Covestro Urethane Comments from Investors’ Call
Good afternoon and good morning to our listeners from U.S. I’d like to begin with our Q3 highlights on Page 2.
Current times continue to be marked by the global coronavirus pandemic and its consequences in all areas of our life. After the drastic impact on the demand for product in Q2, however, demand recovered dynamically joined a course of the third quarter. As a result, our core volumes came in 3% above previous year. We achieved and EBITDA of EUR456 million, which was above market expectations and up to 7% year-on-year. Supported by higher earnings, we achieved a strong free operating cash flow of EUR361 million, 49% above previous year. As pre-released, we’ve raised our earnings guidance for the full year, reflecting a more dynamic recovery and the improved earnings levels.
Lastly and certainly a strategic highlight of Q3 on September 30, we announced the acquisition of the Resins & Functional Materials business from DSM. Meanwhile, the EUR447 million capital increase to finance part of the acquisition price has been successfully completed.
On Page 3, 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 growth of global call volumes in Q3 was based on a broad demand recovery across industries and geographies. While our call volumes were significantly below previous year during the second quarter, they were already above previous year during the third quarter, reflecting a V-shaped recovery.
Demand from the furniture and wood processing industry increased by 6% year-over-year, driven by Asia-Pacific. Most of this growth was attributed to our polyurethane raw material for soft foams used in mattresses and upholstery. Demand appears to benefit from consumers who improved their homes during the lockdown weeks or instead of spending money for travel. Global volumes to customers from the construction industry finished a quarter 7% above previous year.
Looking at our polyurethane segment on Chart number 6. Call volume grew by 4.3% in Q3. Double-digit growth rate in TDI was strongest followed by single-digit growth in MDI and polyurethane around previous year’s level. Largest contributor to growth were applications and the furniture industry. Polyurethane EBITDA strongly increased both sequentially and year-on-year. Compared to Q3 last year, the increase was mainly driven by two factors. Firstly, the significantly lower cost levels, driven by our cost savings measures, and secondly, higher volumes.
As a result, our EBITDA margin increased nicely. Lower selling prices mainly in MDI and polyurethane were compensated by lower raw material prices. Hence, the year-on-year effect from the pricing delta was neutral.
Especially towards the end of the third quarter and into the first quarter, we noticed innovated industry margin levels in TDI globally. Simultaneously, we have been selling practically all available material to our customers working hard to fulfill customer orders. According to our analysis, these first and foremost reflect dynamic recovery and good underlying demand. However, it also suggests constraint industry availability. Including our reported force majority incidents in North America and Europe, TDI industry supply currently appears to be low nameplate capacity level.
Just three questions for me. To follow-up on the tightness in polyurethanes. Do you have any visibility on how this tightness may last in the next through the quarters? And then second question is quickly on the price war that delta. So with the indication that for four years and the minus 100 million in private key hole is around polyurethanes. How would you split back into the divisions?
Daniel, this is Markus speaking. On your first question a few are tightness, it is very difficult to say, it is heavily depends on the competitors whether they solve their problems and here particular in TDI. And as you know and have witnessed over the past couple of years, given the market size compared to plant size in the TDI markets, that one plant is representing a significant amount of the world’s capacity. So one plant can make the difference between a totally oversupply and a totally under supplied market and with that also can lead to significant price movements in very, very short time. And that is further accelerated or amplified by the fact that it is very hard to store TDI and therefore puts TDI on stock for more than a couple of weeks. And in this context, there is more or less impossible to clearly say okay, it was developed like this is very developed like that.
Currently, we are due to the overall industry situation including ourselves in a short supply situation, but that could potentially change. But when this will be and to what extent this will be really for me impossible to focus at on MDI. We have a slightly different story. On MDI, again market size compared to plant size, it is not that impactful in one plant is actually not in service or maybe two or three plants are not in service for a short period of time for example due to unplanned shutdowns.
Secondly, there is some opportunities as we have a broader product range in MDI it is not as broad as in polycarbonates or CAS, but broader than TDI, roughly one on a different grades compared to roughly 10 different grades in TDI. That means also here we have different outlets that means also lower quality MDI that means less reactive, and therefore, let’s say a longer sword maybe can be sold in the market. So, as a little bit more buffer plus the market is structurally more gearing towards a balanced market, I would say and that will also continue if demand is developing more or less mid to long term as we predicted exactly in that direction of a balanced market. So overall, I would say for MDI, despite some shorter movements, I would say that we are approaching once again, a more balanced situation also with regard to the development into the next quarter.
On your second question, I think, I’m not sure that totally correctly, let me try and answer nevertheless. And then please ask again, if it’s not meeting at all, what you were shooting for. So, in terms of the pricing delta, we said for the full year, we are expecting a value of negative 100 million. If you build the bridge between 2019 and 2020. You have seen that for the first nine months of this year, it was negative roughly speaking 260 so that as a delta in Q4, we are expecting a positive pricing delta of roughly EUR150 million. And that is mainly and that goes back to what Markus just said those EUR150 million will mainly stem from our PR segment where we are seeing very constructive pricing in both in MDI and TDI. So I hope that was your question.
The first one is how similar or different is the outer situation at TDI and MDI to what we’ve already seen in 2017 for the market and then — specifically. And given that, is it fair to say that you’re exercising some caution when it comes to your price delta guidance for 2020, but also for ’21? The CEO of Dell, for example, mentioned that the isocyanates feistiness seems to be or might continue also in Q1 2021? Thank you.
Isha, this is Markus speaking. Thank your question. While comparing two situations that are based on unplanned outages in the entire industry, let’s say amongst several years for me is a real challenge, I have to say, because the root cause for these outages might significantly differ, the magnitude of outages might significantly differ, and they’re unplanned. And that by nature makes forecasting possible. And in addition, I would feel really uncomfortable to say that those outages would continue to last significantly into the next quarter. Because we are doing actually the utmost to bring our plants back on track and back on stream. Because our aim is to supply customers based on their needs and to supply the demand. And also make sure that in particular MDI and TDI markets continue to grow. And from that perspective, I would have really a hard time to compare the outage situation in 2017, which has led to significant fly up margins to unprecedented also profitability and results. And from that perspective, would also not see how this was exactly compared to today.
Once again, we have a TDI situation in the United States based on a supplier issue with the key raw material that is also affecting PCS and MDI. And we hope that we get out of this situation as quickly and as soon as possible. And at the same time, we have a technically based failure in one of our parts in the TDI plant in Germany, but we also hope that we get out of the situation as soon as possible and plant can start delivering. And I cannot talk or say anything due to lack of insights about how the competitive situation is looking like in this context.
So yes, frankly speaking, a long answer, maybe not even an answer, but just let’s say an assessment of the situation. I hope that we’re back on stream as quickly as possible that we overcome this very unfortunate situation that we are in right now. And we can deliver to our customers as soon as possible. So that’s my best answer.
On TDI, as you might imagine once we are back on stream, we have a downside risk given that we still have a low overall industrialization, and also based on the high volatility of the prices, and therefore our respective, let’s say overall nameplate capacity is still much larger than the currently underlying demand. MDI once again to reiterate that here the situation is different, because I believe that we are continue to move too much balanced situation in the market. And that will continue also in 2021.« Previous Post Next Post »