The Urethane Blog

Urethane Comments from Covestro’s Investors Call

If you read through the transcript, Covestro expects two weeks of production loss in the Gulf from the storm . . .

Markus Steilemann

Thanks, Ronald. And very good afternoon and very good morning to everyone on the phones joining the conference. The full year 2020 was marked by global coronavirus pandemic. In the first half, we have seen a drastic impact on our product demand whereas in the second half especially towards the year-end you could see a dynamic demand recovery with increasing product margins. In total, the full year came in with core volumes of minus 5.6% below previous year.

The EBITDA came in at €1.5 billion, above market expectations and closed to 2019 levels, a year without a pandemic. We had a strong free operating cash flow of €530 million which was 12% up which was 12% up year-on-year. Their earnings per share of €2.48 were 18% below last year. And we will — would propose $1.30 per share to the upcoming annual general meeting. And based on the new dividend policy, which promise we’ll explain to you later.

Let’s switch to the next page. Here, we give you a little bit more details about where the challenges were and how we successfully brought this to a good end. In 2020, the earnings guidance was achieved. We had, as you all aware, several guidance updates during the year, following the course of the pandemic and also the development of demand. 2020 volumes as mentioned earlier were impacted by downturn of demand and came in below the original year-on-year growth outlooks.

Earnings and cash flow however were on or even above the original 2020 guidance as published in February 2020 ahead of the coronavirus pandemic. Thanks to our agile organization, decisive crisis and cost management as well as extraordinary motivation and dedication among our employees, we could bring those results home. It is fair to say 2020 was a challenging year that we managed successfully. At the end, we delivered on promise.

Let’s turn to the next page. And here, I would like to give you a little bit more flavor about the regional as well as industry distribution. The core volumes as you can see on slide number 40 climbed by 5.6% with all regions and large industry year-on-year. By regions, the three regions were almost on similar levels between minus 4% and minus 6% at year-end. China was best but also negatively impacted by the coronavirus pandemic, especially in February-March. US have shown good demand in furniture stay at home but weak auto and Europe was worst especially Germany due to auto but also weak development in construction.

If you narrow slice the cake by industries, you see that in terms of ranking by kilotons, we sell in these specific industries. It comes in as follows; furniture showed a mixed picture, quite weak in Europe but even up in the US due to good demand for mattresses as import tariffs helped the US producers. Construction was globally down. Exception was Asia Pacific driven by continued investment into non-residential and auto decreased by 14% year-on-year slightly better in global auto production which decreased by 16% based on LMC data. Rather small but with a very positive dynamic was Medical with 13% up year-on-year.

Let’s turn to the next page. Here, you can clearly see that the variance in the second half were above previous year despite constrained availability in polyurethanes and polycarbonates. We also saw a significantly increasing earnings margins towards year end. This earning margin development was supported by strict execution of cost saving measures across all three segments. The improving industry training conditions and industry margins allowed to increase the selling prices over feedstock prices and here especially in polyurethanes.

And now I would like to hand over to Thomas.

Thomas Toepfer

Yes. Thank you, Markus, and a warm welcome to everybody on the call. I’m on page 6 of the presentation where you have the sales bridge. So as you can see our sales declined by 13.7% year-over-year for the full year and the decline in core volumes led to a negative volume effect on sales of 5.1%. That is the €637 million that you see in the bridge. And the majority is driven by the — our Polyurethanes business unit and our Coatings, Adhesives, and Specialty business unit.

And in addition to that, of course, also the lower selling price has led to a sales decline of 5.7%. Again that is the €709 million that you see in the bridge driven by the price development mainly in Polyurethanes but also in Polycarbonates. You also see we had a negative exchange rate effect of €195 million. That is reflecting the weakness of the Brazilian real, but also the devaluation of the US dollar, the Chinese renminbi, and the Mexican peso relative to the euro.

Last but not least, you see in the bridge €165 million from portfolio effects. You have the details in the box on the right-hand side. As you probably remember, we sold our European sheets business and our European systems houses in January 2020 and in late November 2019, respectively. And the effect obviously is reflected in the €165 million.

Let’s turn the page and here are — you see the EBITDA bridge on page 7. We achieved an EBITDA of €1.472 billion, which is I would say only 8.2% below previous year. And I would consider this a very good achievement given all the challenges that we had to cope with in this corona year. If you look into the bridge, you see that it’s not only lower volumes but also a negative or unfavorable product mix that influenced EBITDA. Because you see there’s a relatively high negative volume leverage of 63% reflected in the minus €400 million.

This is of course due to lower demand from our automotive customers, which carry a relatively high margin. You’ll also see that there’s a positive pricing delta for the full year of plus €132 million. That is driven by the strong development in Q4 while for the first three quarters of the year, the pricing delta was negative. And you also see the details behind this with the price moving €709 million and also the raw materials moving €841 million. I think the order of magnitude of that numbers just gives you a flavor of the high variability of those numbers over a full year.

The actually largest positive EBITDA contributor in a positive sense in the year comparison is our cost-saving measures where we achieved €350 million relative to the previous year. And that is somewhat camouflaged in the other items box where you see only positive €162 million and the reason is that we had also some other onetime effects, mainly positive effects, which materialized in 2019 which did not repeat in 2020 and which, therefore, of course, diminished the overall net effect of it, plus there was also negative effects of roughly €60 million from various other items; among others the wage increase and the merit increase that make the largest chunk of it. But my important message is the €350 million cost savings did fully materialize and are included in this box, and I will talk about it in more detail on the next page.

