ongoing related global effects of COVID-19 remain uncertain and visibility continues to be poor, we see improving trends within most of our major markets and are optimistic that the worst of this economic slowdown is behind us.”
Segment Analysis for 2Q20 Compared to 2Q19
Polyurethanes
The decrease in revenues in our Polyurethanes segment for the three months ended June 30, 2020 compared to the same period of 2019 was due to lower MDI average selling prices and lower overall polyurethanes sales volumes. MDI average selling prices decreased across most major markets in relation to the global economic slowdown resulting from the COVID-19 pandemic. Overall polyurethanes sales volumes decreased in primarily relation to the global economic slowdown and the resulting decrease in demand across most major markets, partially offset by growth in China during the second quarter of 2020 and additional sales volumes in connection with the Icynene-Lapolla acquisition. The decrease in segment adjusted EBITDA was primarily due to lower component and polymeric systems margins largely driven by lower MDI pricing and lower polyurethanes sales volumes.
July 28, 2020
Howard Ungerleider
Thanks, Jim, and good morning everyone. Turning to Slide 6, I’d like to start by providing an update on Sadara. Since we last spoke, Sadara and the joint venture partners have continued to make good progress on project completion and debt reprofiling. As we mentioned on our first quarter earnings call, we announced the final logistics service agreement was signed. This was a final substantive step to achieve project completion. Sadara is now in a position to declare project completion, but is considering withholding the final administrative step as long as meaningful progress on the debt reprofiling is made.
Negotiations with the lead agency creditors are underway with a firm target to complete the reprofiling no later than the end of 2020. Sadara is working in good faith with support from Dow and Saudi Aramco to advance a term sheet acceptable to all parties. We look forward to progressing the negotiations in a timely fashion as it’s in the group’s collective interest to complete the reprofiling by the end of the year. Dow and Saudi Aramco remain aligned in the steps needed to facilitate Sadara, maintaining a position of cash flow self-sufficiency throughout the tenor of the reprofiling.
Together Sadara, Dow and Saudi Aramco have also made good progress by executing a framework for longer term structural operating improvements, which are conditional on a successful profiling and include a 10-year supply agreement for additional ethane allocation and a five-year extension to the natural gasoline allocation, further enhancing the crackers feedstock flexibility. And as indicated previously, Dow continues to expect to contribute approximately $500 million to Sadara this year.
Turning to our third quarter modeling guidance on Slide 8. We see third quarter sales in the range of $8.5 billion to $9 billion on our expectation of gradual demand recovery through the quarter. We have provided our best estimate of current sales and volume expectations by segment as well as provided corridors again this quarter for high and low ranges, reflecting the potential for an uneven recovery. And although forward visibility remains challenged, we did deliver sales and volumes in all segments and system with the guidance ranges provided last quarter. And we are now narrowing those ranges this quarter to try to provide even better transparency to our expectations. As usual, we are highlighting the key EBIT drivers in the quarter on a sequential basis.
In the Industrial Intermediates & Infrastructure segment, we’re seeing the beginning signs of consumer durable recovery in the automotive, construction and furniture and bedding markets. We’re also seeing stable demand from the higher levels we saw in the second quarter for our solvent and surfactants that help make cleaning products even more effective. It’s worth pointing out, however, that we remain at trough MDI spread.
Jim Fitterling
Thank you, Howard. Please turn to Slide 9. I want to take a moment to highlight how our operational lever and our differentiated portfolio competitively position us today and for the long term. This quarter, we intentionally adjusted our operating rate lower to meet demand, reducing inventory and prioritizing cash. Operating rates across the integrated ethylene envelope remain strong at 82% down only 1% from the year ago period, reflecting resilient demand. However, in our polyurethanes business, we quickly brought operating rates down to the low 50% range as the extent of the durable end market shutdown became apparent.
We will continue this dynamic management of our assets and in polyurethane, as end markets recover, we expect to quickly ramp back up above breakeven operating rate. Our operational excellence, combined with our purposeful focus on cash and liquidity, are critical differentiators at this point in the cycle. We saw the benefit of our disciplined approach as we released more than $500 million of cash from working capital during the quarter and we used that strength to pay down $600 million of debt.
And as many of our chains have experienced compression over the last few quarters, we’re starting to see rationalization take place in the industry with delayed and canceled ethylene, polyethylene and isocyanates projects. This will help Dow accelerate upward and capture growth opportunities as the recovery strengthen. As demand returns the fundamentals in the markets that we serve remain unchanged and will continue to grow well above GDP.
John Roberts
Thank you. You highlighted MobilitySciences in both Slide 4 and Slide 9. You gave up most of Dow automotive in the DuPont separation. Do you still have a Dow automotive kind of integrated organization or is it just spread around all the businesses and how big is automotive today and what are your strategies there longer term?
Jim Fitterling
Good morning, John. Thanks for the question. We do have a fair amount of business today into the automotive industry, the transportation industry. In the neighborhood of $2 billion to $2.5 billion of sales that goes in there, it’s different than the mix of products that went with the transportation and high performance polymers to DuPont. What went to DuPont was glass bonding adhesives and crash durable adhesives. But remember we still have a very large platform of elastomers, silicones into a number of applications in the automotive construction, also polyurethanes and other materials that go into the interior of the cars, coatings for noise vibration and harshness.
