Covestro Ag Ord

Welcome to the Covestro earnings call on the second quarter results. The company is represented by Markus Dillemann, CEO, and Christian Weyer, 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 IR 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, Ronald, and hello and a warm welcome to our second quarter call. The highlights of the second quarter were the 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. Lower prices are still affecting sales, which came in at 3.7 billion euros. 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 euros. Let me take the opportunity and give you a brief update on AdMob. 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 pursue 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 a flattish development. Looking into the different regions, AMLA 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 showed 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.

Thank you, Markus, and a warm welcome also from my side. We are on page four of the presentation. Sales for Q2 2024 are stable at 3.7 billion euros. 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 euros. This is at the midpoint of our Q2 guidance range of 270 to 370 million euros. 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 euros 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 euros of restructuring costs in the S&S segment as part of the transformation program STRONG. On slide six, we are breaking down the details for the different segments. and are, as usual, starting with solutions and specialties. In S&S, the year-over-year price decline of 7.7% was leading to a sales decline of 3.3%, despite increasing volumes of 4.8%. FX negative impact was neglectable. Sequentially, sales growth was recorded in APEC and North America, while EMLA was declining. The EBITDA in Q2 2024 was lower year over year, mainly due to a negative pricing delta and the already mentioned restructuring cost. The positive volume development could partly compensate the negative effects from pricing delta and other items. The quarter over quarter EBITDA decrease was driven by a negative pricing delta and the aforementioned restructuring costs being booked in Q2 2024. With that, the EBITDA margin decreased to 9.6%. We are now expecting S&S EBITDA to contribute around the 2023 level. This adjustment compares to the previous guidance of a significant improvement is driven by the assumed mid-double-digit million euro restructuring costs and pressure from higher raw material costs. After solutions and specialties, we are now looking at the segment performance materials. Year-over-year sales increased by 2.5%, driven by 15% from volumes and minus 12% from pricing and minus 1% from FX. Quarter-over-quarter sales increased across all regions. North America and APEC also showed sequential volume growth, whereas EMLA was stable. Q2 24 EBITDA of 196 million euros is 35% below last year. The year-over-year decline is mainly driven by the high comparison base. Please remember that in Q2 2023, we booked an internal insurance reimbursement of 75 million euros, which at the same time burdened the segment others. Nevertheless, also the underlying business was down due to a negative pricing delta, which could not be fully compensated by the volume increase. However, sequentially, the EBITDA in Q2 2024 increased, benefiting from a positive pricing delta and positive volumes. In line with the overall narrowing of our FY24 guidance, we are also narrowing our EBITDA guidance for performance materials to now 400 to 700 million euros instead of 400 to 800 million euros. The next topic is a free operating cash flow development. As you can see from the graph, the free operating cash flow in H1 2024 was negative 276 million euros, with the Q2 FOCF contributing negative 147 million. The free operating cash flow declined year on year, driven by lower EBITDA and the bonus payout for FY 2023 in Q2 2024. Changes in working capital of minus 350 million euros in H1 2024 were mainly resulting from the seasonal buildup of inventories. Given the sharp reduction of inventories at the end of last year, we would not exclude a rebuild in 2024, leading to a negative working capital cash out for the full year 2024. H1 24 capex of 272 million is stable year over year. We increased the CapEx into maintenance to reduce the risk for any major reliability issues like we have seen in 23. The growth CapEx focuses on a few selected expansion projects. Income tax paid of 80 million euros was slightly below previous year. The minus 167 million other effects are mainly comprised of the bonus payoff. All in all, the Q2 24 free operating cash flow is seasonally depressed. Our planning still assumes a negative free op in Q3, but a strongly positive free operating cash flow in Q4 2024. Let's now look at our balance sheet on page nine. Our total net debt slightly increased by 308 million euros compared to end of 2023. The increase was mainly caused by the seasonally negative free operating cash flow of 276 million and negative others. The decrease in the net pension liability of 133 million was driven by an increase of the pension discount rates in the US and Germany. This comprises pension provisions of 265 million euros and the net defined benefit asset of 98 million euros. Summarizing our net debt position, the total net debt to EBITDA ratio is at 3.2 times, based on a four-quarter rolling EBITDA of 1 billion euros. However, based on our mid-cycle EBITDA, the ratio would be only around 1.1 times. Covestro remains committed to a solid BAA2 investment grade rating that was confirmed by Moody's in May 2024. Back over to you, Markus.