There is one thing I should mention. The legal department told me I should draw your attention to the footnote in green which says the announced acquisition of DSM’s Resins and Functional Materials business, in short RFM, is subject to regulatory approvals. I think, to give you some more detail beyond the legal disclaimer, we have received a positive approval from all jurisdictions but one, and this is a minor jurisdiction and country. And I’m very, very confident that we will receive the clearance over the course of March so that we can then close the transaction on April 1.

Markus Steilemann

Yeah. Thank you, Thomas. And you see, we pulled the triggers in 2020 for a great operational performance but that was not good enough for us. What we did at the same time, we also looked at all the strategic developments for our corporation and continued, not only with a new vision but also with a new development of our strategy. This is setting a path forward or tomorrow. So, introducing these new strategies to you is to us quite important because works at the pace for the next years to come and where our major focal points will be.

So let me introduce you going from left to right through the chart what are the key three chapters of the new strategy. Our first chapter become the best of who we are. We intend to transform the company to exploit its full potential. The focus here is clearly on processes that made customers successful and just the way we operate fully towards customer needs and overall simplify and optimize all processes and terminals that terminate those activities that are not generating value. A key milestone was already achieved in 2020 by starting the transformation program LEAP that we have initiated there. And I will give you a little bit more details later on the next page.

For the time being now, let’s turn to the second chapter, drive sustainable growth. Here, we address all the sustainability demands in the market and all the needs to really transform and being part of this transformation of the economic system from a linear towards a circular model. And here we’re looking into our own internal company processes by for example developing faster than ever sustainable products and solutions in our portfolio, invest in long-term attractive and sustainable markets and also build assets faster and cheaper than before.

A key milestone here in 2020 was the announced acquisition of DSM RFM business that Thomas has already referred to numerous times. With that, we are building a leading sustainable coating resins player. And the third chapter is about becoming fully circular. We want to actively accelerate and to transition to a fossil-free economy, a fossil-free polymer production switching to renewable energy, managing end of life matures jointly with partners and creating thereby end-of-life materials jointly with partners and creating thereby joint solutions that transition the economy from a linear to a circular model.

The key milestone in 2020 was that we launched our new vision we will be fully circular and that we have also achieved first deliveries of renewable raw materials for our respective operations in some selected products. We foster, in this context, also digitalization to become a digital leader in the chemical industry. Examples are here, digitalization of research and development; and here we have entered into two cooperations with Google as well as Amazon Web Services, AWS. And on top of it, last but not least, foster and further develop our new we-are-one culture. Here, clear examples are the collaboration in our leadership principles of leading forward as a new part of these cultural dimensions and getting frequent and regular feedback from all 17,000 employees about the progress and how they are doing in this context.

Now, let me give you, on the next page, a little bit more flavor on the just addressed LEAP program as part of the first strategy chapter. Here are the details. So, clearly we are moving away and transforming the former three business units into seven business entities which will be fully a profit-and-loss responsible. It is a comprehensive redesign of structures and processes. The goal is to become even more customer-centric than ever before. The implementation of the new organization setup is intended to be active from 1st of July 2021 onwards. The new business entity structure is based on business specifics and customer needs and less so on material characteristics, and this should further foster entrepreneurship within Covestro for the respective business entities.

If you look very rough into it, you see two major groups of business entities. Number 1, the group of solutions and specialties. Here is about differentiated chemical products and application technology services and a strong focus and pressure on innovation and customer interaction. The second group is the performance materials. Here the focus is on reliable supply of standard products at competitive market prices and that for sure comes with the lowest internal cost to deliver and highly available plants that are running fully loaded at any given point in time.

Reporting in a new segment, we’ll start with the Q3 interim statement. However and let me make this very clear, the actual reporting structure is still a work in progress and not determined yet.

With that, I would like to hand back to Thomas.

Thomas Toepfer

Yeah. Thank you. I’m on page 13 of the presentation. And as Markus said, obviously, LEAP is mainly a transformational program along the characteristics of our product. But, of course, there’s also a strong efficiency angle to this which I would like to talk about. So the key methods of LEAP is keep fixed costs flat. And that means our target is to maintain our fixed cost unchanged until 2023 relative to the 2020 level, excluding potential fluctuations from the bonus.

At first sight, that might not sound so ambitious, but in reality, I do think that this is a challenging target because 2020 is of course characterized by a very low fixed cost base given all the short-term measures which we executed over the course of the year and it also means that from that basis we have to tackle yearly fixed cost inflation of at least some €100 million and in that is things like merit increase, etcetera, etcetera.

We have shown for you the historical development in the chart and you can see that we had almost a flat develop in 2019 and 2017 despite of course some — these synergies which we had from the split from Bayer. But then, there was a strong cost increase in 2018 given the focus on growth. And then in 2019 and 2020, you can see that perspective and the short-term measures again yielded a cost reduction.

