Covestro AG (CVVTF) Q4 2024 Earnings Call Transcript

Feb. 26, 2025 2:36 PM ETCovestro AG (CVVTF) Stock, COVTY StockCVVTF, COVTY

Q4 2024 Results Conference Call February 26, 2025 9:00 AM ET

Company Participants

Ronald Koehler – Head of Investor Relations
Christian Baier – CFO & Member of Management Board
Carsten Intveen – Investor Relations Director

Christian Baier

Yes. Thank you, Ronald, and good afternoon, and a warm welcome to everyone. Reflecting on 2024, we faced numerous challenges due to the economic situation, many of which are still persisting. So let us look at the highlights of 2024 and start with a view on the key financials.

In a persistently weak economic climate, Covestro achieved sales of €14.2 billion, only slightly down versus 2023. This decline was driven by lower prices despite significantly higher volumes. The EBITDA Is stable at €1.1 billion, indicating that the difficult demand environment is far from over. Once again, we could secure a positive free operating cash flow of €89 million, in line with our guidance. Our transformation program, STRONG, yielded savings of €119 million.

Turning over to the nonfinancial highlights. The full set of greenhouse gas emissions covering Scope 1, 2 and also Scope 3 went down by 17% compared to the reference years. We added two more PPAs for renewable electricity in Europe for our sites in Spain and Belgium, contributing around 200 gigawatt hours once fully enacted. The new PPAs and other measures planned will increase our renewable share of electricity from 16% in 2024 to around 22% in 2025.

In line with the strategic goal of full circularity and climate neutrality, we consider recycling of waste plastic a key element towards achieving this goal. We made significant steps towards this goal by acquiring a stake in Bio BTX and by signing a supply agreement with Encina. Both companies recycled consumer plastic waste into valuable raw materials like benzene and toluylene for MDI and TDI. We are also collaborating with Neste and Borealis on recycling discarded tires for processing into base chemicals, phenol and acetone for polycarbonate.

In addition to the recycling activities, we inaugurated the first pilot plant for bio-based aniline, an important precursor for MDI using biomass as raw material. With that comprehensive review of the highlights, we are coming to a major investment to pursue our growth strategy.

We are now coming to the business details of 2024 and to the volume development for the last year. Year-on-year, the global sales volume increased by [7.4] availability of our assets, especially in Europe after resolving the technical issues in Q4 2023 and improved demand in APAC. This led to a sales volume increase of 10.6% in APAC and 9.3% in EMLA. Volume development in North America was flattish compared to the prior year.

So how did the different industries develop? Auto was still showing positive growth rates in H1 2024, mainly driven by APAC, however, in the second half of ’24, all regions showed a decline, leading to an overall flattish development for fiscal ’24. Furniture had an overall positive year 2024, with growth in all regions, also benefiting from our improved TDI availability in Europe. The positive trend slightly weakened in H2 ’24, but remained on a growth path.

Looking into the different regions, EMLA recovered quite nicely supported by the improved availability of MDI, TDI and PCS. And also here, construction was the main driver of growth. Sales volumes in North America were burdened by declines in auto and electronics, but benefited from a slight growth in furniture and a significant growth in construction. APAC was the strongest region with all industries with netting growth.

We are now coming to the outlook for Covestro’s core industries on Page 12 of the presentation. The global GDP expectation for 2025 is estimated to be 2.8% and is a continuation of the growth rates of the past two years. Sadly, most of the key industries for Covestro will not achieve such growth rates. But on the positive side, after several quarters, we are now looking at a stable to positive growth picture across all industries.

In automotive, we expect a slight growth of 2.7% after a global decline in the second half of 2024. Also, for EVs and battery electric vehicles, growth rates are again on the rise, with an expected increase of 22.4%. Especially, our engineering plastics entity will benefit from this renewed strength in electromobility.

The outlook for the construction industry will stabilize after two years of decline and remained flat at a growth rate of 0.2%. The crisis is still not over in the residential subsector, but has slowed down with a negative growth estimate of 1.5%. The furniture industry is set for a slight growth after stabilization in the last year. The outlook for soft furniture is even more optimistic at 2.4% growth. The electro industry has already been the highest growing industry in 2024 with 4.1% growth and this trend will also continue in 2025 with another 5.2% predicted growth.

