Covestro Ag Ord

Welcome to the Covestro earnings call on the Q3 results. The company today is represented by Christian Beyer, CFO. You have to excuse the absence of our CEO, Markus Steilemann. He currently attends an economic summit convened by the German Chancellor, Olaf Scholz, in Berlin. Markus is attending this summit in a double function, as the CEO of Covestro and also as the President of the German Chemical Association. 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 the earnings call presentation on our IR website. I assume you have read the faith favor statement. We said I would now like to turn the conference over to Christian.

Thank you, Ronald, and hello and a warm welcome to our third quarter call. Before coming to the business of the last quarter, let me update you on the status of the announced transaction with APNOC. The signing of the investment agreement on 1st of October marked the beginning of a multi-step takeover process, which we believe is in the best interest of our shareholders, the company, and all stakeholders. Last Friday, APNOC published the offer document. The publication of the offer document marked the start of the initial acceptance period, which will last until November 27, 2024. A potential additional acceptance period might last from December 3 until December 16, 2024. The Board of Management, together with the Supervisory Board, will issue their reason statement in due course. But now, let us focus on the highlights of the third quarter. We delivered a continued strong volume growth of 6.1% year on year. However, lower prices are still affecting sales, which came in at 3.6 billion euros. In line with our guidance, we achieved an EBITDA of 287 million euros. Free operating cash flow turned positive with 112 million euros and was in line with our expectations. As usual, with a Q3 call, we are narrowing our EVTA guidance range. Let's now come to another topic. While the discussions with APNOC might be the primary focus of the media and the financial community, we should not forget about our mid- and long-term sustainable future strategy. One part of the strategy is climate neutrality on Scope 1 and 2 emissions until 2035 with a reduction of 60% until 2030. We have made significant progress to achieving our targets. Let me start with our Scope 1 emissions. Beginning of August, we successfully installed a new catalyst in our nitric acid plant in Shaoqing, China that will eliminate the laughing gas and nitrous oxide emissions. The catalyst will reduce both greenhouse gases to nitrogen, oxygen and water. The impact of this new catalyst installation is significant as it will reduce the CO2 emissions by 60,000 tons per year once the project is completed end of 2024. Moving on to scope 2. We have been talking about our renewable electricity purchase agreements already a couple of times. In Q3, we have made another step to become more independent of fossil-produced electricity and increase our share of renewable electricity by signing a PPA with BP for solar power. This PPA increases our renewable electricity share in Spain from 10% to 30% and will mostly be used in our MDI site in Tarragona. On a global scale, it will increase our renewable electricity share from 16% end of 2023 to approximately 18% in 2024. Furthermore, the first breakthrough on renewable steam has been achieved by partnering with Rondo Energy to install an innovative heat battery for the first time. The heat battery will store intermittent renewable electricity as heat. Simultaneously, it will deliver continuous high-temperature steam for industrial production. This is a sustainable alternative to steam generation with fossil fuels. The heat battery will be installed at our site in Brunsbüttel, Germany by end of 2026 and will produce 10% of the steam required at the site, leading to savings of 13,000 tons of CO2 emissions per year. The Breakthrough Energy Catalyst Foundation set up by Bill Gates and the European Investment Bank are financially supporting this installation of the RONDO heat battery. Turning back to the business and the volume development in the third quarter of 2024. Year on year, the global sales volume continued to increase by 6.1%. This is driven by an improving demand but also constantly delivering on our reliability ambition after the issues in Europe in 2022 and 2023. The volume growth rate has slowed slightly compared to H1 2024 due to a baseline effect as we were able to ramp up production already during H2 2023. Going through the different industries, construction showed the highest growth rate with a low teens percent increase and furniture with a mid-single-digit percent volume increase. Electro developed flattish and auto exhibited a low single-digit volume reduction. Let's now look into the different regions. In EMLA, construction and furniture are showing continued strong growth based on improved availability of MDI and TDI since the resolved internal availability issues. However, auto is on a slight decline and electro on a significant