So, what you should assume for 2021 is a cost increase of between €100 million and €200 million. That is due to the higher maintenance cost and the merit increase, our investment and digitalization and circularity. And I would also say it’s clearly in line with our previous guidance where we said there will be a rebound in short-term costs because not all of the measures which we executed in 2020 will be — can be sustained. And that is the character of a short-term cost measured by nature.

But then, you should expect in 2022 and 2023 that with the implementation of LEAP, we will counterbalance the increases so that overall, as I said, the fixed costs should not increase up until 2023 relative to the 2020 level.

So with that, let’s do a little deep dive on one specific measure which is our head count development on page 14. We said in the beginning of 2020 that we wanted to reduce our head count from 17,200 to 16,800 through the execution of prospective. I think we can say we’ve clearly over delivered on that target and came out at 16,500. And our plan is to further reduce that over the course of this year by 400 FTEs to 16,100 until the end of 2021.

Now, of course, by the end of the year, roughly 1,800 FTEs will join us through the consolidation of RFM. But I can clearly say that the reduction has nothing to do with the synergies. It’s simply a function of our restrictive controlled hiring policy which we have established for Covestro excluding the acquisition. And then of course, all the synergies effects which we’re envisioning in connection with the transaction will then come on top of it.

So with that, let’s turn to page 15 where you see the EBITDA guidance. For 2021, our guidance is an EBITDA of between €1.7 billion and €2.2 billion. But we have also put in the chart for you the mark-to-market estimate for 2021. So that is if you were to take the January market data and the midpoint of the guidance range in terms of the volumes that we see. And if you multiply this out, this would lead to an EBITDA of €2.7 billion.

Now the obvious question is why do we assume that the prices or margins will come down from here over the course of the year. It is simply because if you look at the overall utilization rate, it still appears to be low. If you look at the nameplate capacity that is installed and the underlying demand relative to that. And the currently very strong demand and the high prices therefore in our view are driven by catch-up effects by some extra effects from the stay-at-home policy where people do work in their homes. They buy mattresses, refrigerators, etcetera.

We do observe quite a bit of restocking activity in various industries. We do know that there are logistic challenges and there’s also no question that currently there is a higher than usual number of outages in the market. And I would say that each of those factors by itself is maybe not significant, but the accumulation of all these all together brings us to the conclusion that there will be a normalization of margins over the course of the year. And that is reflected in the EBITDA guidance range that we have given out.

I should also say that our guidance includes the RFM acquisition. However, please note that the contribution from RFM on a net basis is almost negligible simply because the additional EBITDA and the integration costs on the other hand pretty much balance out each other. And we have in the — in the box on the right hand side indicated the usual sensitivities for volumes and also for currencies which should help you to fill the cells in your Excel spreadsheet.

So with that, let’s come to the — to the further guidance items on page 16. I would say that the clear message here is that in 2021, we expect to exceed the pre pandemic levels of 2019. And this is why we’ve given you three columns in the chart 2019, 2020, and then the guidance for this year. So, let’s just look at the most important numbers.

Our view is and sorry one more remark, I should again say that the guidance is including RFM but it is excluding any potential LEAP onetime costs. So, that means we might over the course of the year be in a position to build accruals for the execution of the efficiency part of LEAP, but that is not included. But in any case it would not be a cash effective item because those cash outs would only occur then in 2022 and after. But I think that just as a remark is important for you.

So, let’s look at some important numbers. As you can see on the — in the first line item, we’re expecting car volumes to come in at 10% to 15%. That includes 6 percentage points from RFM acquisition and the free operating cash flow which we’re expecting between €900 million and €1,400 million. That includes of course a positive effect from three — in the order of magnitude of €300 million which is the bonus achievement which is included in the EBITDA but will not be cash effective in 2021. So that is pretty much the same effect that I was alluding to when I talked about the 2018-2019 numbers earlier.

And then as you can see in the middle of the page, we do expect a strong start into 2021 in terms of the first quarter where we expect an EBITDA of €700 million to €780 million in Q1 driven by the positive pricing delta and a mid to high-single-digit car volume growth which at the same time meets a still low cost level and it also includes the negative effects which we currently see from the unusual weather conditions which also we do experience in Texas so that is already baked in into the Q1 guidance as well as in the guidance for the full year.

Let’s go to page 17 and talk about the use of cash. And I would say there is a slight evolution, not in the priority — in our priorities but maybe in how exactly we define the individual buckets. So the most, most important thing on the left-hand side still is CapEx for us. It is and will remain the main use of cash with a focus on value creation. And I will talk about it in some more detail on the next page.

We have, as you have seen from our press release, adjusted our dividend policy to a payout ratio. Again, I will talk about it two pages from here. In terms of portfolio, I can iterate that there is no immediate plan for another acquisition during the integration phase of RFM. And we also have no further disposals planned. But, of course, the inorganic growth potentially remains of a strategic focus that we have with respect to the growth of Covestro should an opportunity arise.

Last but not least, on the right-hand side, you know that we did execute a share buyback over the course of 2017/2018. Our view going forward is that this is clearly not imminent. But the focus would be, if at all, to execute such a share buyback in the future only opportunistically and in an anti-cyclical manner.

So, with that, let’s look at some details with respect to CapEx. As I said, it does have the highest priority in terms of use of cash. It has to deliver attractive returns, and that is our key criteria. And our maintenance CapEx is roughly €350 million to €400 million to secure the safe, reliable and efficient operations of all our plans. Now, what we do envision for 2021 is a number of approximately €800 million. That includes also the CapEx spend for RFM which is roughly €50 million on a full year basis.