So what we did was we pulled together a mobility platform that we can put out to the industry to have that face to the industry. And then what we’re doing is pulling the resources that know that industry together from the existing businesses, to be able to focus on them and to drive that growth, especially as we see them making changes as they come out of this pandemic to really lean in on next generation mobility platforms, vehicles, and some of the needs that they have there.
Vincent Andrews
Thank you, and good morning, everyone. If I could just ask, in II&I and PM&C, if I look at your volume guidance, and maybe we can focus on the low end and the high end, how should we be thinking about the incremental margin sequentially as that volume comes back?
Jim Fitterling
Good morning, Vincent. We’ve got volumes up 10% to 15% in II&I and 5% to 10% in Performance Materials & Coatings. I would think about it in this way. I think, it’s more around operating rates and the ability to get those volumes moving and get up above breakeven operating rates in polyurethanes and also seeing some increase in the industrial activity.
In II&I, a lot of solvent applications there go into industrial coatings, so they would go into things like the automotive industry, the aerospace industry, the oil and gas industry, also oil and gas production. So those have been relatively flat. So I think as those operating rates come up, we’ll see an improvement there.
Just to give you an example in Polyurethanes. In the second quarter, we saw automotive rates down 50% year-over-year. They’re back in third quarter. They’re going to be still below last year, but they’ll be about 20% below last year. And some of the other sectors like consumer durables, where they were off 30% year-over-year in the second quarter. We expect them to come back to about 10% below year-over-year.
So as that operating rate improves, you’re going to see polyurethanes, our target is to be it breakeven operating rates or above in Q3. They’ll be about – probably about 9% below last year in terms of volumes. I would say that will be the main thing. I don’t expect they’ll get a lot of benefit from pricing. They may get some benefit from raw material costs because we have seen ethane still stay relatively available. So the ability to have a good price on ethane as we go through the quarter looks stronger than it did in the middle of the second quarter.
Jeff Zekauskas
Yes. Thanks very much. I also have a couple of questions on Sadara. So the EBIT at Sadara has been negative for a few quarters. So is the way that we should understand that, that losses in MDI are offsetting income contributions in polyethylene. Is that the main dynamic? Or are there other dynamics? And secondarily, in the changes in the supply agreements, does this mean that Sadara is being expanded? Or does it mean that it’s staying the same, but the raw materials flowing in might be different? And then lastly, do you expect to still contribute money to Sadara in 2021 or 2022? Or you won’t? Or you can’t tell?
Jim Fitterling
Good morning, Jeff. Thanks for the question. Three questions in one. So I think that’s…
Howard Ungerleider
It’s one question with three parts. I think…
Jim Fitterling
I think, I can’t comment on the EBIT of the different business units in Sadara. I don’t have that in front of me. But I can tell you that plastics has performed better than isocyanates and polyurethanes, and that is improving. And so maybe, Howard, you could comment a little bit on the other two parts of Jeff’s question on the feedstock agreement and the next steps?
Frank Mitsch
Good morning, folks. A bit of a broader question. Obviously, there’s been a lot of restructuring that’s been going on with the combination and then the separation of DowDuPont, and then you announced this morning the 6% headcount reduction, which was a bit of a surprise, at least, to me. Over what time period do you plan on executing that? And I guess, this might be a little bit unfair. But I mean, should we be taking this as a sign that Dow is not seeing a return to pre-pandemic levels for several years? Or how should we think about it?
Jim Fitterling
Good morning, Frank. I think a couple of things to take into consideration as we look at it. Obviously, we’re seeing volumes come back. We also need to see margin improvement to get back to pre-COVID levels. We have some industries that we serve that have been hit pretty hard. So automotive and construction have been hit pretty hard. We’re seeing people go back to construction sites, but on existing projects, and we’re watching closely to see how new construction projects get permitted. And a fair amount of product that we sell goes into products that help support the construction market. So we’re watching that. On the consumer side, those demands and volumes look much better.
And so we need to see ourselves get to a point where operating rates and margins improve before we get ahead of ourselves. We did finish in the second quarter, all the IT separation from DuPont. So that’s good. We’re going to swing IT activities over to digitalization to help better serve our customers. We’ve had good success there in silicones. We’re making great progress there in coatings. We want to take the whole platform over to an e-commerce platform that can make it easier for customers to interact with us.
We turned on a lot of capabilities for them in the second quarter. So what we’re trying to do is look at how to be more efficient as we move forward and also look at our structure in terms of the fact that we – I don’t expect us moving CapEx up until we get back to pre-COVID type volume levels and margin levels, and so that would mean probably a couple of years before you see us ramp back up into that kind of space.
Howard Ungerleider
Frank, this is Howard. To answer your question on run rates, our target is to be a 50% run rate on that restructuring program by the end of second quarter next year and 90% by the end of next year.
