Covestro AG (CVVTF) Q2 2023 Earnings Call Transcript

Aug. 01, 2023 3:32 PM ETCovestro AG (CVVTF), COVTY

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Covestro AG (OTCPK:CVVTF) Q2 2023 Earnings Conference Call August 1, 2023 9:00 AM ET

Company Participants

Ronald Koehler – Head of IR

Markus Steilemann – CEO

Thomas Toepfer – CFO

Markus Steilemann

Hello and a warm welcome also from my side to the results of our second quarter call. We are still operating in a challenging environment characterized by weak demand, de-stocking and industry wide price pressure. Consequently, our sales were significantly down year-on-year to €3.7 billion. In line with our guidance we achieved a second quarter EBITDA of €385 million. Free operating cash flows strongly improved year-on-year and was minus €10 million only slightly negative in a seasonal weak quarter. This was supported by a rigorous working capital management.

For full year 2023 we confirmed our guidance for all KPIs, however, we now expect to be rather at the lower half of the guidance ranges. Finally, we continued our 500 million share buyback program and brought back 1.2 million shares during the quarter.

On the next page, we’re coming now to the business and the volume development in the second quarter of 2023. Year-on-year, the global sales volumes decreased by 8%. This was caused by on-going demand weakness across all regions and limitations in our internal availability. Looking across the industries, we see quite a mixed development with auto and electro on a growth path, but furniture and construction with declining volumes.

Europe is continuing to be the weakest region with significant decreases in almost all industries important to Covestro, except automotive, where we had a slight increase. Part of the volume weakness was still caused by the known production limitations and chlorine in Germany. The gradual ramp-up of the production during the second quarter has been on schedule and we expect this to continue throughout the third quarter, resulting in a return to full output in the fourth quarter of 2023.

Sales volumes in North America also declined across most industries. Construction witnessed a significant decline, whereas electro and furniture were only slightly down. And in line with the global trend, auto transportation improved slightly. Against the overall declining trend in the other regions, Asia-Pacific showed a positive volume development. This was driven by a low comparison basis as we suffered from the COVID lockdowns last year. Compared to this low basis, electro, automotive and furniture achieved significant growth. However, despite the weak basis, construction still slightly declined.

With that summary of the demand development, I’m now handing over to Thomas, who will guide you through the financials.

Markus Steilemann

Thank you, Thomas. Now we’re coming on the next page to the outlook for Covestro’s core industries. Since beginning of the year, the outlook of the global GDP has slightly improved from 1.5% to now 2.4%. Although the message sent from this is positive, our core industries are not the beneficiary of this development.

After the end of the COVID pandemic, the service sector is more than proportionately benefiting from the regained freedom of travel and socializing, thus driving this GDP growth. Most of the producing sector remains stuck in the on-going demand weakness and destocking trend. It’s important to Covestro, we see that only automotive is expecting a further improved demand raised to 6% now.

The expectation for the construction industry has deteriorated and even turned negative. The reason for these trends are the high interest rates, higher cost for building materials and on-going destocking. The furniture industry is seeing a very similar trend with now an expected second year of declining markets. The demand expectations for electro were also adjusted downwards to almost no growth.

With this disappointing development of our core industries, let us now turn to the Covestro outlook for the third quarter and the full year 2023. On Page 15, you see as explained in the outlook for our core industries that we currently see the potential risk of a further deteriorating economic environment and on-going demand weakness for the remainder of the year.

Therefore, we currently expect our EBITDA to come out at the lower half of our guidance of €1.1 billion to €1.6 billion for the full year 2023. We expect now volumes to decrease mid-single digit percent year-on-year for the full year 2023. However, the second half of 2023 will result in higher available capacities from resolving our production limitations towards the first quarter 2023.

This should allow us to continue a slight quarter-over-quarter volume growth in 2023. The current mark-to-market calculation comes out at about €1.2 billion based on July margins flat forward. This is in line with the midpoint of the lower half of our EBITDA guidance. We are confirming the mid-cycle EBITDA level of €2.8 billion in 2024.

We are confident that we can achieve such an EBITDA level in a normal economic environment. The most important element of bridging the gap would be a high utilization rate of our plants.

Without further investments, we could grow our volumes by more than 20%. Even on today’s depressed product margins, this would translate into an additional EBITDA contribution of more than €1 billion.

Thomas Swoboda

Yes, good afternoon everybody. I will risk two questions, please. Firstly, on your guidance for Q3, it seems that you were pointing to a more negative pricing delta in Q3. Could you discuss where you see pricing pressure in particular on product, product and regional level, if possible.

My second question is — and I will risk asking on the current situation, but I will ask it indirectly. In terms of your of your long — mid to long-term growth ambitions do you currently face any limitations in terms of backward integration financing capabilities? Or how can I put it, being very being very exposed to the capital market that are limiting your growth vice versa, if you would have limited resources and would be shaded from the public a little bit more, would you be able to grow much, much faster than you would be — then you are able to grow currently in the mid to long-term. Thank you.

Thomas Toepfer

So Thomas, let me maybe take the first question with respect to the guidance in Q3 and also what that means with respect to the pricing delta. So first of all, I would confirm that for Q3, we’re expecting a negative pricing delta. If you look at it from a quarter-over-quarter perspective, so that could be somewhere in the region between €150 million to €200 million negative. If you look at it from a year-over-year perspective, I’d say it’s almost neutral.

So what is it that we’re seeing quarter-over-quarter is mainly a weakness in TDI, mainly in Europe, but also to some extent in other regions. The polio weakness will continue and there might be a little bit more downside in PCS commodities, while MDI, we rather would assume that it is flattish. So it’s a mix mainly coming from our quality businesses where as I said sequentially, we would see that there is a negative pricing delta, as you correctly said. However, again, year-over-year, it’s almost neutral.