And on the next page, some more details on our new dividend policy. So, let me first of all start by saying that we propose a dividend of €1.30 per share for the year 2020 which is obviously €0.10 more than for 2019 and it is in terms of payout ratio, a 55% payout of our net income which is, by the way, the highest relative payout ever in the history of Covestro, as you can see from the chart.

And we have defined going forward that a payout range of 35% to 55% of our net income would be an appropriate policy which then also means that you can expect higher payout in years with peak earnings while in such a case, the ratio might be towards the lower half of the range. And then, of course, also, you might expect lower payouts in years with trough earnings. And in that case, we would then push it to the upper end of the range just as we have done for 2020.

So with that comment, I would like to hand it back to Marcus for the closing.

Markus Steilemann

Thanks a lot, Thomas. And allow me to highlight once again the operational as well as strategic highlights of a really challenging year 2020 which we have successfully managed. The volumes were above pre-pandemic levels already in the second half of 2020 despite constrained product availability. The earnings were delivered in line with guidance, and we have seen significant positive momentum towards year end. The cost savings also significantly supported earnings; the short-term savings were delivered; and the Perspective program was successfully completed.

In 2021 earnings, you can see again above pre-pandemic levels of 2019. This assumes a strong rebound from depressed earnings levels seen in 2020. And on the strategic side, we have developed a new company strategy that was introduced as a strong focus on transforming the company, driving sustainable growth and becoming fully circular.

Thanks a lot for your attention. And now, we’re looking forward to your questions.

Thomas Toepfer

Thanks. Yes. Chris let me take the second question with respect to the Texas situation. So, first of all, not surprisingly, we had to put our production into secure idle mode also due to the request of the governor so to save energy. So, our production output currently stands at zero and we’re expecting to lose about two weeks of production and that means that by the end of this week or the coming weekends, our assumption is that we can ramp-up the production again.

If you translate this into financial numbers, this means a loss of EBITDA for Q1 which is in the low to mid-double digit range. As I said that is baked into our Q1 guidance and also into the full year guidance. And in terms of core volume growth that means several percentage points of growth that we lose in Q1 and which will now bring us to a guidance of a mid-single digit core volume growth in Q1 as opposed to a potentially high-single digit core volume growth which we had been expecting previously. So, I think that is the effect.

Your last question with respect to construction, in Q4, I would say our core volume growth in Q4 stood at 1.7% positive. Construction is absolutely in line with that. And there is no specific outlier in Q4 with respect to the regions in construction. So, to your question, do we see a marked effect or a cool down, I would say no.

Thomas Swoboda

Yes. Good afternoon, gentlemen. I have two questions please. In terms of your guidance and looking at your main product lines, I understand the reason you’re giving the rather cautious guidance is a multitude of smaller things. But looking at your core product lines, where do you see the major risk of correction after current overshooting? That was the first.

And the second, in two parts on polycarbonates, you commented about the portfolio shift towards more sophisticated products. I’m interested in where do you see the proportion of the more sophisticated products in a normalized environment versus the more bulky part. And 2(b), if I may, do you see any change in dynamics in the [indiscernible] supply especially in China in the emerging markets? Do you expect more available capacities in 2021 one versus 2020? Thank you.

more available capacities in 2021 versus 2020? Thank you.

Markus Steilemann

Hi, Thomas. This is Markus speaking. Allow me to take your first question. So, if you look and let’s see to a specific order talking about business units but you can then make your own assumptions on that one, we see the potential largest impact on polyols because here we see historically speaking the highest prices currently, also from a long-term perspective, followed by TDI and, here in particular, also towards what Thomas has mentioned earlier, about where we see the calculatory industrialization on the one hand which is if you take full nameplate capacity versus actually somewhere in the mid-70s. However, due to let’s say practical availability of plants, this is more now going towards the 90s, maybe even above. And then followed by the PCS, but here the common commodity path. So, if you take polyols, TDI, PCS, I think you have, in this order, a clear ranking of where we would see in the current business the potential largest effects. On the second question, Thomas will help.

Sebastian Bray

Good afternoon and thank you for taking my questions. I would have two please. The first is on longer term group CapEx ambitions. Can you please remind me of when Baytown, the US MDI facility is going to come online and what the level of CapEx currently being spent on that project is, in other words, for 2022 and 2023, could there be a substantial step-up in CapEx? My second question is more administrative. What was the market growth in each of MDI, TDI and Polycarbonates in 2020 globally just to get an idea of how Covestro performed on a relative basis? Thank you.

Markus Steilemann

Yeah. Let me take your first question, Sebastian. So, I would say in a nutshell the situation is unchanged. We have parked the MDI Baytown project in the beginning of last year and we said we would revisit it at the end of this year if and when we will resume it. Now, with respect to what does that mean in terms of CapEx implications, so currently, we’re spending zero on the project. We have essentially ramped down the project team.

We had successfully passed an internal milestone so the project work could be easily archived and saved and the project can be restarted and it can be until then run at practically no cost. So, as I said, at the end of this year, we will revisit the case. If we should decide to continue the Baytown project, it would not have any major CapEx effects all the way to 2023. Why is that? Because we would then have to continue with the engineering work but the heavy spending then only comes once the construction work really kicks in and that will be clearly after 2023, so not before the year 2025. And I think that’s the status. As I said, we will revisit at the end of this year.

