Covestro AG (CVVTF) Q2 2024 Earnings Call Transcript

Jul. 30, 2024 11:49 AM ETCovestro AG (CVVTF) Stock, COVTY Stock

148.05K Followers

Comments

Covestro AG (OTCPK:CVVTF) Q2 2024 Earnings Conference Call July 30, 2024 10:00 AM ET

Company Participants

Ronald Koehler – Head, Investor Relations
Markus Steilemann – Chief Executive Officer
Christian Baier – Chief Financial Officer
Carsten Intveen – Director, Investor Relations

Markus Steilemann

Thank you, Ronald and hello and a warm welcome to our second quarter call. The highlights of the second quarter were continued strong volume increase of 9.3% year-on-year. With this, we are fully on track to our target of a high single-digit percentage volume increase in the full year 2024.

However, lower prices are still affecting sales, which came in at €3.7 billion. We achieved an EBITDA of €320 million, landing on midpoint of our guidance range. Free operating cash flow was minus €147 million, in line with our expectations. And we are narrowing our EBITDA guidance to €1 billion to €1.4 billion.

Let me take the opportunity and give you a brief update on ADNOC. As we stated on June 24th, we believe that ADNOC and Covestro can generally reach a common understanding regarding core aspects of a possible transaction. Therefore, we have decided to open our books for a confirmatory due diligence and to start concrete negotiations regarding a potential transaction, including the potential conclusion of an investment agreement. This phase is ongoing in a constructive manner.

We pursued the negotiations in accordance with our fiduciary duties in good faith, open-minded and in the interest of our shareholders, our company, our employees, and all other stakeholders. This said, we ask for your understanding that we will not make any further statements at this stage and do not intend to comment further on this issue unless legally required.

Let’s turn pages to Page number 3. Turning back to the business and the volume development in the second quarter of 2024, year-on-year, the global sales volume continued to increase by 9.3%. This is driven by an improving demand, but also by fixing our reliability issues in Europe.

Going through the different industries, construction showed the highest growth rates with a low-teens percentage increase. Furniture and electro follow with a high single-digit increase. Auto exhibited flattish development.

Looking into the different regions, EMLA continued to benefit significantly from the resolved internal availability issues. Drilling it down into the different industries, we see a mixed picture. Construction and furniture are exhibiting strong growth, mostly associated with better availability of our core products, MDI and TDI. Electro and auto, however, are showing a strong decline.

Overall, sales volumes in North America increased slightly, driven by strong growth in furniture and a slight increase in the construction industry. Electro developed rather flattish, while auto shows significant decline.

Asia-Pacific continues with positive growth across all industries that Covestro is focused on. Furniture, auto, and construction exhibited significant growth, while electro showed a slight increase.

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

Christian Baier

Thank you, Markus, and a warm welcome also from my side. We are on Page 4 of the presentation. Sales for Q2 2024 are stable at €3.7 billion. The strong increase in volume was offset by negative pricing and FX.

Prices declined by 9.7%, counterbalancing the volume increase of 9.3%. The negative FX effect of minus 0.4% was neglectable, and mainly driven by the weaker Chinese renminbi.

With that, let’s turn to the next page where we are showing the Q2 2024 EBITDA, bridge. Year-on-year, we have a decrease in EBITDA of 17% to €320 million. This is at the midpoint of our Q2 guidance range of €270 million to €370 million.

Selling prices declined stronger than raw material costs due to the ongoing unfavorable industry supply-demand ratio. As a consequence, EBITDA was impacted with minus €186 million from a negative pricing delta.

The volume increase only partially compensated the negative pricing delta. And the volume leverage was clearly below the long-term average, due to the historically low margins. FX And other items also contributed to the negative development to a minor extent.

Just to provide full transparency on the EBITDA, bridge. Other items were impacted by €23 million of restructuring costs in the S&S segment as part of the transformation program, STRONG.

Markus Steilemann

Yeah. Thanks, Christian. And let’s turn to page number 10. And also let’s turn now the focus to the future. On June 25th, we launched our new transformation program, STRONG. With STRONG, we are shaping the sustained competitiveness of Covestro with effective structures and efficient processes and supported by a broad AI implementation. After ramp-up phase, beginning 2028, STRONG targets to generate annual savings of €400 million. This is slightly below 10% of our global fixed cost base.

In order to make this happen, we are expecting cumulated €300 million restructuring cost. Our updated 2024 EBITDA guidance assumes a mid-double-digit million euro positive impact from STRONG as savings will be partly counterbalanced by restructuring costs. What are we doing content-wise with STRONG? We have an underlying set of measures that leads to these savings, one-time costs and potential impairments.

For example, we are streamlining our structures and asset footprint, and we are pushing forward our near and offshoring activities. We also skipped already our 2024 non-tariff selling increases. Further content, we will share with you based on the implementation of further steps and after having informed the respective employees.

On the next page, we are now coming to the outlook for Covestro for 2024. We are narrowing our EBITDA guidance for full year 2024. We’re now expecting the EBITDA for full year 2024 to come out between €1 billion and €1.4 billion.

The mark-to-market EBITDA is calculated at around €1.2 billion based on June 2024 margins flat forward and our current budget assumptions for 2024. The updated guidance now assumes only limited changes in our product margins per ton. A more pronounced rebound from the historical low levels is getting rather unlikely in the second half of 2024.

As there has been no significant change in the global demand picture and the industry outlook, we are skipping the comprehensive discussion and the slide here. Let me just highlight the overall trend. The market outlook on global GDP is now around 2.6%, and the outlook for our core industries is mostly unchanged versus the Q1 call.