Chris Parkinson
Thank you. Just on the polyurethane side and construction and II&I, and just how do you see the demand spectrum, you hit on this a little bit, how do you see the demand spectrum evolving in 2021 versus 2019 level? So put simply if you were to index your outlook for the key end markets to 2019 versus where you see supply trends heading into 2021, just how would you assess supply demand dynamics as well as spreads? Just any additional color there. Thank you.
Jim Fitterling
Yes. So I think when you look at volumes in PU and you look at that segment, we talked about volumes being down 20% and prices being down on top of that. What we’re starting to see is automotive production is coming back. Automotive is back at about 80%, maybe as much as 90% of where it was in Asia. It’s not back to those levels yet in the U.S., but it’s trending back in that direction. I think, it will take polyurethanes a little longer to come back than plastics for example because that demand is going into much more ratable consumer applications. So, our view would be, you’ll probably see polyurethanes back above breakeven operating rates before the end of this year. And then next year, you’ll start to see them building some positive trends and maybe pre-COVID levels may be out to the 2022 kind of timeframe.
July 28, 2020
Howard Ungerleider
Thanks, Jim, and good morning everyone. Turning to Slide 6, I’d like to start by providing an update on Sadara. Since we last spoke, Sadara and the joint venture partners have continued to make good progress on project completion and debt reprofiling. As we mentioned on our first quarter earnings call, we announced the final logistics service agreement was signed. This was a final substantive step to achieve project completion. Sadara is now in a position to declare project completion, but is considering withholding the final administrative step as long as meaningful progress on the debt reprofiling is made.
Negotiations with the lead agency creditors are underway with a firm target to complete the reprofiling no later than the end of 2020. Sadara is working in good faith with support from Dow and Saudi Aramco to advance a term sheet acceptable to all parties. We look forward to progressing the negotiations in a timely fashion as it’s in the group’s collective interest to complete the reprofiling by the end of the year. Dow and Saudi Aramco remain aligned in the steps needed to facilitate Sadara, maintaining a position of cash flow self-sufficiency throughout the tenor of the reprofiling.
Together Sadara, Dow and Saudi Aramco have also made good progress by executing a framework for longer term structural operating improvements, which are conditional on a successful profiling and include a 10-year supply agreement for additional ethane allocation and a five-year extension to the natural gasoline allocation, further enhancing the crackers feedstock flexibility. And as indicated previously, Dow continues to expect to contribute approximately $500 million to Sadara this year.
Turning to our third quarter modeling guidance on Slide 8. We see third quarter sales in the range of $8.5 billion to $9 billion on our expectation of gradual demand recovery through the quarter. We have provided our best estimate of current sales and volume expectations by segment as well as provided corridors again this quarter for high and low ranges, reflecting the potential for an uneven recovery. And although forward visibility remains challenged, we did deliver sales and volumes in all segments and system with the guidance ranges provided last quarter. And we are now narrowing those ranges this quarter to try to provide even better transparency to our expectations. As usual, we are highlighting the key EBIT drivers in the quarter on a sequential basis.
In the Industrial Intermediates & Infrastructure segment, we’re seeing the beginning signs of consumer durable recovery in the automotive, construction and furniture and bedding markets. We’re also seeing stable demand from the higher levels we saw in the second quarter for our solvent and surfactants that help make cleaning products even more effective. It’s worth pointing out, however, that we remain at trough MDI spread.
Jim Fitterling
Thank you, Howard. Please turn to Slide 9. I want to take a moment to highlight how our operational lever and our differentiated portfolio competitively position us today and for the long term. This quarter, we intentionally adjusted our operating rate lower to meet demand, reducing inventory and prioritizing cash. Operating rates across the integrated ethylene envelope remain strong at 82% down only 1% from the year ago period, reflecting resilient demand. However, in our polyurethanes business, we quickly brought operating rates down to the low 50% range as the extent of the durable end market shutdown became apparent.
We will continue this dynamic management of our assets and in polyurethane, as end markets recover, we expect to quickly ramp back up above breakeven operating rate. Our operational excellence, combined with our purposeful focus on cash and liquidity, are critical differentiators at this point in the cycle. We saw the benefit of our disciplined approach as we released more than $500 million of cash from working capital during the quarter and we used that strength to pay down $600 million of debt.
And as many of our chains have experienced compression over the last few quarters, we’re starting to see rationalization take place in the industry with delayed and canceled ethylene, polyethylene and isocyanates projects. This will help Dow accelerate upward and capture growth opportunities as the recovery strengthen. As demand returns the fundamentals in the markets that we serve remain unchanged and will continue to grow well above GDP.
John Roberts
Thank you. You highlighted MobilitySciences in both Slide 4 and Slide 9. You gave up most of Dow automotive in the DuPont separation. Do you still have a Dow automotive kind of integrated organization or is it just spread around all the businesses and how big is automotive today and what are your strategies there longer term?