The appliance sector will be showing slower growth versus last year and only exhibiting a 1.2% increase. Summarizing this outlook, we see some green shoots with the development in electro, auto and furniture and the stabilization in construction. We are positive on our volume development and with increasing volumes, also assume an increase in margins starting during 2025.

Our single largest project is the aniline plant in Antwerp, which should support our MDI business in Europe with low-cost raw materials. The expected start-up is in early 2026. We assume a high double-digit euro million EBITDA contribution from this plant.

And now comes the moment you have all been waiting for, the update on the ADNOC or now correctly XRG transaction. The voluntary tender of €62 per share concluded at the end of 2024 after two tendering phases with almost 82% of Covestro shares being tendered. This is an important milestone and underscores that the Board of Management of Covestro in line with its fiduciary duties, has agreed on an attractive offer for the Company, its shareholders and all other stakeholders.

In total, the aggregate of shares tendered and purchased by XRG amounts to 91.58% of the total Covestro shares. Additionally, XRG secured 3.44% of shares through instruments end of January 2025, leading to XRG direct and indirect ownership of more than 95%. Since the signing of the transaction and investment agreement, teams from ADNOC and Covestro have been diligently working on the required regulatory approvals. All foreign direct investment, the European foreign subsidies regulation and the majority of merger control proceedings were initially triggered before Christmas. The remaining merger control filings were submitted in January.

In the meantime, 50% of the approvals on FDI have been granted. This potential deal is one of the largest transactions ever in Germany. So it is not surprising that we are in a Phase 2 investigation with the German Federal Ministry of Economic Affairs and Climate Action.

On the merger control side, approvals from approximately 1/3 of the 19 countries have been achieved. Additionally, there are various requests for information from the different responsible authorities that the respective teams are following up on to ensure a closing of the potential transaction within the expected time line. We are confident that transaction will close in the second half of 2025 and will drive significant value for our investors and stakeholders, paving the way for future success and innovation.

So let me quickly summarize the highlights for fiscal year 2024. Sales have slightly decreased to €14.2 billion, which was caused by lower prices and an unfavorable FX, while positive volumes were pertaining. EBITDA for fiscal year 2024 of €1.1 billion is similar to the year ’23 and in line with our guidance. This was burdened by negative pricing delta offset by higher volumes and positive other items.

Christian Faitz

Two questions, if I may. First of all, if I look at your assumptions for end market growth on Slide 12, it actually looks like we are going to see a significantly higher growth dynamic versus ’24 in your relevant markets? I mean, I’m fully aware it’s still muted. Hence, could you please share with us some insights into what your salespeople are currently seeing in terms of order book development. I would also be particularly interested in hearing a few words on how in your order book, China has come out of a New Year celebrations. That’s question number one. Shall I pose question number two or after you answer the first one.

Carsten Intveen

Please go ahead.

Christian Faitz

All right. So second. I’m fully aware that any potential tariffs put in place by the dream teams in Washington and/or in Brussels do not have a significant direct effect on your assets. Yet, have you modeled a scenario where some of your local customer industries might be hit from automotive to furniture, for example? And if so, can you share with us some insights preferably in numerical form.

Christian Baier

Yes. Thank you, Christian, for your questions. I’m very happy to address those. So from an end market perspective, you’re absolutely right, the numbers that we are showing where we are relying also to external sources show a little bit of a positive development in ’25 compared to ’24. And then still, this is more predicated in our perspective to the later part of the year to that extent because if we now put it together with the salespeople perspective, there is the one or the other green shoot, but certainly not in a structural manner at this very stage.

As we have stated, Q1 is rather be a little bit muted from that perspective. So we’re rather relying to a certain extent also on those perspectives that we can see in some of the areas, but it’s more than the external data at this stage. When we put that together with the China perspective, so how did China come back from Chinese New Year. First of all, in our case, they went into reasonably well. And now it is about the two sessions that are about to take place on the governmental side to see what kind of incentives and what kind of approaches are being taken on the economic boost that is expected to a certain extent, but that’s, at the moment, still somewhat pending. And therefore, the crystal ball is not completely clear yet after Chinese New Year.

With respect to the perspective on the tariff side, I think, first of all, we are certainly very significantly producing within the regions and for the regions. And that’s also what you put out there. Therefore, there should be a rather limited flow in between the various pieces. And if we look at it by MDI, U.S. is a net import market for many of our products, especially for MDI. And therefore, higher tariffs should be positive for us as we are a local producer and partly are then competing with imports.

