Covestro Ag Ord

Welcome to the Covestro earnings call on the Q1 results. The company is represented by Marco Steinemann, CEO, and Christian Beyer, CFO. During the presentation, all participants will be in a listen-only mode. The presentation will be followed by a question and answer session. If you have a question, please use the raise your hand function or post your question into the Q&A tab. You will find the quarterly statement and earnings call presentation on our investor relation website. I assume you have read the safe-haver statement. With that, I would now like to turn the conference over to Markus.

Thank you very much, Ronald, and hello and a warm welcome also from my side to our first quarter call. The highlights of the first quarter were a volume increase of 11% year-on-year. This represents the second quarter in a row with a positive volume growth. Lower prices burdened sales, which came in at 3.5 billion euros. We achieved an EBITDA of 273 million, approaching the upper end of our quarterly guidance range. The free operating cash flow shows the usual seasonal pattern with minus 129 million euros. Overall, we are fully on track to achieve our full year 2024 guidance. Let me take the opportunity and give you a short update on the discussions with APNOC. The status remains unchanged as the discussions are still ongoing. Let's turn to page number three. Before coming to the business details, I would like to direct your attention to two CapEx topics. We remain very disciplined on CapEx with a stable budget of around 800 million euros for 2024. Herein, we continue to invest with a focus on selective expansion projects, asset reliability and efficiency. The business unit Engineering Plastics recently inaugurated a new polycarbonate copolymer plant in our integrated site in Antwerp. Polycarbonate copolymers represent a material class in which polycarbonates are chemically reacted with additional components forming a new polymeric chain. These copolymers are very important for the advancement of our business as they allow for easy adjustment of technical properties in our materials. The investment is in the mid-double-digit million-euro range and covers a pilot plan for tests and a full production plant. The new solvent-free technology with an innovative reactor concept has been developed by Covestral. It allows fast product changes and reduced time to market for new solutions. Target applications are antennas, battery housings, photovoltaics, healthcare equipment and IT applications. Future innovations might also focus on mobility and other trends. We expect a low double-digit EUR 1 million amount as additional EBITDA contribution per annum, while further increasing our captive use of polycarbonates. Let's turn to the next page. Another example of an investment, this time contributing to expand our competitive position for TDI in Europe. Based on our assessment, Our TDI plant in Dormag remains the cost leader compared to our European and international competitors. In addition, our customers advocate strongly for local production instead of relying on fragile international logistics. Therefore, we started a comprehensive three-year debottlenecking and modernization project on our TDI plant and the precursor unit for TDA. This will increase the capacity towards 280,000 tons and at the same time improve reliability significantly. The additional capacity will be available beginning of 2025. During the modernization, we will also implement several measures and parts to increase the efficiency of the unit. One example is that we are integrating a new reactor that allows us to generate steam for the unit by using heat generated by the chemical processes. This measure will save around 22,000 tons of carbon dioxide per annum. A positive effect contributing to our Scope 1 emission reduction, but it will also have a positive EBITDA effect as the cost for purchasing energy and carbon dioxide certificates decreases. We expect a very favorable return on investment with a mid-double-digit million euro investment leading to an additional low-double-digit million euro EBITDA per annum. Let's turn to page number 5. Let us now come back to the business and the volume development in the first quarter of 2024. Year on year, the global sales volume increased by 10.9%. There are three reasons for the increase. Firstly, improving demand. Secondly, fixing our reliability issues in EMEA. And thirdly, end of the stocking or perhaps even some restocking. Going through the different industries, construction showed the highest growth rates with a high teens percentage increase. Furniture and electro followed with a high single-digit increase. Auto remains on a more modest growth path with a mid-single-digit percentage increase. Important, on global level, all industries showed a positive volume development. Looking into the different regions, EMEA benefited strongly from the resolved internal availability issues. All industries important to Covestro are exhibiting growth with a strong increase in construction, furniture, and electro. This is mostly associated with better availability of our core products, MDI, TDI, and polycarbonates. Auto is showing a slight increase as the backlog in the order book seems to be worked through. Sales volumes in North America also increased slightly, driven by growth in the construction industry, while furniture, auto, and electro were still declining. Asia-Pacific experienced growth across all industries that Covestro is focused on. Furniture, auto, and also construction exhibited significant growth, and 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.