Jim Fitterling
Good morning, John. Thanks for the question. We do have a fair amount of business today into the automotive industry, the transportation industry. In the neighborhood of $2 billion to $2.5 billion of sales that goes in there, it’s different than the mix of products that went with the transportation and high performance polymers to DuPont. What went to DuPont was glass bonding adhesives and crash durable adhesives. But remember we still have a very large platform of elastomers, silicones into a number of applications in the automotive construction, also polyurethanes and other materials that go into the interior of the cars, coatings for noise vibration and harshness.
So what we did was we pulled together a mobility platform that we can put out to the industry to have that face to the industry. And then what we’re doing is pulling the resources that know that industry together from the existing businesses, to be able to focus on them and to drive that growth, especially as we see them making changes as they come out of this pandemic to really lean in on next generation mobility platforms, vehicles, and some of the needs that they have there.
Vincent Andrews
Thank you, and good morning, everyone. If I could just ask, in II&I and PM&C, if I look at your volume guidance, and maybe we can focus on the low end and the high end, how should we be thinking about the incremental margin sequentially as that volume comes back?
Jim Fitterling
Good morning, Vincent. We’ve got volumes up 10% to 15% in II&I and 5% to 10% in Performance Materials & Coatings. I would think about it in this way. I think, it’s more around operating rates and the ability to get those volumes moving and get up above breakeven operating rates in polyurethanes and also seeing some increase in the industrial activity.
In II&I, a lot of solvent applications there go into industrial coatings, so they would go into things like the automotive industry, the aerospace industry, the oil and gas industry, also oil and gas production. So those have been relatively flat. So I think as those operating rates come up, we’ll see an improvement there.
Just to give you an example in Polyurethanes. In the second quarter, we saw automotive rates down 50% year-over-year. They’re back in third quarter. They’re going to be still below last year, but they’ll be about 20% below last year. And some of the other sectors like consumer durables, where they were off 30% year-over-year in the second quarter. We expect them to come back to about 10% below year-over-year.
So as that operating rate improves, you’re going to see polyurethanes, our target is to be it breakeven operating rates or above in Q3. They’ll be about – probably about 9% below last year in terms of volumes. I would say that will be the main thing. I don’t expect they’ll get a lot of benefit from pricing. They may get some benefit from raw material costs because we have seen ethane still stay relatively available. So the ability to have a good price on ethane as we go through the quarter looks stronger than it did in the middle of the second quarter.
Jeff Zekauskas
Yes. Thanks very much. I also have a couple of questions on Sadara. So the EBIT at Sadara has been negative for a few quarters. So is the way that we should understand that, that losses in MDI are offsetting income contributions in polyethylene. Is that the main dynamic? Or are there other dynamics? And secondarily, in the changes in the supply agreements, does this mean that Sadara is being expanded? Or does it mean that it’s staying the same, but the raw materials flowing in might be different? And then lastly, do you expect to still contribute money to Sadara in 2021 or 2022? Or you won’t? Or you can’t tell?
Jim Fitterling
Good morning, Jeff. Thanks for the question. Three questions in one. So I think that’s…
Howard Ungerleider
It’s one question with three parts. I think…
Jim Fitterling
I think, I can’t comment on the EBIT of the different business units in Sadara. I don’t have that in front of me. But I can tell you that plastics has performed better than isocyanates and polyurethanes, and that is improving. And so maybe, Howard, you could comment a little bit on the other two parts of Jeff’s question on the feedstock agreement and the next steps?
Frank Mitsch
Good morning, folks. A bit of a broader question. Obviously, there’s been a lot of restructuring that’s been going on with the combination and then the separation of DowDuPont, and then you announced this morning the 6% headcount reduction, which was a bit of a surprise, at least, to me. Over what time period do you plan on executing that? And I guess, this might be a little bit unfair. But I mean, should we be taking this as a sign that Dow is not seeing a return to pre-pandemic levels for several years? Or how should we think about it?
Jim Fitterling
Good morning, Frank. I think a couple of things to take into consideration as we look at it. Obviously, we’re seeing volumes come back. We also need to see margin improvement to get back to pre-COVID levels. We have some industries that we serve that have been hit pretty hard. So automotive and construction have been hit pretty hard. We’re seeing people go back to construction sites, but on existing projects, and we’re watching closely to see how new construction projects get permitted. And a fair amount of product that we sell goes into products that help support the construction market. So we’re watching that. On the consumer side, those demands and volumes look much better.
And so we need to see ourselves get to a point where operating rates and margins improve before we get ahead of ourselves. We did finish in the second quarter, all the IT separation from DuPont. So that’s good. We’re going to swing IT activities over to digitalization to help better serve our customers. We’ve had good success there in silicones. We’re making great progress there in coatings. We want to take the whole platform over to an e-commerce platform that can make it easier for customers to interact with us.
We turned on a lot of capabilities for them in the second quarter. So what we’re trying to do is look at how to be more efficient as we move forward and also look at our structure in terms of the fact that we – I don’t expect us moving CapEx up until we get back to pre-COVID type volume levels and margin levels, and so that would mean probably a couple of years before you see us ramp back up into that kind of space.
Howard Ungerleider
Frank, this is Howard. To answer your question on run rates, our target is to be a 50% run rate on that restructuring program by the end of second quarter next year and 90% by the end of next year.