Thomas Toepfer

Okay. Sebastian, let me take the second question, if you look at the demand, industry on development and that is all based on Covestro own estimates. Let me start with MDI. Here, we would estimate that the market demand or industry demand has slightly declined by about minus 1% and you will later see that this is the smallest decline that we’ve seen or, let’s say, three major commodities.

One of the reasons for that goes back to what Thomas alluded a little bit too earlier about where we have seen in a crisis year or in a pandemic year 2020 demand still holding on. And that was particularly for example in the construction industry because of so many people stayed home and so many people that had a rough refurbishment work and so on and so forth. And that has driven particularly also demand for MDI. And that’s why the decline was based on our estimate only around minus 1%.

Now, turning to TDI, the demand decline is larger and here most pronounced with minus 8.5% once again based on our own internal estimates. And if we then turn to Polycarbonates, you can clearly tell that this is let’s say a little bit below minus 7%. So, according to our estimates 6% to 7% negative and here, particularly driven by the significant demand drop in the second quarter in the overall automotive industry that I also referred to a little bit earlier, which means we mastered due to the significant shift from specialities towards commodities quite nicely.

Nonetheless, this has overall significantly impacted the Polycarbonates — Polycarbonate industry demand. I hope that gives you some flavor. However, it is very important to take into consideration that this does not yet include, let’s say, some effects that we might only see once we get detailed Q4 industry data because all those data I have just presented are as of today preliminary data making a few assumptions about first quarter but we’re still waiting for the details.

Georgina Iwamoto

Thank you and good afternoon, Markus and Thomas. Thanks for taking my questions. And the first is about how you might characterize mid-cycle EBITDA? I think it was about two years ago that you first referenced about €2 billion of being mid-cycle and since then there’s been capacity additions and acquisitions including RFM. And also we’ve had the additional transformation program announced for cost reductions.

And I think that is also fair to say that the trough EBITDA that we saw last year was higher than we expected certainly versus your guidance at the beginning of 2020 versus the final result. And so with that in mind, do you think it still makes sense to say that mid-cycle EBITDA is €2 billion or does that need to be upgraded? And then my second question. Your guidance includes a GDP assumption of 4% to 5%. I just wondering where that forecast comes from? And if you used Goldman Sachs estimate of 7%, how might that impact your volume guidance? Thank you.

Thomas Toepfer

Yeah. So, let me start with your first question with respect to mid-cycle EBITDA. And if you look at page 15 of the presentation, I think if you look at it we would characterize the upper end of our EBITDA guidance range, so the €2.2 billion, that is actually catching this dotted line which we would say this is the mid cycle line and therefore the headline says EBITDA development is approaching the mid cycle level. So this would be the situation as we see it as of today.

Now going forward, of course, the things have to be adjusted because as of next year Covestro will include RFM. That means a business that on a standalone basis had an EBITDA of roughly €140 million plus the €120 million synergies that should come through over the course of time. Plus, of course, there should be continued volume growth. And if we then take into account that our ambition is not to see any cost increases that would then further increase the mid cycle level all the time. So to your question, I think we never said that the €2 billion would be a static line. But of course there is effects that will kick in a staggered manner over the next number of years that will bring this mid cycle point upwards.

To your second question, yes, indeed we — I mean maybe unfortunately from your point of view did not use the Goldman Sachs guidance but the 4% to 5%. If we were to go with the Goldman Sachs number that would probably mean a 2 percentage points higher core volume growth because obviously our volume development is closely linked to GDP and we’re outgrowing GDP by 1 to 2 percentage points over time. So, I think that would be my rough guess what the implications would be.

Markus Steilemann

Yeah. And Georgina, this is Markus speaking. If you would allow me to add on that one, then we might run into availability issues because as of today and also then for this year, we’re running our plants fully flat out, so that might then also, let’s say, touch the ceiling here of what we would be able to deliver in terms of availability.

Jaideep Pandya

Hi, thanks. The first question is just going back to your comment that you made about running flat out. Could you just tell us like, you know, as of now, how much volume do you have in your system, i.e., with a current capacity network that you have across your three key products and the downstream businesses, how much volume can you actually see before you need more, you know, sort of greenfield or other big brownfield capacity expansion? That’s the first question.

Second question is really sort of around MDI but also sort of MDI and TDI. You’ve seen a lot of outages in the last couple of years for various reasons. In your experience, when plants go down and when you have to bring them up, what is the sort of structural problems that the industry might be facing which we, as investors/analysts, don’t actually appreciate. So, if you could give us some more meat on that, that would be great.

And then, just finally, just want to pick your brain on — this is more sort of questions last comment, but you’ve the RFM acquisition and you’re obviously in polycarbonate trying to gear your portfolio towards sustainability, circularity, etcetera. Will you still talk about mark-to-market which is essentially the way sort of upstream material companies talk about? So, I’m sort of confused. Do you see yourselves going more downstream or you still want to do quarterly mark-to-markets as well? So, if you could just help me understand what is really the longer-term way you see Covestro should be valued as by investors/analysts? Thank you.