Sebastian Bray

Hello. Good afternoon, and thank you for taking my questions. I have two, please. The first is related to the operations in Germany, and I think you touched on it already in response to Christian’s question. But has there been — how close to net income breakeven are the operations in Germany currently? And has there been a sequential improvement? Or is it roughly stable between Q1 and Q2?

My second question is on trading by geography. Could you give us a feel for how China is developing and if you expect any bigger recovery moving into 2025? And likewise, any comments on Europe and the US to welcome? Thank you.

Christian Baier

Yes, very happy, Sebastian, to take the first one, and then Markus will go on the second one. With respect to operations in Germany, between the quarters, it’s broadly the same development that we see here. Operationally, we are reasonably close without any special items, if you will, to the zero line, if you take into account the German tax group, it obviously also includes relevant parts of administrative functions, which are then trending in that context. So operationally stable, reasonably close to the zero line from the bottom and then further burden, if you will, from an administrative perspective, which is then driving also the tax losses that we do have sitting in Germany that can be used indefinitely. Markus, please?

Markus Steilemann

Yes. Thanks, Sebastian, also warm welcome from my side. Well, Asia Pacific and that is mainly China continues with positive growth actually across all industries that we are serving, particularly strong has been auto as well as electro. And currently, let’s say, we see this trend ongoing for us also in the third quarter.

For Europe, the picture is different. We have seen also here a good second quarter. But if you now look at the base in Q3 2023, that base was already increasing because we started to fix the reliability issues exactly from the third quarter 2023 onwards, gradually continuing into the fourth then. And that means that also the base for comparison is therefore increasing. That would then lead to lower, let’s say, comparable year-over-year growth rates, which doesn’t indicate a weakness in the market just a different comparison basis, to be clear. And for the US, we see and expect that the third quarter should be relatively stable and steady with regard to the growth rates. Helpful?

Jaideep Pandya

Thanks a lot. The first question is on the different products in the portfolio of Performance Materials. Could you give us some color where are we with regards to margin development for MDI, TDI, PC and polyols? Like what do you see sort of in the market?

And sort of a related question, I think your utilization has now jumped to around mid-80s. So maybe you have another 5%, 7% go, but spreads are really not piping in the market. So I mean when — could you give us a reference point to last time when utilization was 85%, what was the sort of mark-to-market you were looking at back in the day? Because I’m just trying to understand what is the leverage Covestro has internally versus, let’s say, improvement in external factors to get out of this €1.2 billion, €1.3 billion EBITDA ZIP code.

And then, sorry, my last question, and apologies, I’ll stick to the party line, but I just want to understand from the ADNOC situation, is there any sort of scope for the deal to break because, obviously, you have made considerable progress in terms of even reporting or communication, and I understand there is a three-months window. But is there any reason why we should be worried? Or is that completely off the table now and it is really merely a question of price and a timing point of view? Thanks a lot.

Markus Steilemann

Yes, Jaideep, also welcome from my side. So on the different commodities in our portfolio, let’s start with MDI, we perceive the current situation compared to the previous situation that we have talked about to be at a stable margin situation; TDI as well as polyols going slightly down from our expectation and also what we currently see in the first couple of weeks in Q3. And the polycarbonate business is also stable. But more importantly, in this context is getting by the day, basically, the respective downstream business because we’re selling the minority of polycarbonates in the, let’s say, commodity area. This has now only be about one-fifth of the entire polycarbonate we’re selling externally, whereas four-fifth is in the more stable downstream business. And that EP part of our Solutions & Specialties has shown to be, from my perspective at least, very resilient in the overall context. So shall I continue then with the second part or — yes.

Jaideep Pandya

Yes, please.

Markus Steilemann

Okay. So I can also dwell further, let’s say, on MDI. But with regard, let’s talk about Adnoc. So from my perspective, the situation and also the information we can provide has been provided. It has been, from my perspective, as you said, a significant step forward on 24th of June, where we opened the books, where we entered into clear and official negotiations. And I can only reiterate what I have said today numerous times. I think in this phase, the ongoing process is how shall I put it, going well, yes, to be very clear.

And I know that Christian and I have used numerous ways to say today. But from that perspective, I would take it, as we have said it in numerous ways today, not as a, let’s say, indication that something is going right or something is going wrong, but rather as the best thing that we can say in terms of how we currently perceive the situation, yes? Because anything would say in terms of well likelihood has increased, likelihoods decreased, would maybe not express where we currently are. I can only say that everything that I have experienced so far personally is that the phase in which we are currently in is going on constructively. And yes, I could say it in different ways, but that’s really what it is.

You could now start to speculate and say, well, could this be faster? Could that slower? Is there anything that we should worry about? But I think given the very confidential environment in which we have worked so far has served us well, even though I can also fully understand that, at times, you, for sure, have more desire to get even closer to the matter and maybe your desire is there to earlier get more information than we’re currently providing it. But rest assured, we are continuing to negotiating in good faith, open-minded and in full alignment with our fiduciary duties. And secondly, I also would like to reiterate once again that we need to balance, on the one hand, hand, time and, on the other quality of the outcome. And really we balance this each and every day to the best extent possible also in your interest.

https://seekingalpha.com/article/4708050-covestro-ag-cvvtf-q2-2024-earnings-call-transcript?mailingid=36235157&messageid=2800&serial=36235157.196&source=email_2800