decline. An almost comparable industry picture can be observed in North America. Construction developed positively with a significant increase. Furniture is flat, but like in EMLA, electro and auto are showing a slight decline. APEC again continues with stable to positive growth across all industries, important to Covestro. Construction exhibited significant growth, furniture and electro slight growth, and auto was flattish. Let's move to the sales bridge on page 5 of the presentation. Sales for Q3 2024 were slightly up at 3.6 billion euros. The price decline of 4.2% could be more than compensated by the volume increase of 6.1%. This marks a turnaround after six quarters where volume growth could not fully counterbalance declining prices. The negative FX effect of minus 0.9% was slightly higher than in previous quarters and mainly driven by the weaker Mexican peso, Brazilian real and US dollars. After sales, we are moving on to the Q3 2024 EBITDA bridge. Year on year, we increased EBITDA by 3.6% to 287 million euros, which is well in our Q3 guidance range of 250 to 350 million euros. Selling prices declined stronger than raw material costs due to the ongoing unfavorable industry supply-demand ratio. Consequently, EBITDA was impacted again with a negative pricing delta of minus 126 million euros. However, this is a lower number compared to previous quarters, but still an indication of the low demand and low margin environment we are operating in. The volume increase could only partially compensate the negative pricing delta. The volume leverage was clearly below the long-term average due to the historically low margins. Fx was neglectable and other items contributed positively. On slide 7, we are breaking down the details for the different segments, starting with solutions and specialties. In S&S, the year-over-year price decline of 4.9% was leading to a sales decline of 2.0%, despite increasing volumes of 3.9%. Sequentially, sales growth was only recorded in APEC, while North America and EMLA were declining. The EBITDA in Q3 2024 was lower year over year due to a negative pricing delta and slightly higher fixed costs. The quarter over quarter EBITDA increase reflects lower bonus provisions. With that, the EBITDA margin increased to 11.7%. We are now expecting SNS EBITDA to contribute slightly below the 2023 level. This adjustment, compared to the previous guidance of a stable earnings situation, is mainly driven by a weaker development in our auto-related business. After solutions and specialties, we are now looking at the segment performance materials. Year over year, sales increased by 4.1%, driven by 8.6% volume growth, minus 3.6% from pricing, and minus 0.9% from FX. Quarter over quarter, sales in North America were flattish, while APEC and EMLA declined. The Q3-24 EBITDA of 125 million is 46% above last year, mainly due to volume increases and lower bonus provisions. However, the pricing delta remains negative. Sequentially, the EBITDA in Q3-24 decreased based on a negative pricing delta, mainly reflecting a weaker development in TDI and polyols. In line with the overall narrowing of our FY 2024 guidance, we are also narrowing our EBITDA guidance for performance materials to now 400 to 600 million euros instead of 400 to 700 million euros. We are now coming to the free operating cash flow development. As you can see from the graph, the free operating cash flow for 9M 2024 was negative with minus 164 million. However, Q3 turned positive with a free operating cash flow of 112 million euros. The 9M free operating cash flow declined year-on-year driven by lower EBITDA, higher working capital, and the bonus payout for FY23 in Q2 2024. Changes in working capital of minus 265 million euros after nine months of 2024 are mainly resulting from a build-up of inventories due to higher volumes. Given the sharp reduction of inventories end of last year, we anticipated an inventory increase for the full year 2024. 9M CapEx of 422 million was slightly lower year over year. We increased the CAPEX into maintenance to further improve the reliability of our assets and avoid issues like we have seen in 2023. The growth CAPEX has been reduced and focuses on selected expansion projects. Income tax paid of 153 million euros was significantly below prior year, reflecting a different geographical mix. The minus 204 million in other effects are mainly the bonus payout. Our planning assumes a positive free operating cash flow in Q4 with an unchanged guidance for fiscal year 2024 of minus 100 to plus 100 million euros. We assume a positive working capital contribution in Q4. However, given the higher volumes, the working capital is expected to remain negative for the full year 2024. CapEx is on track towards our guidance of around 800 million euros, with a figure slightly below 800 million euros more likely. The cash out for taxes is now expected to be only 150 to 200 million euros, based on a different geographical earning mix. Let's now look at our balance sheet on page 10. Our total net debt increased