Markus Steilemann

Okay. Well, Jaideep, let me — this is Markus speaking. Let me take the first question. So, to just give you a number, in 2019, we have actually sold 5.1 million tons of coal products. And if you then do the math, that was then down in full year 2020 as we have reported about minus 5.6% resulting in 4-point — a little bit more than 4.84 million tons of finished goods. So, if you take this into consideration and we would run our asset flat out, then, the upper end from existing assets is 9% additional core volume growth that we could deliver for 2021. And in 2022, we already spend €400 million to €500 million.

We intend to spend already €400 million to €500 million on expansion CapEx. And then as where the linear model fails because the linear model does not take into considerations that in some specific years we have major turnarounds and in those major turnarounds we partially compensate by building up inventories before and all while doing so-called industry swaps.

And talking about industry swaps that also gives us sometimes the opportunity to bridge, let’s say, those large investments where we normally have then, let’s say, one point in time overnight additional let’s say 3%, 4% capacity available. And therefore, we just can bridge this by buying, for example, if you want to say we lend material from other suppliers which would then at a later point have to get back to smoothen so to say the growth curve.

But in general terms, we have always said that we want to grow at or above GDP. And you can also see in our formal presentations that we for example doing quarterly calls where you can see how we see the market growing. Let’s say our CapEx is going let’s say to support this growth ambition. So long story short, for this year we would see the upper end to be at 9% growth.

And that excludes by the way the DSM RFM business and for further years out, we continue to spend €400 million to €500 million on expansion CapEx. And by the way, that’s almost order of magnitude that we already see for 2021 where we will also only have €350 million to €400 million on maintenance CapEx and the rest is going into gross CapEx. So that maybe gives you an idea about how we look at the current growth.

Thomas Toepfer

And then Jaideep with respect to your second question, I would say there is no specific magic trick or structural problems that we see that you don’t see. I think the fact of the matter is simply it’s pretty complicated chemistry and you do see force majeures much more often in the market that is tight simply because that’s — if there’s an outage then people have to declare force majeure while in the market that is long, they can procure the material potentially elsewhere and are then not so vocal about the technical issues that the producers are facing.

And the second factor probably is that in a market where people run their efforts at maximum speed and potentially compromise on some, some maintenance work is also more — there’s a higher danger that an outage might occur. So, currently, with all those factors, we do have an outage weight of roughly 20% in MDI and TDI globally in the market which we do consider is higher than average. But again I think there is no magic trick to it. It’s just — if you really put pressure on the production then, the danger of an outage is simply, simply higher.

With respect to your last question, I would say, first of all, we do have a very homogeneous portfolio because most of our products really have recourse to the same chemical backbone. However, some of them really carry the characteristics of commodities and some others the characteristics of specialties. And that is very much the driving factor for the LEAF program that Markus presented where we want to structure our company also in business entities exactly along those characteristics.

Now, why do we talk about mark-to-market, simply because in the current environment, our Specialties and Solution businesses do have a relatively stable margin but there’s quite a bit of swing factor from our commodity style businesses. And to give the transparency about where does this currently stand, we do think that the mark-to-market analysis is helpful. Over time, I would say there is a movement that we envision to further move into the Brazilian space. And this is why we think the RFM acquisition makes perfect sense.

This is also why organically for example in PCS, we’re moving into more high qualitative applications and more resilient applications for the product. But of course it’s a longer journey. And in between the intra-year swings still are characterized by some swing factors that come from pricing.

Jaideep Pandya

Can I just one — ask one follow up on MDI specifically. Do you see Q2 still as a heavy turnaround quarter planned — turnaround quarter? And therefore this year is funny in a way that you know H1 has more planned turnarounds than H2. Hopefully no sort of unplanned turnaround so therefore supply significantly improves through the year for the industry that is.

Markus Steilemann

Okay. We’re just pulling up the Excel sheet so.

Thomas Toepfer

And I think, if I just jump in so that my colleagues have a little bit more time to look at the numbers in itself. But if you look at it, why maybe Q2 is coming in potentially as one of those turnaround quarters. One of the key reasons is that during the pandemic many companies adjusted to turnarounds that were legally required but not the ones that they actually have scheduled, they were not legally required simply because of all the challenges that were there in terms of maintaining safe and stable operations, and at the same time protecting also people and workforce.

So but currently actually and I would like to get back to Thomas to give you a little bit more flavor. We do not see an unusual situation coming up in the second quarter but maybe Thomas has more details to that.

Sebastian Satz

Yes. Good afternoon and thanks very much. I also got three question, please. The first one is on your strategy and your intention to become fully circular. I’m under the impression that it’s quite difficult to recycle MDI or MDI-based insulation materials. How should we think about this? How can you address that to achieve your target?

The second one is a quick follow up on your midterm CapEx guidance. Can you just confirm that excluding the — and based on MDI plans, your CapEx in the coming few years is going to stay roughly at this €800 million level that you’re guiding for 2021. And the third one is on your Q1 guidance, €740 million EBITDA at the midpoint. Can you quantify roughly how much of that you would consider as exceptional or flyer because of the tightness in your change that you could do? Thank you very much.

