Covestro AG (CVVTF) Q2 2025 Earnings Call Transcript

Aug. 01, 2025 6:20 AM ETCovestro AG (CVVTF) Stock, COVTY StockCVVTF, COVTY

Covestro AG (OTCPK:CVVTF) Q2 2025 Earnings Conference Call July 31, 2025 9:00 AM ET

Company Participants

Carsten Intveen – Investor Relations Director
Christian Baier – CFO & Member of Management Board
Markus Steilemann – CEO & Chairman of Management Board
Ronald Koehler – Head of Investor Relations & Corporate Controlling

Markus Steilemann

Thank you, Ronald, and good afternoon to everybody, and a warm welcome to our second quarter call. With the end of today, Covestro’s Chief Commercial Officer, Sucheta Govil, will go into her well-deserved retirement after 2 consecutive terms on the Board of Covestro. I would like to express my sincere gratitude to Sucheta for her exceptional contributions and her dedication to shaping our company.

On behalf of the entire Board of Management, I now have the great pleasure to introduce the new Chief Commercial Officer of Covestro, Monique Buch, to the investor community. Monique is an esteemed top manager with an impressive track record and a long-standing experience in the materials business. In her last position, she served as Executive Vice President, Nonwoven at Lenzing AG Austria. This position had been preceded by various leading positions at Freudenberg and Dow Corning. She obtained a master in Industrial Engineering & Management from the University of Twente.

The other members of the Board of Management of Covestro and I are delighted that Monique will take an active role in improving our business performance while transforming Covestro to the circular economy and execute our sustainability — sustainable future strategy. Turning to the next page. Positive news are coming from our M&A team. We always said that we are looking for bolt- on acquisitions for our Solutions and Specialty business. Now with the acquisition of Pontacol, a Swiss manufacturer of multilayer adhesive films, we have done another step in this direction. This move expands our specialty films product and technology portfolio, enhancing our European market presence.

The acquisition offers attractive value creation through portfolio, organizational and procurement synergies. The addition of production sites in Switzerland and Germany strengthens our global manufacturing network and improves regional availability of adhesives films. This expansion enables us to deliver more powerful customer solutions, increase competitiveness and grow sustainably. We expect sales growth in the low double-digit euro million range by accessing growing applications, including security glazing, flexible printed electronics and wind blade leading edge protection.

The EBITDA contribution of these attractive applications is expected in the mid-single-digit million euro range. The closing is expected in the second half of this year. After these encouraging news, let us now turn to the key effects of the last quarter. Turning to next page. The key effects of the second quarter were sales volumes remained stable. We had lower sales of EUR 3.4 billion, and they were caused by lower prices and unfavorable currency. We achieved an EBITDA of EUR 270 million, which is in the upper half of our guidance range. The free operating cash flow came in negative at EUR 228 million. Following our July 11 announcement, we adjusted our guidance for EBITDA, free operating cash flow and return on capital employed above WACC. We were the first of several chemical companies that have since revised their guidance in response to adverse market conditions.

Turning over to the next page. We are looking at the business and the volume development in the second quarter of 2025. Year-over- year, global sales volume remained flat, almost balancing negative developments in Europe, Latin America and Asia Pacific with positive volume trends in North America. Across different industries, construction showed the highest growth with a mid-single-digit percentage increase, mainly driven by regional supply and demand patterns without major import-export trade flows. All industries depend on imports/exports declined. Automotive saw a low single-digit decline. Furniture followed with a mid-single-digit decline and Electronics was most affected with a high single-digit decline.

Regional performance varied significantly. Europe and Latin America presented a mixed picture. Furniture/wood showed a slight increase. Automotive remained flat, while construction declined slightly and electronics dropped significantly. North America sales volumes, especially in Performance Materials, increased significantly, driven by strong growth in construction due to gaining market share from competitors relying on imports. Furniture/wood increased slightly. Electronics developed flattish, while automotive

showed significant decline. Asia Pacific maintained a slight sales volume increase due to significant growth in construction, automotive with slight growth, but strong negative trends persisted in electronics and furniture.

Christian Baier

After Solutions and Specialties, we now turn to the Performance Materials segment. Year-over-year sales declined by 11.8%, driven by negative contributions of minus 6.6% from pricing, minus 3.0% from FX and minus 2.2% from volumes.

Quarter-over-quarter, sales increased in APAC and North America, while EMLA declined. The Q2 ’25 EBITDA of EUR 149 million is lower year-over-year, mainly due to a negative pricing delta, while positive volume effects from reducing low-margin or loss- making business. Sequentially, the EBITDA in Q2 ’25 rebounded after the Q1 impact from onetime costs related to the closure of our PO JV with Lyondell. It increased due to positive effects from others, mainly from bonus provision release and cost contingency, positive volumes and pricing delta following the high energy costs during the winter period. We are also reducing the EBITDA guidance from EUR 400 million to EUR 700 million and now expect PM to contribute between EUR 200 million to EUR 500 million. This adjustment is based on the low probability of a margin recovery for H2 2025.

Markus Steilemann

Thanks a lot, Christian. We are continuing with the outlook for Covestro’s core industries on Page 12 of the presentation. Global GDP forecast has decreased to 2.5% from February’s 2.8% outlook. This reduced global outlook also affects most of Covestro’s core industries. Automotive growth forecast decreased to 0.6% from 2.7%, primarily due to U.S. tariff policies disrupting global supply chains and demanding weakness in Europe and North America.

