Covestro AG (CVVTF) Q3 2023 Earnings Call Transcript

Oct. 27, 2023 4:24 PM ETCovestro AG (CVVTF), COVTY

SA Transcripts

141.28K Followers

Covestro AG (OTCPK:CVVTF) Q3 2023 Earnings Conference Call October 27, 2023 9:30 AM ET

Company Participants

Ronald Koehler – Head, IR

Markus Steilemann – CEO

Christian Baier – CFO

Markus Steilemann

After these encouraging news, let us now come to the highlights of the last quarter. On the next page, you see the overall economic situation has not improved during the last quarter. Low demand and industry-wide price pressure as a result of oversupply across many core products are still ongoing.

With that, in the normal pass-through mechanism of lower raw material costs, our sales were significantly down year-on-year to €3.6 billion. In line with our guidance, we achieved a third quarter EBITDA of €277 million. Free operating cash flow strongly improved in the third quarter 2023 and came out at €308 million. This was supported by our ongoing stringent working capital management. As usually, with our Q3 results, we are narrowing our guidance range for the full year 2023.

Before ending on the highlights, let me briefly address the ADNOC situation. On September 8th, we announced to enter into open-ended discussions with Abu Dhabi National Oil Company. We are pursuing these discussions in good faith, open-minded, and in the interest of our shareholders and all other stakeholders.

We remain fully compliant in our communication approach and will only comment on the progress of the negotiations, if required by the European Market Abuse Regulation. As that is currently not the case we will refrain from any additional comments regarding the ADNOC topic.

Let’s move to the next page. Despite the still economically challenging times, we keep investing into the growth of our business. In the second quarter 2022, we presented to you our investment plans for our solutions and specialties entities Elastomers and Coatings and Adhesives.

A little more than one year later and exactly on time and on budget, I have the great pleasure to announce the completion and soon start of operation of both expansions. The first ramp-up was done early Q3 with the new elastomer production line in our integrated site in Shanghai. This plant and its products will especially serve renewable energy markets like wind energy and solar panels and also heavy-duty applications. In line with our strategy, the business unit elastomers will continue to regionally enlarge its production footprint.

In our business entity Coatings and Adhesives, the investments in two plants for polyester resins and polyurethane dispersions reached the milestone of full mechanical completion.

Now, further work is ongoing to get the plan to the ramp-up phase in the first quarter 2024. This is the first plant that has been constructed in a modular way in line with our build faster and cheaper program, underlining our cost-leading asset structure.

The products coming from these units are supporting the profitable growth of our CA business in a variety of products, catering for the automotive, construction, sports, and leisure as well as furniture industry.

Let’s now turn to the next page. Coming now to the volume development in the third quarter of 2023. Year-on-year, the global sales volume decreased by 3.8%. This was caused by ongoing demand weakness across all regions and limitations in our internal availability.

However, the rate of decline is now smaller compared to the previous quarters. As a reminder, first quarter was down by 17% and second quarter by 8% year-on-year. We still expect a positive low single-digit year-on-year growth in the fourth quarter.

Historically, a volume turnaround has always been followed by an improvement in margins, at least with a certain time lag. Auto remains on a growth path, still benefiting from a healthy order book. After five quarters of declining volumes in furniture, the sector turned around in the third quarter with mid-single-digit growth.

Also, Electronics developed flattish after four quarters of decline. The weakest sector remains construction.

Looking into the different regions, and large showed a return to growth path with increases in three of four industries important to Covestro after we partially solved the limitation on our internal chlorine supply.

As a result of the low comparison base furniture stands out with significant increase, whereas construction and auto showed a slight increase. Electrode was still slightly declining.

Sales volumes in North America also increased slightly across the two industries, electro and auto. Furniture showed a flattish development, but construction witnessed an ongoing significant decline.

After the positive volume development in Asia-Pacific in the second quarter, based on a low comparison basis from the COVID lockdowns last year, growth rates have normalized. Furniture and auto now exhibited slight growth and electrode showed a flattish development. Construction was still affected by a significant decline.

Markus Steilemann

Yes. Thanks Christian. And we are now coming on the next page to the outlook for Covestro’s core industries, and we’re now on Page number 13 of the presentation. The global GDP expectation has been almost flat since our last review and is estimated to be 2.5%.

Sadly, this flattish development does not hold true for most of the industry is important to Covestro. Only automotive is experiencing a positive volume growth, and this trend is continuing with an improved outlook of 7.9% now. The sub-category of EV or battery electric vehicles is against this trend experiencing a slight downgrade of 7.2 percentage points in growth, expecting now 35.3%.

This is still above any other growth rate we currently see in our core industries. The outlook for the construction industry has deteriorated further to minus 2.2% and residential construction has lost more than 4 percentage points in growth down to minus 4.3%. The reason for this trend are well known. High interest rates and high cost of building materials. Also, the furniture industry is seeing a reasonably accelerated negative trend with an expected second year of declining markets between 4% and 5%.

Only the demand outlook for Electro is seeing a flattish development as 0.4% can hardly be counted as growth. Here, the appliance sector is against the trend seeing an upgrade in its growth projections and is expected to show an increase of almost 8%.

Summarizing the data we can see that the development of most of our industries has significant room for improvement. This underlines our own evaluation of the current market conditions that a turn to a positive development is currently still not foreseeable near-term.