Markus Steilemann

Thomas, this is Markus speaking. Thanks for your question and coming to the second question that you have asked. Covestro has a very clear strategy. It’s well positioned in the key regions. That means North America, Europe as well as Asia Pacific. And we have access to very competitive and sufficient and reliable raw materials, be it on smaller raw materials or strategic raw materials for our business.

And in that context, with regard to the limitations that you indicated also on growth, we do not see neither by the way how we are financed or let’s say, well, by the respective resources limitations on our growth opportunities.

Jaideep Pandya

And then the third question, I’m sorry to ask you this very directly now. But I mean what is your different strategy given that finally, somebody is knocking on your door little loudly. So if this is real, how are you defending this? Or are you just using the famous words, no comment and not talking. So can you please confirm what is official version from Covestro on ADNOC? And how are you defending it if it is real? Thanks.

Markus Steilemann

So that’s for your second question. And on the third question, I have to say that Covestro does not comment on rumors and that this is a general policy. And so I also, in this case, please bear with me if I say that Covestro does not comment on respective market rules.

Jaideep Pandya

Sorry to just – apologies for this but. So you’re basically saying you can even say, if you’ve got an offer or not, this is all market rumor. Is that how we should understand this comment?

Markus Steilemann

You should understand the comment as it says, Covestro does not comment on rumors.

Geoffery Haire

Hi, thank you for letting me ask a question. So I apologize in advance for the question. Leaving aside any potential bidder for Covestro and price. What does the Supervisory Board and the Management Board look for when it comes to a potential suitor?

Markus Steilemann

Well let me be very clear on that point. We are at any given time committed to all stakeholders. So we are at any given point in time looking at all options that make sense. And therefore, let me also hear rest assured the Board of management is fully aware of its fiduciary duties. And in this context, aligns any of its decision solidly with the interest of its shareholders and the shareholders. So this principle is embedded in and also secured by a regular exchange with the Supervisory Board. I hope that gives you some clarity around your questions.

Geoffery Haire

Okay, thank you. And thanks Thomas for all your help over the years.

Jaideep Pandya

Yes, thanks a lot. The question really is just around your asset network, specifically in Europe. I mean Markus, you mentioned about the 20% volume uplift, but it sort of looks like we might be in a cycle where that is a bit far away. So — and then if I look at the Chinese plants that are coming up, the nameplate capacity is at par with yours or even higher than yours.

So in that context, does Europe need to shut down maybe 15%, 20% of polyurethane capacity to actually balance and have a situation where you just don’t get swamped from imports? Or can you actually survive a benign demand environment in Europe and still maintain profitability or breakeven or above breakeven? Just want to understand what is your European profitability today? And if volumes don’t improve, where do we go? Thanks.

Markus Steilemann

Yes. Jaideep, thanks for your follow-up question. And on spot so to say, I would say, because for sure, we also having all those questions in mind. But let me elaborate a little bit of that. I don’t know whether you call — recall the year 2015. In 2015, we had also quite significantly underutilized European assets, and we made it in about a year. Those assets were filled. Then if you look at today’s situation and the industry cost curves, we are in almost every product, in every let’s say, plant that — where we produce that the cost leader and where we haven’t been the cost leader, we invested in the plants, for example, Tarragona, Spain into chlorine production, which now puts this asset from our perspective into the cost-leading position in Europe. Then it also has been mentioned, I think by Thomas a little bit earlier, the closure of the TDI/BSF plant held, as already said. And in that context the imports that we are currently seeing is mainly coming from high-cost producers, which have assets outside of Europe and try to import Asia Pacific to supply their customers with their own demand.

So in general terms, I see that MDI demand should accelerate because the MDI demand is driven by energy-efficient buildings, as you know. And we think next to the fact that there is a construction industry decline refurbishment of existing buildings will get more and more important to get to the carbon dioxide emission reduction targets that the European Union has. And that’s why there will be sufficient and additional demand for MDI returning plus that assets are the ones that are leased underutilized. That means the assets that should be first, if I may say so, back into the positives is definitely MDI then followed by TDI, once again, BSF closure helps and then the polycarbonates, but here only the standard polycarbonates, whereas we have more or less now 4/5 of our external sales in the non-standard polycarbonates, so they’re highly blended grades for special applications.

So long story short, it’s about cost leadership in Europe. It is about that we see opportunities that demand will come back in industries where it counts and that at current energy price levels with a leading cost position, we also feel comfortable and competitive against attempts to import material from outside Europe. So all in all, you could only look at the negative side. But as an individual company, we feel very well positioned to also master this challenge and also return back may I call it to enjoyable margin levels. Currently, we deliver positive results, but they’re definitely not at an enjoyable level. Let me put it that way.

Thomas Toepfer

Well, thank you very much, Carston [Ph]. I just wanted to steal two minutes of your time for thanking, first of all, Markus, thank you very much for your kind words. I can only say it was always a pleasure and a real privilege to be part of the Covestro team. I think it’s an absolutely fascinating and great company, and I really felt privileged to be part of it over the last 5 years.

And secondly, I would like to thank everybody on the call for – for the many discussions that we had over the last 5 years for following Covestro through some ups and downs and for challenging us with your questions. It was also always a real pleasure to be in touch with you.

And I’m really looking forward to at least meet some of you again in the future. Again, let me conclude by saying I’m really very attached to Covestro and it’s also, to some degree, with a heavy heart that I’m leaving. But of course, it’s a little bit of a personal decision because it will be — because it will bring me back to Hamburg, which is my home city. And therefore, it’s kind of a homecoming for the family. So with that, Carston, back to you and — or back to Ronald, I think to conclude the call, and I wish everybody a nice summer holiday.

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