EV and battery electric vehicles outlook remains strong at 24% growth. Construction industry growth forecast increased to 0.6%, partly due to stabilization in the Chinese housing market, though ongoing conflicts and political uncertainty limit further growth. Furniture industry growth forecast decreased to 0.5%, which is 1 percentage point below earlier forecast, mainly due to weaker production in APAC and North America regions. Electronics industry growth forecast is now at 3.7% with persistent uncertainty regarding U.S. trade policy and potential tariffs affecting investments. Household appliances showed slightly higher expected growth at 2.4%.

Let’s turn to the next page. As already mentioned, we have adjusted our guidance as published on July 11 due to downgraded industry growth expectations following U.S. tariff announcements and the lack of substantial margin recovery prospects. The EBITDA guidance is now between EUR 700 million and EUR 1.1 billion, down from EUR 1.0 billion to EUR 1.4 billion after the first quarter. The free operating cash flow guidance has been adjusted in line with EBITDA and is now expected between minus EUR 400 million and plus EUR 100 million.

Unfortunately, the day after our ad hoc release, we were impacted by a fire in the transformer station in Dormagen owned by the chemical site operator, Currenta. The sudden lack of electricity led to a shutdown of our polyol plants, but mainly damaged our chlorine production, which subsequently impacts our TDI as well as several solutions and specialty value chains.

We are still uncertain about the full financial impact. However, first preliminary evaluations revealed a possible high double-digit to low triple-digit million euro EBITDA burden for the full year 2025.

Christian Faitz

Two questions, please. First of all, at the low end of your EBITDA guidance for the Materials segment, you’re not expecting much of a positive contribution in H2. So just about EUR 40 million at best, I guess, kind of H2 ’22 situation. What are the assumptions for this lower end? And I take it this includes the force majeure effects, correct?

And the second question would be, are there any signs of a demand revival into Q3 from any key customer industries, furniture, electro/electronics, automotive?

Markus Steilemann

Yes. Thanks, Christian. This is Markus speaking for your questions. Let me start with the second part or second question, the revival signs of any industries going into the third quarter. I hope we could provide you with an overview about where the different industries in terms of overall industry outlook look like. And I’m here specifically referring to one of the slides that we have in our presentation that supports the respective call.

And there you see that many of the industries that we are serving mainly take automotive, construction, furniture, electro — and electronics, there is a positive growth outlook for the full year 2025. However, in general terms, we have to say that this industry growth outlook has been revised downwards for some major industries. And that downward revision having now Q1 and Q2 behind us, for sure, would impact the second half of this year stronger. So if you do the math, you would figure out that currently, there is limited to no signs of a significant uplift. It might be regionally slightly different here and there. But in general terms, we have to say that the world is still challenged. And one of the major reasons is the ongoing uncertainty due to ongoing negotiations of U.S. tariffs.

So that is the underlying thing. And that all comes on top of the uncertainties that we have seen so far and the prolonged crisis, and I don’t want to reiterate it since when we already have consecutive crisis going on 2021 with Corona, energy peak and so on and so forth. So long story short, the market currently is in a very challenged overall situation. So that means for second half, I personally would not see a significant broad-based across the board uplift in demand. And once again, there might be here and there some regional differences by industry or in general. But I do not think that this is sufficient to provide a broad positive overall uplift of the markets for our industries and for our main customers, yes.

Well, let’s not forget, Covestro is doing a lot on self-help. We have just — and I have been mentioned today is this program is strong. We also have made it very clear where we stand in terms of the rest of the year outlook with our updated guidance. And now coming back, let’s say, to your first question, the costs that we had to digest this year for example, restructuring costs for PO11 are nonrecurring then, let’s say, for the next year, most likely.

And the Dormagen case that I just mentioned has not been included in the midpoint, but should be covered at the low point. So there will be ongoing margin pressure also for our materials like polycarbonate and polyols. So it will remain a challenging year. And at the same time, we have to also make clear that we do everything that is in our own power to make sure that we deal with the current

situation. So the underlying is relatively stable, yet at, for us, also low levels. And therefore, we would expect that Q3 is therefore similar to the second quarter, but excluding the Dormagen incident. So I hope that gives you somewhat a picture and a flavor.

Chris Counihan

I just wanted to ask about Dormagen and specifically how long you expect the plant to be out for, firstly? Obviously, you’ve given a financial impact, but just I wasn’t sure if I heard how long you expect it to be on force majeure for as of today.

And then secondly, obviously, that’s about 1/3 of your TDI capacity. If I look at my supply demand. Is there the potential for the other 2/3 to benefit from the market being a bit tighter?

Markus Steilemann

Yes, Chris, thanks for your question. Very roughly speaking, we expect Dormagen to be out for several months. And now comes the big but. What is mainly affected for the several months is the chlorine supply. The chlorine supply is absolutely essential to run the TDI plant. However, there’s other chlorine customers internally as well as externally, and that’s why we also issued that force majeure because there is onward opportunity to gradually at least bring back some of the other internal value chains, for example, in the Solutions and Specialty area, but that will also be a matter of weeks, so not days, but really weeks.

So gradually, we expect that more and more plants will come up on stream, but the big volume and also a margin contributor, TDI that is definitely out from today’s perspective for several months. With regard to your second part, we have just observed that Asia prices have rebounded based on the prices that were quoted by traders. First, we have to take a look at it, is it sustainable? And in the U.S., we have, let’s say, in the entire industry, not so fast-moving prices due to contractual basis, and I’m talking more about what I perceive as a general industry pattern rather than our own situation. And therefore, we have not seen any reaction so far. And also, please bear with me, we’re not going into any further details because the TDI market is a very, let’s say, narrow market. And therefore, anything I say could be one word too much around this. And from that perspective, please allow me that I leave it with that.

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