Chris Parkinson
Thank you. Just on the polyurethane side and construction and II&I, and just how do you see the demand spectrum, you hit on this a little bit, how do you see the demand spectrum evolving in 2021 versus 2019 level? So put simply if you were to index your outlook for the key end markets to 2019 versus where you see supply trends heading into 2021, just how would you assess supply demand dynamics as well as spreads? Just any additional color there. Thank you.
Jim Fitterling
Yes. So I think when you look at volumes in PU and you look at that segment, we talked about volumes being down 20% and prices being down on top of that. What we’re starting to see is automotive production is coming back. Automotive is back at about 80%, maybe as much as 90% of where it was in Asia. It’s not back to those levels yet in the U.S., but it’s trending back in that direction. I think, it will take polyurethanes a little longer to come back than plastics for example because that demand is going into much more ratable consumer applications. So, our view would be, you’ll probably see polyurethanes back above breakeven operating rates before the end of this year. And then next year, you’ll start to see them building some positive trends and maybe pre-COVID levels may be out to the 2022 kind of timeframe.
July 28, 2020
Markus Steilemann
Thanks Ronald and very warm welcome also from my side. This is Markus Steilemann speaking, CEO of Covestro. Good afternoon and good morning to our listeners from the United States. Before we go through the details of the second quarter I would like to begin with really exciting and far reaching news. Our new vision, we will be fully circular. Planet change, growing world population, increasing urbanization, global developments like these are enormous challenges. We at Covestro want to help overcome them with our multitude of innovative products and solutions.
We strongly believe that the high quality polymers and their components that Covestro develops and produces are the key to a sustainable future. Our vision clearly states we are doing everything we can to realize the circle [ph] economy, which ultimately is a great social transformation project to make the world climate neutral and to protect its dwindling resources. Guided by this long-term strategic vision, we will anchor the principle of the circular economy within the entire company in order to fully implement it. We are working on a comprehensive set of strategic and operational goals that will lead us toward this long-term vision. We will pursue this path consistently and with commitment in the interest of our customers, suppliers, employees, and the capital markets to name a few of many important stakeholders. While striving to establish circularity in our value chains, we particularly focus on four areas. Firstly, alternative raw materials; secondly, energy efficient, innovative recycling technologies; thirdly, renewable energy; and last cross industry collaboration for joint solutions.
On the next page, we provide examples for each of those four areas. Let’s start with the field of alternative raw materials. Many of you will be familiar with our breakthrough solution in polyurethanes to replace about 20% of fossil feedstock by carbon dioxide in [indiscernible]. Because we have already talked about this innovation I’d like to highlight another marketed product from our coatings, adhesives, and specialty segment. A bio-based hardener for automotive coatings the carbon basis of this product is up to 70% made from renewable raw materials. Through this, we enable manufacturers to optimize the carbon dioxide footprint of their products. Without any compromises with regards to protective functions and appearance, this final top coat for cars requires considerably lower use of fossil raw materials than in conventional systems. We were able to prove this by collaborating with Automotive Group Audi and the coating experts of BASF Coatings.
With the financial highlights on Page 4, I’d like to turn to the results of the second quarter 2020. Current times are marked by the global corona virus pandemic and its consequences in all areas of our life. While we globally continued business operations in the second quarter our daily focus was to take care about the safety of our employees and business partners, to ensure our ability to deliver to customers and to secure a strong liquidity position. As expected, our call volume declined significantly by 22.7%. We achieved an EBITDA of €125 million, which was above market expectation. Despite the massively negative volume impact of the pandemic we achieved a positive free operating cash flow of €24 million in the second quarter of 2020. EPS came in negative at minus €0.28 per share. Despite continued high uncertainties in our economic environment we confirm our full year guidance for this year.
Now let’s move to Page number 5. We introduced the volume chart on this page, a quarter ago to illustrate the weekly regional impact of the corona virus pandemic on our business. The key observation is exceptionally high volatility globally. While overall volumes sold in our core business fell by 22% compared to the second quarter 2019, the monthly break up shows significant dynamics. While we recorded the strongest year-on-year monthly decline in April, with group volumes down by 32%, we observed a sequential improvement since mid of May. June call volumes came in at minus 8% year-on-year. We estimate that the pandemic impacted our global second quarter call volumes was minus 27% year-on-year. In our pre-Corona budget we assumed positive call volumes of around 4% in the second quarter. Looking at the impact by region, the volume numbers reflect the global sequence of the pandemic outbreak. In China we recorded the earliest volume impact, followed by so far a strong recovery. Since May monthly sold call volumes were above the previous year, however, with high weekly volatility. In Europe, we recorded the strongest year-on-year decline in mid-April. During the quarter, various European countries were hit by the pandemic in varying intensities and timings. Since May our call volumes followed a relatively stable, sequential upward trend.