Markus Steilemann

Yeah. Thanks, Sebastian. Referring back to our strategy here. With classical recycling and classical recycling from your so-called mechanical recycling, it is absolutely right that the MDI that has been in use for example for refrigerators or for insulation of buildings is difficult to recycle. I would even say it is almost impossible to recycle it in a way so that you can use it again once for the same purpose. There are always downcycle opportunities. And that, by the way, is already happening today. So, this is going into different other construction purposes and applications; however, no longer into insulation. But exactly, that is where we would like to focus on.

And we have developed in our laboratory and made significant progress to show that you can recycle with advanced recycling methodologies and here, particularly, chemical recycling methodologies, get the molecules out again, by the way, separating legacy chemicals which is a huge environmental benefit and then, using the output of this chemical recycling process once again, for example, by getting out MDI or MDA in that context and by getting out other components to reuse them for the same purpose. That means this is not downcycling, but it is — not even upcycling, but really full recycle that you could do with that, and that gives you access.

But there’s also other sources in that context. For example, bio-based raw materials, for example, carbon dioxide. Because in the end of the day, just imagine, we are molecule managers. That means we know how to do chemistry and we know exactly how to mimic nature in this context. And that is what we’re doing in our laboratories. And now, we’re looking into opportunities, okay, how can we first of all create markets for those recycled raw materials, how can we make sure that the supply chain is going from linear models to circular models, and how can we make sure that then the best partner in the value cycle is doing their respective job.

That means who is doing then the chemical recycling. Is it us, our licensing those technologies out? Is it a third party who is doing that? And that is exactly what we are building. And by the way, as I said earlier, we have already received the first barge of recycled phenol and we intend now to further develop into different fundamental, strategic raw materials like benzene and toluene just in the course of this year. And we’re doing this with large partners who are out there who are doing exactly that and now moving into renewable raw materials.

And they also intend to use feedstock that I just mentioned from the construction industry, municipal waste, or even carbon dioxide as a source. So, there’s a market that is being built but it’s a long-term vision. So, it will not happen overnight, but we can demonstrate that it works. We are building those markets. And once they have been built, then you will also see that scale is being built to make the market, yeah, just very liquid in that sense.

Thomas Toepfer

So, Sebastian, your second question was whether we would remain at the €800 million level in terms of our CapEx if Baytown work is not resumed. I would say this is directionally correct. To give me a little bit more headroom in case two or three midsized projects occur at the same time in terms of timing, my wording will be that we should stay below the €1 billion threshold, but I think, as I said, directionally your statement I would subscribe to that.

Second — your third question was with respect to mid-cycle margins. I mean, you’ve seen that we would characterize a full year EBITDA of €2.2 billion as being mid-cycle and that in terms of quarterly margins means that a mid-cycle margin is somewhere between the margins of Q3 of last year and Q4 of last year. And I think that gives you the order of magnitude to that question.

Markus Mayer

Thank you. Good afternoon, gentlemen. One question on this new structure, the reporting structure; and then two smaller ones on the guidance. First on the split of this performance materials division, how should we think about the different products which are in this new business unit in terms of 40 percentage would be then Polycarbonate MDI, etcetera? That would be my first question.

Second question is then on the guidance, just a clarification because as I said that this restructuring cost for the LEAP program or this extra cost for LEAP program yet included in the EBITDA or/and or in the operating cash flow guidance. And then the last question would be done on the assumption for core volume growth for RFM for full year 2021. Thank you.

Thomas Toepfer

Yeah. So let me start with the last two questions. So under guidance, yeah, just to be crystal clear and reconfirm, the guidance that we’re giving for 2021 fully includes the consolidation of the RRM business in both directions. It includes the additional EBITDA for most likely nine months, very most likely nine months. But it also includes the integration costs for that business.

What it doesn’t include is the potential accruals that we might have to build for the measures in connection with the LEAP program, which will only be executed and cash effective in the years 2022 and following. And therefore, we deem it appropriate not to guide for that number because it will not be cash effective in 2021.

Markus Mayer

Okay. Thank you. Understood.

Markus Steilemann

And then core volume growth. I think you asked. I’m not sure whether I fully understood your question. We said we’re expecting a core volume growth of 10% to 15%. And that includes 6 percentage points from the consolidation of the RFM business, so the organic growth without RFM, therefore is 4.29 with a bit of 6.5.

Markus Mayer

Also my question was on basically the assumptions of the underlying growth of RFM. So I thought the 6% M&A effect, but what is on the underlying function for this business?

Markus Steilemann

There is no specific assumption baked in. So the 6 percentage points in fact is a pure first-time consolidation M&A effect so to speak. Other than that, I think what we have said when we talked about the acquisition is that RFM is positioned in a space that should yield above-market growth simply because it has a high exposure towards sustainable and water-based coating technologies. So, again, I think what you should take into consideration is a growth rate at least in line with the cusp business and what we have shown for Covestro as a whole. So, I think that will be my comment on the RFM growth on a standalone basis.

Markus Mayer

Okay. Understood. Thank you.

Markus Steilemann

And then I think your first question on the structure, so the performance materials group would obviously contain all the products that have a more commoditized character. So TDI would be part of it. But also the commodity presence in the PCS space. We will give you more details once we talk about the reporting structure. And that brings me to the second most important point, what we have presented to you today is not yet the final reporting structure that still has to be worked out. And therefore, we will come with some more details latest in Q2 of this year on this.