With this, let us now turn to the Covestro outlook for the full year 2023. As explained in the outlook for our core industries, there is no substantial indication of a short-term improved — improvement of the economic environment. We expect the ongoing demand weakness to continue at least for the remainder of the year.

Christian Baier

Yes. Thank you, Markus, and Christian, thank you for the welcome. Look forward to our future interactions. With respect to the topic of debt refinancing, we are obviously looking at various products that we’re having. At the moment, there is very significant cash that we have out, especially when we look at the bond maturing in the next year, we are talking about interest rates of below 2%.

In the current market where we are a couple of percentage points higher, we will certainly be very flexible to use available funds but also tap other sources of financing. As just recently, we have tapped the European Investment Bank for a very strong loan facility that we got there. So, we remain active in the capital markets in order to really look at what is the best solution at the time at hand with having a very broad spectrum of tools that are always available to us also in the current markets without the significant increases in the interest rates.

Jaideep Pandya

Yes. hello. I hope you can hear me. My first question really is around — my first question is around the €3 billion investment on the MDI project. I know, Markus, you’ve mentioned about ADNOC. I won’t make you very uncomfortable. But obviously, this is a topic which is very strategic for Covestro.

So, could you just give us some sort of information about how are you tackling this in the light of your discussions with a low in the sense? Is this on the table and being reviewed in totality? Or is this actually off the table because you have taken the project off the table. That’s my first question.

The second question goes back to — it’s sort of tied to the first question. It goes back to your point about €1 billion EBITDA growth even at current margins, 20% volume growth, so how do we get that to the €2.8 billion? Would the €800 million really have to come from improvement in spreads? And what sort of spread improvement that sort of quantifies — if you could just give us some color with regards to that?

And then the final question really is around the competitive landscape. I assume that your availability improves next year and you would like to take back some share presumably in and in MDI from the chlorine issue that you had. Key competitor in China is increasing capacity quite aggressively.

So, could you tell us like in a backdrop of low volume growth next year how do you see the competitive behavior? I mean are you willing to go a bit aggressive on pricing to get back to share? Or are you going to defend pricing as well? Thanks a lot.

Markus Steilemann

Yes, Jaideep. Thank you so much for your questions. Let me start with the first one. And that is totally unrelated to ongoing open-ended discussions with ADNOC. It is just a general explanation of the rationale to invest in MDI.

And maybe one, if you allow minor correction, we’re not talking about a €3 billion investment but the investment costs are rather around €2 billion, depending on where you invest, maybe slightly lower, maybe slightly higher and also depending on how you invest.

That means the way how you construct the plant might also have a significant impact about the total cost of the plant. So, long story short, the number is rather around €2 billion and not in the order of magnitude of €3 billion.

So, having said that, the decision to pause an MDI investment was not driven by financial means. It was driven by the current, let’s say, short-term, at least turbulent market dynamics in the MDI market and also the worries that we already could foresee in the current construction market.

We know that mid to long-term MDI is still in high demand, and it is still the best raw material for insulation panels for commercial as well, sorry, for commercial and residential buildings.

But we also have to very carefully assess when that growth is, let’s say, kicking in. And as we currently see the construction market is under big pressure. The construction market worries us a little bit at current times.

And from that perspective, I think it was a wise decision not to go for the respective MDI construction at the time when we had it on the table because it would have just further increased the price pressure on MDI and in the MDI markets.

So, from that perspective, I would say we are currently once again assessing when is the right moment in time to invest and we will let you know as soon as possible when we have taken the decision.

If you look at the supply/demand balance, last sentence to this, we see that there is actually towards the end of the 2020s, beginning of 30s, no additional supply capacity coming.

And from that perspective, we think at the right moment in time to once again go back to that investment decision is coming soon. Was that in terms of the €1 billion related or, let’s say, with the way to the €2.8 billion, I would actually hand over to Christian. Christian?

Markus Steilemann

Thanks. And Jaideep, to your next question about — yes, you called it market share, you adopt name drop words like price war. I think what is important that this 20% is an average number and an average global number. And that is important. Why? Because it is not only MDI and TDI, where we try to gain market share back it is also other products where we see significant room in increased asset utilization also in the Solutions and Specialty area, not to that same extent. But to, I would say, still reasonably high extent that would also contribute and help us to get back to higher volumes out of existing assets.

Secondly, at least from our perspective, Wanhua has always been a return-driven competitor who behaved very logical.

Thirdly, we believe that there is first signs of growth opportunities, at least from the second half of next year. And we must also not underestimate that, let’s say, if I may say, so the leading docs on the place are not directly getting into an infight, but there’s still a smaller docs, let’s say, in the backyard, which also produced at much higher cost than we do. So, there’s also an opportunity for us to gain market share, whilst at the same time, not getting heads on with one of the largest players in this market.

Fourthly, Wanhua has currently its largest asset base in China. And we know that many customers are looking at us, particularly in Europe and would love to have more material from us. And we have, in Europe, cost competitive assets compared to imports from Asia-Pacific, so landed costs.

And so from that perspective, overall, we believe there is sufficient room to sell out our fully running assets, particularly but not limited to Europe. Particularly in the — but not limited to the MDI as well as TDI space without entering to a price war. I hope that gives you some flavor.

https://seekingalpha.com/article/4644625-covestro-ag-cvvtf-q3-2023-earnings-call-transcript?mailingid=33172467&messageid=2800&serial=33172467.143