In the U.S. we witnessed the latest volume impact by the pandemic. The recovery path has been lagging the other regions with a volatile upward trend since May. To illustrate what we mean with volatility the depicted volume improvement towards end of June is the result of one weekly data point that includes one big customer order. Looking into July we started the third quarter by continuing the volatile path of sequential recovery. Call volumes in July appear above June, but still somewhat below the previous year. In a nutshell, the recorded pandemic impact and subsequent recoveries followed exceptionally volatile dynamics. Along these lines our visibility was and remains exceptionally low.
Let’s turn to Page number 6. Page number 6 summarizes how we managed the crisis. In response to the unprecedented negative impact on our business we realized substantial cost savings, established a solidarity pact for our global workforce, and secured a strong liquidity position. Let me highlight three points. We entered a far reaching solidarity pact in May. This six month pact includes a temporary salary reduction of 6.7% for a non-managerial workforce. The agreed salary reduction increases throughout the managerial staff to 15% for Board and Supervisory Board members. While this pact was voluntary for all managerial employees, the acceptance was extremely high at close to 100%. The quoted numbers apply for Germany, subsidiaries outside of Germany have implemented comparable country specific measures to reduce cost. I am surely delighted by this level of solidarity through the company among the Covestro workforce.
During the past weeks and months we continuously adjusted the utilization rates of our production efforts according to the development of customer demand. Globally as of July assets utilization rates for MDI and TDI are almost back to normal rates. This is also true for polycarbonates in Asia Pacific. Utilization rates for all other products continue at reduced rates in line with demand. Importantly, our leading production and process technologies have proven their scalability in quickly adjusting operating rates and reliability in safe operations. On the cost side we implemented short-term cost savings in total of more than €300 million. In the second quarter cost saving substantially contributed to earnings. While these cost savings are temporary by definition, we also further executed our structural cost and restructuring program perspective. As announced with full year results in February, we had set a target of reducing global headcount by 400 to 16,800 by year-end. We can now report that we have achieved this global — this goal six months earlier by end of June. We are working on a further reduction of the global headcount by end of 2020.
Now let’s turn to Page number 7. Here I would like to highlight some volume development by region and as a concession to the exceptional time also by industry in detailed numbers. The decline of global call volumes was strongly impacted by a half business with the automotive and transportation industry. Demand in Europe and North America were even worse in terms of year-on-year rates. Demand from auto in China ended the quarter on par with previous year. Demand from the furniture and wood industry in China also finished the quarter with positive double-digit growth rates year-on-year. Yet global volumes in the furniture industries were down approximately 30%. Global volumes to customers from the construction industry declined by approximately 15%. Here volumes for polyurethane based insulation were down by approximately 20%. Polycarbonates realized double-digit volume growth driven by demand for resin used in pandemic related protective gear and face shields. Volumes sold into the electric, electronics and appliance industry partly benefited from extra demand from consumers who established their home offices with new IP equipment. Nonetheless, global volumes decreased also year by approximately 15% while volumes in China were back to single-digit growth.
The positive highlight among the remaining diverse industries were attractive volume growth rates in global medical applications in both the polycarbonates and coatings adhesive specialty segments. Here volumes grew by approximately 25% year-on-year, for example, driven by high demand for housing of respirators. Looking at customer industries by region, we recorded low double-digit declines in auto and electro in Asia Pacific and single-digit declines in furniture and construction. Please note that shown volume growth rates of minus 8.4% in Asia Pacific and at the same time 5.5% in China imply declining volumes of 33.8% in the rest of Asia Pacific. In EMLA volumes declined due to the pronounced weakness in auto and furniture. In electro and construction volumes declined at low double-digit rates. Similarly, in NAFTA, demand was weakest in automotive. All other industries declined low double-digit. With this I will now hand over to Thomas for the full set of financials. Thomas, please.
Thomas Toepfer
Yes, thank you Markus. And also hello to everybody on the call from my side. I’m on Page 8 of the presentation where you have the sales bridge and you see a year-on-year decline of 32.9% for the second quarter of 2020 and the negative volume impact of the corona virus pandemic led to a 22.3% year-on-year sales growth volume decrease and that is the 712 million that you see in the bridge. Moving to pricing the lowest selling prices mainly in PUR and PCS negatively impacted the sales by 9% and that is the 290 million that you are seeing. But it’s important to note that while in 2019 it was mainly increased competitive pressure that resulted in declining selling prices and the movement that you now see in 2020 are rather driven by a lower feedstock price environment. And I would also like to emphasize that sequentially the selling price has only declined by 3%. Moving on to FX rates in the bridge, they were virtually unchanged affecting sales by minus 0.01% year-on-year, driven by the weakness of some emerging market currencies. But on the other hand, sales were helped by a stronger U.S. dollar. And last but not least, portfolio changes reduced our sales by 1.5% or €49 billion in Q2 and you have the details of that in the bullet on the right hand side of the page.
