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Covestro AG (CVVTF) CEO Markus Steilemann on Q3 2021 Results – Earnings Call Transcript

Nov. 08, 2021 2:32 PM ETCovestro AG (CVVTF), COVTY

Start Time: 09:00 January 1, 0000 9:58 AM ET


Q3 2021 Earnings Conference Call

November 08, 2021, 09:00 AM ET

Company Participants

Markus Steilemann – CEO

Thomas Toepfer – CFO

Ronald Köhler – Head of IR

Markus Steilemann

Good morning and good day to everyone. Thanks Ronald also and a very warm welcome from my side. So we are now on Page 2, which is the financial highlights for the third quarter 2021. In the third quarter 2021, our earnings performance was well above previous year.

In the prior year quarter, as you know, we had already seen a strong volume rebound from the coronavirus pandemic. We also see continued solid demand in key industries on a global scale. The strong earnings momentum continues to this day and also well into the fourth quarter.

The EBITDA of €862 million came in at the upper end of our Q3 guidance of €760 million to €860 million. At the same time, there is a solid free operating cash flow of 381 million and this is slightly above the prior year, only held back by a valuation-driven increase of working capital.

Year-to-date, the earnings per share are at €6.80, up from $0.80 at the first nine months in 2020. On July 1st, we also implemented our new segment and reporting structure, and we now have two segments with Performance Materials and Solutions & Specialties. Today, we also raised our earnings guidance for the full year 2021.

Let’s turn the page to the solid demand recovery that continues on a global basis. Year-to-date, we have seen a solid demand recovery from prior year impacted by the coronavirus pandemic. There has been solid industry demand and that applies globally as well as in our three key regions.

The table shows the full year estimates for our key industries and respective important sub-industries. The expected demand growth in all key industries for the full year 2021 is well above the full year 2020 values. Please compare for this purpose the middle column with the left column on the chart. The industry data are largely consistent also with our customer feedback.

With that, please turn to the next page. While the global demand development is positive, the growth potential of our core volumes was limited. Why? The level of unplanned constraint to product availability in 2021 is significantly higher than normal, and the chart lists some key single adverse effects in total limiting our core volume growth by around 6 percentage points this year.

Let me go through the four major points each. First, refilling inventories, especially for polycarbonate products, to improve future availability. That is estimated to contribute a full year impact of approximately 3%.

Second, making up pandemic-related delays of scheduled maintenance shutdowns and that leads to above average maintenance activities in 2021. This contributes approximately for the full year 1% of volume growth.

Third, a large unplanned shutdown of MDI plant in Brunsbüttel is assessed to have an impact for the full year of approximately minus 1%. By the way, we have just lifted the force majeure on the MDI production in Brunsbüttel.

And fourth, last but not least, the U.S. winter storm Uri that happened this year in February and its consequences on the U.S. supply chains has approximately an impact of 1% for the full year 2021.

To put this into perspective, four negative effects eat up 6% positive core volume growth from the acquired RFM business. And 2021 constraints are at the same time an opportunity to grow core volumes mid to high single digit in the next year 2022.

Let’s turn to Page 5. As you can see on the chart, our core volume growth of only 0.8% in the third quarter 2021 reflects two things; that is solid customer demand on the one hand meets constrained product availability on the other hand.

Let me guide you through the volume development by our key industries, ranking by kilotons sold. In furniture and wood, we have seen a decline of minus 17%. The solid demand was there, yet constrained by TDI and polyols supply and availability.

Secondly, on construction, we have seen minus 11%, again, a solid demand situation but constrained MDI and polycarbonate availability. And then auto and transportation, minus 6% that still outperformed the global auto production decline of minus 16%. And that was driven by structural factors like, for example, a strong electric vehicle growth.

And last but not least, electro flat with 0% with a small growth opportunity here in Asia Pacific. The volume development by the three regions and the key countries is comparable to the global picture that I have just provided.

One positive exception [ph] though, the higher core volume growth of plus 22.4% in Germany, due to relatively low prior year base and highest relative contribution from the RFM businesses compared to the United States as well as China.

Markus Steilemann

Yes. Thanks a lot, Thomas. And let’s go for the group first. On Page 8, you see that in Q3 2021, we have the highest quarterly sales in Covestro’s history. Sequentially, the sales increase was driven by higher volume as well as price, and the EBITDA continues to be on a higher level.

It was the fourth consecutive quarter with an EBITDA margin around 20%, still well below historic peak of 28.1% in the first quarter of the year 2018. Sequentially, the EBITDA increased due to higher volume, while pricing delta was slightly negative.

Now let’s turn to the Performance Materials segment. The Performance Materials core volume growth, as you can see on Slide 9, was at minus 11.6% year-on-year. However, it is not reflective of demand, as Thomas also pointed out numerous times.

The underlying global demand is solid in our key industries, and core volumes of standard products were constrained by product availability and shortages of feedstock. Most prominently, MDI in Europe was on force majeure during the third quarter after shutdown of our Brunsbüttel plant in Germany.

Also more internal allocation of available material to Solutions & Specialties was happening instead of external sales by Performance Materials. Compared to prior year, the EBITDA increased mainly due to strong positive pricing delta, compensating higher provisions for variable compensation.

Sequentially, the EBITDA increased due to higher volume and positive pricing delta. If intersegment sales edit to reported external sales, the adjusted EBITDA margin of 25.6% would be there instead of reported 34.5%.

So let’s turn to Page 10, and take a look at Solutions & Specialties. The Solutions & Specialties core volume growth was at 22.7% year-on-year and included about 20 percentage points from the acquired RFM business.