Thank you, Markus, and a warm welcome also from my side. We are on page six of the presentation. Sales for Q1 2024 are down by 6.2% year on year to 3.5 billion euros. The strong increase in volume was more than offset by negative pricing and FX. A negative impact of 576 million was coming from 15.4% lower prices, and here the pricing in the business entity performance materials declined much stronger with minus 21.3% than in the solutions and specialty segment with minus 10.4%. The volume increase of 405 million euros, or 10.9%, was significant. The segment performance materials exhibited a much stronger increase with 17.3%. This was supported by the resolved internal issues on the chlorine supply and thus better availability of our core products. Solutions and specialties showed a solid 5.9% increase in volume. The negative FX effect of minus 1.7% or 62 million euros was mainly driven by the weaker Chinese renminbi. With that, let's turn to page seven of the presentation where we are showing the Q1 2024 EBITDA bridge. Year on year, we have a slight decrease in EBITDA of 4.5 percent to 273 million euros, which is approaching the upper end of our guidance range of 180 to 280 million euros. Selling prices declined stronger than raw material costs due to an unfavorable industry supply demand ratio. As a consequence, EBITDA was impacted with minus 175 million euros from a negative pricing delta. The volume increase could not fully absorb the negative pricing delta, and the volume leverage was clearly below the long-term average due to the very low margins. FX also contributed to the negative development. Other items showed a positive development. This was driven by the success of our savings initiative with significant reduction on fixed costs. On slide 8, we are breaking down the details for the different segments and are starting with solutions and specialties. In S&S, the year-over-year price decline of 10.4% led to a sales decline of 6.2% despite increasing volume of 5.9%. FX also had a negative impact. Sequentially, sales growth was recorded in AMLA and North America. Due to Chinese New Year, declining sales were observed in Asia-Pacific, and overall, the trend was still slightly positive. The EBITDA in Q1 2024 was higher year-on-year, mainly due to higher volumes and a positive pricing delta, burdened by negative others and FX. The quarter-over-quarter EBITDA increase was mainly driven by seasonal factors and despite a slightly negative pricing delta. Raw material prices significantly increased during Q1, with an even accelerating trend in Q2. As a consequence, we expect a meaningful burden from higher raw material costs in Q2. At the same time, pricing flexibility is limited in S&S given quarterly or partly even longer contract duration and a value-based pricing strategy. This said, we expect Q2 EBITDA to be around the Q1 level. After solutions and specialties, we are now looking at the segment performance materials. Year-over-year sales declined by 5.7%, driven by price as the main contributor with minus 21.3% and FX with minus 1.7%. Volume, however, was up 17.3% and partially compensated for the drop in sales. Quarter-over-quarter sales increased across EMLA and Asia Pacific while North America was flat. Growth in EMLA was significantly driven by the improved internal availability. APAC showed slight growth. The Q1-24 EBITDA of €103 million is around 40% below last year. The year-over-year decline is mainly driven by a negative pricing delta and FX. Volumes and reduced fixed costs contributed positively. Sequentially, the EBITDA in Q1 2024 increased mainly due to positive volumes and reduced operational costs as well as a positive pricing delta. The next topic is the free operating cash flow development for Q1 2024. As you can see from the graph, the free operating cash flow in Q1 2024 was negative with 129 million. The free operating cash flow slightly improved year on year despite the lower EBITDA due to continuous working capital management and lower capex despite higher income tax payments. Changes in working capital of minus 229 million in Q1 2024 were mainly attributed to higher stocks. As mentioned already, Q1 capex of 106 million euros was down year on year and underlines our savings ambition. All in all, the Q1 2024 free operating cash flow is showing a normal seasonal dip related to increases in working capital after the winter break. Let's now look at our balance sheet on page 11. Our total net debt slightly increased by €186 million versus end 2023. The increase was mainly caused by the seasonally negative free operating cash flow of €129 million and negative others. The decrease in the net pension liability of 50 million euros was driven by an increase of the pension discount rates in the US and Germany. This comprises pension provisions of 348 million and a net defined benefit asset of 73 million euros. In 2022 and 2023, we executed a share buyback program of close to 200 million euros before the authorization expired. We are keeping the option of anti-cyclical share buybacks in the future in line with our cash spending priorities. The renewal of the authorization was successfully endorsed by the AGM earlier this month. Summarizing our net debt position, the total net debt to EBITDA ratio is at 2.9 times based on a four-quarter rolling EBITDA of 1.1 billion euros. However, based on our mid-cycle EBITDA, the ratio would be only around one times. Covestro remains committed to a solid investment grade rating. Our BAA2 rating was confirmed by Moody's end of Q2 2023. On the next page, we are now coming to the outlook for Covestro for 2024. We confirm our EBITDA guidance for fiscal 2024, assuming that the rather slow development of the economy will prevail in Q2. We are expecting the EBITDA for fiscal 2024 to come out between 1 and 1.6 billion euros. The mark-to-market EBITDA is calculated at around 1.2 billion euros based on April 2024 margins, flat forward, and our current budget assumptions for 2024. This is a 0.1 billion euro increase compared to January, driven by slightly improved margins. Many of you have remarked the missing mid-cycle numbers on this chart. Let me be very clear. We remain committed to our mid-cycle EBITDA concept with a mid-cycle level as indicated by the blue line. Our mid-cycle is also supposed to steadily increase based on capacity additions and the shift of commodities to our downstream businesses and solutions and specialties. We gave you two examples for both segments at the beginning of this presentation. We are confident that we would achieve an EBITDA of 2.8 billion euros in 2024 under normal economic conditions. Just a few words to the global demand outlook, which we are usually showing on a separate slide. The market outlook on global GDP is still around 2.5%, and the outlook for our core industries is mostly unchanged versus our February call. Given the minor movement in the industry outlook, we are skipping the comprehensive discussion and the specific slide here. Let me now focus on the additional guidance elements. Also here, the fiscal year outlook is unchanged. The free operating cash flow is forecast to come out at 0 to 300 million euros. The ROC above WACC is expected at minus 2 to minus 7 percentage points. and the greenhouse gas emissions in Scope 1 and 2 are estimated to be between 4.4 and 5 million tonnes. In Q2 2024, we expect an EBITDA between 270 and 370 million euros. The strong volume growth we have seen in Q1 continued in April. However, margins remain on a rather low level, which is expected to lead to a quite negative year-on-year pricing delta in Q2. For the full year 2024, we remain confident about a high single-digit percent volume improvement. However, we expect that lower selling prices will counterbalance the volume expansion in sales. Therefore, we expect sales between 14 and 15 billion euros. As you have seen already, we are quite focused on the CapEx budget of around 800 million euros. With our maintenance capex, we are strengthening the reliability of our assets, especially in performance materials. The expansion capex of around 300 million euros is mainly dedicated to strategic expansion projects, like the new copolymer plant in Antwerp for the business entity Engineering Plastics. And with that, back to Markus.