by €159 million compared to end of 2023. The increase was partly caused by the seasonally negative free operating cash flow of minus €164 million after the bonus payout in Q2 2024 and negative others. The decrease in the net pension liability of €142 million was driven by an increase of the pension discount rates in Germany and the return on plan assets. This comprises pension provisions of 374 million euros and net defined benefit assets of 118 million euros. Summarizing our net debt situation, the total net debt to EBITDA ratio is at 3.0 times based on a four-quarter rolling EBITDA of 1 billion euros. Covestro remains committed to a solid BAA2 investment grade rating that was confirmed by Moody's in May 2024. We are now coming to the outlook for Covestro's core industries on page 11 of the presentation. The global GDP expectation has been almost flat for the fiscal year 2024 and it estimated to be 2.7%. This positive development did not apply to most of the industries important to Covestro. After positive growth during the past two years, the automotive development will be at best flattish. Also, the subcategory EV, BEV, has observed a significant decrease in growth rates, but is overall still positive with almost 12%. The outlook for the construction industry remains negative, minus 2.5%. Residential construction is expected to decline by 5.8%. The reasons for this trend remain elevated interest rates and high cost of building materials. The furniture industry is set for stabilization after two consecutive years of strong decline. We assume a flattish development in 2024. The electro industry has also seen a contraction in the past two years with declines of up to 2%. The projection for 2024 has been the positive surprise with an upgrade to 4.2% from initially 1.5%. The appliance sector follows a similar upgraded outlook pattern and is expected to increase by 4.8%. Summarizing this outlook, we see some very limited green shoots with the developments in electro, but observe the development in automotive and construction with concern. During the past two years, we experienced longer than normal durations of negative growth in furniture and electro. With this experience in mind, we expect the ongoing construction weakness to continue into 2025 and might see automotive joining a similar negative pattern. With this, let us now turn to the Covestro Outlook for FY2024. As usual, in Q4, we are narrowing our EBITDA guidance for the full year. We are now expecting the EBITDA for fiscal year 2024 to come out between 1.0 and 1.25 billion euros. The mark-to-market EBITDA is calculated at around 1.1 billion euros based on September 2024 margins, flat forward, and our current budget assumptions for 2024. The economic outlook gives little hope for a rebound of margins from the historically low levels we are currently at, and the updated guidance now incorporates this assumption for the remainder of fiscal year 2024. Let's now switch to the additional guidance elements for FY 2024. In line with EBITDA, also ROSI above WAC has been narrowed to minus 7 to minus 5 percentage points. Guidance for free operating cash flow as well as greenhouse gas remain the same. stable at minus 100 million euros to plus 100 million euros for free operating cash flow, and greenhouse gas emissions in scope 1 and 2 are between 4.4 and 5.0 million tons. We are narrowing down our sales expectation to 14 to 14.5 billion euros, the income tax to 250 to 300 million euros, and the financial result to be between minus 100 and minus 130 million euros. The other KPIs remain stable. So let me quickly summarize our Q3 2024 highlights. We have seen continued strong volume growth of 6.1%, which was driven mainly by higher demand and an improved internal availability. We are seeing sales going slightly up to 3.6 billion euros, which was caused by the continued strong volume increase, while on the other hand lower prices and an unfavorable FX. With an EBITDA of 287 million euros, well in the guidance range of 250 to 350 million euros, we have developed an improvement on the EBITDA side, burdened still by negative pricing delta. We have narrowed our guidance range for fiscal year 2024 with an expected EBITDA of 1.0 to 1.25 billion euros. And we are continuously making strong progress on our path to climate neutrality with significant projects underway for Scope 1 and Scope 2 emissions. And now Roland and I are happy to answer any questions that remained open, and I'm happy to hand over to Carsten, who will guide us through the Q&A session.

Thank you, Christian. Ladies and gentlemen, we will now begin the question and answer session. If you have a question, please use the raise your hand function on your telephone. This is star 5. or post your question into the Q&A tab. If you wish to cancel your request, please use the raise your hand function again. When speaking, please ensure that you are unmuted. The first question comes from Christian Zeitz from Kepler Chevrolet. Christian, please unmute your microphone with star six.