While volume effect on sales was negative in Performance Materials, this volume effect was 6.9% positive on sales in Solutions & Specialties. Both year-on-year and quarter-on-quarter EBITDA, however, declines. Compared to prior year, the EBITDA decline mainly was due to negative pricing data and higher provisions for variable compensation.

Sequentially, the EBITDA decrease was driven by negative pricing delta, while volume growth contributed positively. We have seen a significant increase of feedstock prices in a relatively short period of time, and that could not be fully passed on.

Markus Steilemann

Yes. Thanks a lot, Thomas. And please allow me, before I wrap up the Q3, I would like to bring your attention to one highlight of sustainability-driven innovation on Page 15. This is about the Circular Foam project that closes the material cycle for polyurethane rigid foams.

And you might now ask yourself, why is that relevant? It is relevant, because every one of you has a refrigerator at home and you can assume that in almost every refrigerator, polyurethane rigid foam is the most effective and also very cost effective solution for insulation purposes to make this device very energy efficient.

And on top of that, what works with a refrigerator works with entire houses, be it private homes or commercial buildings. Also here, millions of tons of rigid PU form is used and so far, there is no real recycling solution available. And that’s why Covestro has started and is coordinating an EU innovation project with 22 partners from European countries.

You see just a simplified overview on Chart 15 about how that project work. And believe it or not in reality, it’s way more complicated. But we’re not shying away from this. The project goals and benefits are establishing a coordinated waste management and suitable recycling processes. In other words, redesign the entire value chain.

Secondly, develop an innovative chemical recycling process for rigid polyurethane foam. And last but not least, significant savings potential here in terms of waste, incineration cost as well as carbon dioxide emissions for the entire value chain once the circular concept is established.

What is Covestro in this consortium focusing on as an innovative recycling solution? First, we enable the reuse of materials at end of a useful life where mechanical recycling is failing, and therefore not a suitable option.

And we also develop new processes in chemolysis and also smart pyrolysis to obtain polyols on the one hand and amines as a circular raw material on the other hand for production of fresh polyurethane rigid foams without loss in quality. Therefore, for Covestro, this project, Circular Form, is another lighthouse project with which we are advancing the realization of a circular economy as part of our vision.

Geoff Haire

Yes, sure. It was a fairly straightforward question. Within your business, what parts are most sold out? So where have you got the biggest capacity constraints?

Markus Steilemann

Okay, Geoff, this is Markus speaking. And I take it, you see we’re still, let’s say, so excited that we are still struggling who should go first to answer all those questions. So let me start with MDI. So we believe that the MDI market is overall very strong. And why do we believe that? Well, in 2020, according to the data we see, there has been a downturn of only around 1.5%. The industry is expected to increase on the other hand already by 10% in the full year 2021. So that means we will be then for the full year well above 2019 level already. PCS is also strong, however, but just back on 2020 global market level. So here we still need some time to be really well above pre-crisis levels. Then we also increased in this industry our global market share. TDI is still below 2020 levels as furniture and bedding did not fully recover. However, we actually sold out in all our product categories. If you look now at supply/demand, I think what is important to understand, the difference between nameplate capacity where you normally calculate the overall industry utilization and available capacity. And here we have seen in our three, let’s say, major products group quite, let’s say, different pictures. MDI I talked about, there’s not so much of a big difference, even though there is still some impact from Uri, let’s say, winter storm that happened back in February in the United States. However, in TDI, actually the nameplate capacity would still be this year around 74%. But the available capacity is significantly lower. Let’s say, what has been significantly lower. And therefore based on that perspective, the industry utilization on available capacity is much higher. Since BASF had actually brought back its TDI plant in Ludwigshafen after a major, let’s say, additional turnaround, we have seen that already margins in Europe have actually come down. And that’s why I would not expect at current overall margin levels that we will see, let’s say, significant further pressure on the spreads that we are currently seeing in the TDI business. And therefore, there should be limited further downside risks from today’s perspective.

Thomas Swoboda

Yes. Good afternoon, everybody. I have one question please. And first, thank you for providing the detail on the challenges you had on your volumes on Page 4. I have a question on the rebuilding of inventory, which you say has taken up around about 3% of your capacity. So the question is twofold. Firstly, could you comment when this rebuilding of inventory happened? What’s the particular quarter that allowed you to rebuild inventory? Could you just help in how it’s achieved? Could you just comment how it developed? And secondly, could you just describe where you see the year-end inventories for your main product groups? That would be very helpful. Thank you.

Markus Steilemann

So, Thomas, on the inventory buildup, so first of all, we’re doing this for two reasons. One is we do think that the supply chains will still be under stress in the first half of 2022. And we, therefore, want to be prepared with respect to our customers and be a reliable supplier. But on top of that, what is important to know is that in Q1 next year, we do have a peak maintenance quarter with significantly higher maintenance shutdowns than we would usually have in the first quarter of the year. And to prepare for that, that is why we’re building the inventories. So there’s nothing else behind it. We’ve started to do so already over the summer. And therefore, you’ve seen the effect to a minor effect in Q2 and now to a bigger effect in Q3, and that will slightly continue until the end of the year. But the real value, of course, as you will see in our balance sheet then depends on the valuation. So again, if you weigh the two factors, valuation versus KT, then still the valuation has a much bigger effect on our inventories. And in terms of kilotons, we’re really only going back to a healthy level, plus a little bit of reserve for the higher maintenance shutdown. So we’re not doing crazy things here, but really just bringing it back to normal.