Charlie Webb

Hi, gentlemen. Thank you very much for taking my question. Maybe just a couple of follow ups. So when you noted I think on the call, you see 20% outage rate in MDI and TDI. Is that currently including what’s going on in Texas or is that kind of excluding Texas? Is that what you are seeing?

Now I’m just trying to understand that, that does seem extremely high on an annualized basis. So where would that normally be, which would be helpful when we kind of consider planned turnarounds, etcetera. That’s the first question.

The second question just on cast. Can you just help us understand what you are seeing? We obviously hear some more positive comments from your customers around industrial coatings demand recovering. If I remember right we were talking about the kind of operational leverage effects that was impacting you negatively in 2020. So, just trying to — how do we think about that in 2021 as some of these volumes start to come back. Would be — it would be very helpful.

Markus Steilemann

Charlie, maybe on the first one, this above does include — exclude Texas this above 20% let’s say above 20% has not taken into consideration what we have seen and witnessed actually happening in last week due to the very bad weather conditions. If you would that let’s say consider if you would consider that that would lead to an outage rate in that sense of almost 25% given that the majority of the respective industries is really concentrated around the Bay area there.

And if you look at industrial coatings, the second question that you will refer to, we are sold out. HDI, one of the key raw materials is not raw materials but key material we are selling to our customers is extremely tied. And raw materials also HMDA is extremely tied and we had to declare force majeure in Leverkusen for HDI. And unfortunately also HDI is one of the products that is affected due to the Texas shutdown. So we could sell more if we would have more to be very clear.

Charlie Webb

So, kind of as we think about that volume, strong kind of volume recovery in cast, should we expect a nice drop through on those incremental volumes given it was an area we cited as having negative leverage effects last year? And should we expect a fairly sharp rebound from an operating leverage standpoint?

Thomas Toepfer

Yeah. While the key issue there is always you know where is the demand for that, you know, can you really catch up on that once you have lost the business and that’s always the key question. And from that perspective there is a strong leverage indeed. And in second quarter, we also expect that compared to previous year’s level, we definitely will see this type of kicking in.

The question is always can you sell what you have not sold in Q1. And I don’t think so because we are fully sold out. We don’t have any inventories. And once again we have been hit hard also by the weather conditions and therefore also had to declare force majeure as I said in Leverkusen due to a different reason.

But also now in Baytown, the situation is only slightly yet steadily recovering because even though we are ready to restart the plants, we have to rebuild the entire supply chain. The raw materials suppliers have to come on stream. And also the entire logistics has to be built up more or less from scratch in the next couple of days before we are back to normal.

Charlie Webb

Okay. And maybe one last question if I can, given what sounds like a very tight supply picture, given we’re expecting that the automotive demand be notably better year-on-year and, as you say, some areas your either sold out or somewhat constrained, I mean, is there a risk that heading into Q2 once Chinese New Year is kind of behind us and everyone is back and working, is there a chance that actually spreads could move higher before they normalize?

It just all sounds like a pretty tight situation right now. And perhaps, if that is the case, maybe if the demand continues to remain pretty strong and recovery, reopening kind of gathers momentum, we can actually see things get tighter before they then loosen up. Is that a potential scenario or do you not see that?

Markus Steilemann

I think Thomas has tried to restrain a little bit earlier in a different context and the question was kind of coming at that time from a different angle. But if you look at spot prices that we are seeing and there are also currently up strongly in China for MDI as well as TDI and also the last days have waited on that sentiment positively or supported that sentiment positively given the force majeure in the US that we just touched upon, you could build a scenario in this direction.

However, you have really have to keep in mind that raw materials, I mean, the input factors for MDI and TDI spiking given the current shortages, propylene, US benzene, and China and so on and so forth. And if it goes down normally, based on experience, it goes pretty fast and pretty let’s say — I would not say disruptive but in very, very short time. So, from that perspective, now speculating whether April will continue with higher margins or whether we’ll see let’s say that margins for those products will drop. That’s pure speculation, honestly speaking.

Thomas Wrigglesworth

Two questions for me. Just trying to triangulate some of the comments. You talked about building assets faster and cheaper with the new strategy. Can we take it that polyols are the key focus there for building assets? Is that how we should think about that? And then secondly, just a quick one, given you’ve got these news business entities, why shouldn’t the future financial reporting marry with the new business entities? I don’t seem to understand why that isn’t the case. Thank you.

Markus Steilemann

Well, fast and cheaper refer us once again to the entire range of capital expenditure and definitely, let’s say, not to PO. In that context, PO is a very important asset for us, but we have no intention to build, and this is here, clearly, the bottleneck. But if you look at the overall, let’s say, asset structure that we have, the overall product portfolio, all of this asset structure and all of this product portfolio is targeted with this new initiative to build faster and cheaper. And we have already internally started six large initiatives to really make this a reality.

Thomas Toepfer

And maybe on the second question. It’s very simple. I mean, we’re talking about seven business entities. On the other hand, IFRS regulation says in order to qualify as a separate reporting entity, would have to be more than 10% of asset sales and also profit. That is not the case for all of them. So the question for us really what is a sensible grouping of those seven that’s kind of his consistent with IFRS but then also may extend from an investor perspective. And that is currently what we’re looking into.