So we are modeling various topics there, but I think the bottom line to be kept in mind is that we are producing within the regions and therefore, feel quite well set up also in more tariff scenarios.

Sebastian Bray

I would have three, please. The first is on gas and energy cost guidance. European gas costs are over 50% higher than where they were last year. what is put into the guidance? And how nervous are you for Q1, Q2, that we’re going to go back into a scenario we had two years ago where people were cutting production and revising guidance down midway through the year?

My second question is on the Chinese regulatory process. I think the Chinese regulator has actually approved some deals, but Covestro filed for a simplified process, but it seems to be taking a bit of time. Is there anything to read into this? Or is everything just fine, and this takes what it takes time wise?

And my third question is on regions, and it builds on the previous one from Christian. Where are we in terms of starting the year? Is Europe okay-ish? Is it wobbly a bit because people are concerned on energy. Is China basically fine, touch wood on New Year and U.S. okay-ish, too, but any regional color is welcome.

Christian Baier

Yes. Thank you very much, Sebastian, and I will tackle two and three and then hand over to number one on gas to Ronald later on. On number two, this was China with respect to the regulatory process. We are very confident that this is the normal process that we are going through there. The team in collaboration is well prepared to address all the regulatory requirements that we go through and therefore, good confidence to properly also be successful in this very regulatory process.

From a regional perspective, very happy to look at the individual pieces. First of all, we need to keep in mind that for some to many of our industries, especially from a seasonal perspective, it’s a little bit early to call on that, but starting with China that I mentioned before, all eyes are now on the governmental hearings that are being done over the next few weeks in order to see how China really comes out of Chinese New Year at that stage. But overall, we are in a reasonably okay set up but not yet any jump in terms of demand expected at that end.

I think the same somewhat holds true with respect to Europe, where certainly, there is now also from a political perspective, a little bit more initiatives in stabilizing and pushing forward the domestic situation. So I think we are very much looking at the political landscape and not in any way scared, but to expect maybe a little bit of also business-friendly perspectives, which should then, at some point, also translate into customer confidence.

At this point of view, and of time, there is not anything specific and strong. I think that is probably somewhat different in the U.S. because there, the direction is very clear that is being taken, and we are certainly preparing for that also with the before mentioned investment in Hebron that we are doing because we see some good market opportunities to develop.

In the very short term, this is tough to gauge. And therefore, we need to put a little bit out to the second half of the year where there are a couple of structural elements that should be positive although we should be keeping in mind that still also throughout the year, there will be a bit of capacity coming online, that could be a curve ball in that context.

But overall, expected that the second half of the year should be a bit more benign on that. and now Ronald will be on the gas question.

Ronald Koehler

Yes. Energy costs, you might be aware, we last year had a global bill of €1 billion in energy costs. We forecast this year roughly €1.1 billion, mainly driven due to — from the most recent increases and especially obviously hitting Q1. And indeed, it’s also part of our Q1 guidance. And let’s say, if you look at the underlying year-on-year increase we’re having from €273 million to, let’s say, midpoint of our guidance without restructuring costs of around €200 million. So to say the gap is indeed what we would expect as margin pressure most likely coming then from these higher energy costs. So clearly, there is a negative effect on that.

However, we — as we speak, we see natural gas prices and electricity costs coming down. We also would expect that typically over the summer period with, let’s say, green energy, the prices might go lower. So that’s also part of our, let’s say, forecast. And therefore, we believe there should be not a lasting effect. And you know I mean there are several scenarios right now discussed in the market. One scenario is even very bullish, let’s say, if the Ukraine war would come to an end, that energy prices would fall. Just as a reminder, of the €1 billion last year, 2/3 of the energy costs were related to Europe.

So of course, any significant relief there would be a positive. On the other side, yes, the short-term drivers were quite negative, but covered in our guidance, I would say. That’s the important message from my side.

Sebastian Bray

That’s helpful. If I might just follow up quickly on the North American market. Do you see any signs that some of the end customers, I’m thinking of some of the adhesives manufacturers and so on have indicated about weakening domestic demand there or not really?

Christian Baier

No, overall, we don’t see any relevant signs of concern there. We rather see the U.S. as one — from the big three markets as the one that is balanced in between with China being stronger from a demand perspective, with Europe being weak and the U.S. in between, but no relevant concerns in that perspective that you just described.

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