So let’s move to the next one, Page 9. As you can see in Q2, we generated an EBITDA of €125 million, which was above the market expectations. Nonetheless, the decline of 72.8% compared to previous year was obviously very steep. So as a consequence of lower demand from certain custom industries, our product mix was effected unfavorably and this resulted in a relatively high negative volume leverage of 47% and you find this also on the bullets on the upper right hand side of the page. Moving on lower selling prices, as commented before were only partly compensated by a relief of lower fix [ph] prices and as a result, the year-on-year pricing delta was a negative €100 million. FX effects to EBITDA were positive 1.6% year-on-year, despite a slightly negative effect that we just reported in the sales bridge and the difference in absolute numbers is very small and mainly linked to transactional effects. Last but not least, at least the line other items contributed positively with €91 million and the key contributors were short-term cost savings and lower provisions for short-term bonuses. And currently, these bonus provisions for 2020 run at zero. So I would just like to emphasize that excluding a prior year onetime gain of 19 million, which we recorded in our cash segment, the line other items would have even amounted to positive €110 million. And that is obviously a function of the cost saving and efficiency measures that we implemented.
So with that, let’s move into the business units and segments. I’m on Page 10. If you look at our polyurethanes segment on this chart, we faced a core volume decline of 25.9% in Q2 and the polyols recorded the largest negative decline rate, followed by TDI and MDI. And obviously, the key reason for the declines in all key industries was the global impact of the corona virus pandemic. The polyurethanes EBITDA as you can see turned negative in this quarter. But to give you historical reference, this segment had already experienced one quarter of negative earnings in Q1 2009 during the peak of the global economic crisis in that year. Drivers of this year’s earnings were the pronounced volume decline and the negative pricing delta compared to prior year and especially portfolio of earnings were burdened by lower volumes, the take or pay contracts in place with our propylene oxide JV partner, and competitive pressure.
Let’s move to Page 12 where you see the CAS segment. As you can see, the segment posted a year-on-year volume decline of 25.3% affected by the corona virus pandemic and the continued demand weakness from customers for automotive applications. And as the volume leverage of CAS is highest among all three segments, the lower volumes largely contributed to the strong EBITDA decline of 60%. Again, corrected by the onetime gain of 19 million that I was mentioning earlier, which was included in previous EBITDA, the year-on-year decline would have been smaller, but still amount to 49%.
Christian Faitz
Yes, sir. Thank you. I hope you can hear me well. Good afternoon gentlemen. Just two questions if I may please. First of all, can you please share us — share with us the current Q3 trends in the Polyols market as this was the major direct for the polyurethanes business in Q2? And then according to Chart 5, the volume recovery in the U.S. in the last couple of weeks in Q2 seems to have been quite remarkable with or without that one customer you refer to, can you share with us the trend that has continued, if that trend has continued into Q3 or have renewed lockdowns in the U.S. and the entire political situation there, put an end to the volume revival in the meantime? Thank you.
Thomas Toepfer
Well, okay let me take a minute. Can I take the last question? So first of all I think we obviously provided a lot of the details during the month and week of the corona crisis just to give you a little bit transparency. I think it would now be a little too early to say, okay, let’s talk about July on a region by region basis with the month not even having ended. I think our overall message is that the good momentum that we’ve seen in June has continued into July. We think that sequentially we will look at an improvement. Maybe year-on-year is still a slight decline. And I think the general trend is also true for all regions. So it’s not that things have in a certain region completely collapsed after that. So I think let me maybe leave it at this degree of precision because the month is not even over.
Thomas Swoboda
Yes, good afternoon. Good afternoon, everybody. I have two questions, please. Firstly, kind of a follow-up on polycarbonates. I mean, congrats on the performance in Q2. That looks very good. But my worry is a little bit around this capacity overhang, we are still seeing especially in China. And my question is, do you think Q2 could have been already the trough for this business despite the capacities that are coming to the market or is it still relevance here or should we have relevance here that profitability could still deteriorate from the currently very, very good level? The second question is on Polyols and on the EBITDA bridge you have given for Q3. This is very helpful. I was just missing the effect from Polyols, do you expect the headwind from Polyols to start to wane already in Q3 or should we expect this to be a little bit longer lasting, any indication you could give on the phasing of the negative effect from Polyols would be helpful? Thank you.
Markus Steilemann
Yeah Thomas, thanks for the question. [Indiscernible] Markus speaking. Let me let’s say give you some flavor on how we look at polycarbonates. We have a capacity overhang and that was already there in the second quarter. And I have to say that was despite the fact or really under the impression of additional capacity that was coming up. And capacity does not equal capacity. What do I try to indicate? We see still a steep cost curve for the base rates of polycarbonates. That means the highly commoditized grades. And from our assessment, almost all capacity was coming in and you might, let’s say wonder that even though it is new capacity, it comes due to several reasons more on the higher cost side and cost producer side rather than on the lower cost producer side, where we have positioned ourselves very successfully since many years. And that’s why I believe that on the commoditized polycarbonate grade side, we have already seen trough levels and approach trough levels in the second quarter. And at the same time, coming back to what I have said earlier, we have constantly rebuilt the entire product mix over the last decade for polycarbonates, and that gives us now two actually opportunities to play.
On the one hand, to continue to play and shift on the highly specialized rate side and on the other hand, to fully leverage our cost advantage by fully loading wherever possible our low cost base rate polycarbonate plans. So from that perspective, I would not expect despite the fact that there might come additional capacity on stream, that we would let’s say see lower trough levels in that sense. The only large impact that could happen is if we would see a significant drop in volumes in the overall demand in the market that would then in the end also affect us. But I think we have also answered that a little bit earlier on a different context. Currently, we see since mid of May continued trend across the globe and all regions that say of sequentially increasing demand and here, especially in polycarbonates. And I hope that helps you a little bit to see the dynamics here. And for the Polyols question I would like to hand over to Thomas.
Thomas Toepfer
Yes Thomas, I think on the Polyols our assumption would be that the burden will be eased in Q3 simply because it will be only we’re expecting a pickup in volumes relative to the trough that we’ve seen in Q2. And that obviously will lead to at least that the take or pay clause will not be affected or effective. So that will give us a saving here. Plus, I think it could also improve the margins a little bit so that overall and that’s baked into the assumptions that we’ve given you, we would expect a nice rebound if you are in Q3 relative to Q2.
Markus Steilemann
And the third topic is if you look at the current let’s say shutdowns, there is publicly available information that would indicate that we have between 200,000 and 300,000 tons of capacity that is temporarily in a shutdown and has been not taken out of the market, but is not producing. What does that mean? That means between 4% and 5% of nameplate capacity in the market is currently not on stream. And with regard to the last topic on TDI MDI capacity, if I’m not totally mistaken I understand that we have in TDI roughly 200,000 to 300,000 tons of nameplate capacity currently not producing and that represents at current market size, roughly 10% of nameplate capacity being temporarily taken out. And on MDI I just currently do not have any indication due from public sources that really MDI capacity has been taken out even on the temporary note, that’s all we have for the time being.
Markus Steilemann
Markus, this is Markus speaking. So on your first question, the automotive picture for us is that for the entire year we still expect that the automotive segment will be affected, most likely to the largest extent in our entire portfolio. And we see very different pictures developing recently with respect to end consumer demand and also with regards to stock levels. So whereas in China, we see currently that what end consumers are buying and here demand is really picking up quite swiftly and quickly is really also then translated into real production and not served out of stocks. And we have a different picture for Europe and also quite comparable in the United States. We are still a lot of cars are sitting so to say on the inventory that have been brought to the car dealers, that have been produced, and they are sitting still in the inventories. That means whenever consumers are buying there, that does not directly translate into the real demand that would normally under normal, let’s say, inventory levels being created. So what does that mean? Even though we see slight recovery in the automotive industry, demand for our products and here for sure, particularly in the polycarbonates segment, first thing is that demand is maybe not directly related to what the current, let’s say, buying rate of end consumers is.
And secondly, we must also not underestimate that due to the specific situation in particular in Europe and also the U.S. that demand will be highly volatile in our side and continue to be highly volatile in the next couple of weeks and also months to come. So on your second question, given the let’s say the low margins in a market that we have seen high cost producers normally do not react by let’s say continue to be very aggressive on prices, but what they do is they start to shut down temporarily capacities. And I have alluded to that a little bit earlier what currently we see from publicly available sources on polycarbonates as well as on TDI. And so from that perspective, for me, there is a limited risk for further deterioration.
Chetan Udeshi
Yeah, hi. Just a couple of questions. Maybe I missed it but can you inform us or what is the utilization of your assets right now in between businesses? And second question is what is the status of the 200,000 tons MDI expansion that you had landed in Germany this year and with the new CAPEX framework can you remind us of what are the key new capacities that he will have online next year for 2021 in different businesses, thank you?
Markus Steilemann
Okay Chetan, this is Markus speaking. Thanks a lot for the question. So if you would refer to Slide number 6 of our presentation there on the bottom left you would see some indications about where we are in terms of capacity utilization for our plants. In Europe for PUR we are back to high rates and PCS and CAS are still at reduced rates. North America MDI is back to high rates, all other products are running currently at reduced rates. And for Asia Pacific if you are as well as PCS is back to high rates and generally the utilization rates adjusted in line with the respective demand. If you ask about the status of the MDI plant in the Northern part of Germany in Brunsbüttel to be very precise runs at full let’s say nameplate capacity as intended. And the last question is about how much additional capacity would we see for the next year and yeah I will hand over to Thomas.
Thomas Toepfer
Yeah Chetan, maybe let’s put it this way. I mean the 200 KT MDI in Brunsbüttel they are up and running but of course with the market development as markets that we’re not fully utilizing our assets on a full year basis. Therefore I would — what I would say is there is nothing major as the 200 KT coming on stream next year. It’s smaller things like a compounding additions which we have North Rhine-Westphalia and all the other things in the space of CAS but nothing major in terms of MDI or TDI which is not a problem because I think as we just discussed it will take maybe a year or two before the markets comes back to the pre-colonial levels and with the expansion in Brunsbüttel that we have put in place I think we’re absolutely well place to even without big additions next year fully capture the market growth and maybe even more than that. So to your question very precisely, nothing major coming on stream but not a problem, we have enough capacity to grow at least in line with the market.
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