Covestro Ag Ord

Welcome to the Covestro earnings call on the full year 2024 results. The company is represented by 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 IR website. I assume you have read the safe haber statement. With that, I would now like to turn the conference over to Christian.

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 euros, only slightly down versus 2023. This decline was driven by lower prices despite significantly higher volumes. The EBITDA is stable at 1.1 billion euros, indicating that the difficult demand environment is far from over. Once again, we could secure a positive free operating cash flow of 89 million euros in line with our guidance. Our transformation program Strong yielded savings of 119 million euros. Turning over to the non-financial 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 BioBTX and by signing a supply agreement with Encina. Both companies recycle consumer plastic waste into valuable raw materials like benzene and toluene 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. As you can see on this chart, we continue to invest into our future and drive forward our growth. One example is the expansion in Hebron, Ohio in the U.S., where we are going to spend a low triple-digit million euro amount to expand our compounding lines. This investment is part of our sustainable growth strategy, enabling us to meet the growing demand for specialized polycarbonate materials and strengthen our position in North America. We are continuing our journey to achieve full captive use of our standard polycarbonates in the future. The expansion will include new production lines and infrastructure to manufacture customized polycarbonate compounds and blends, significantly boosting our capacity in the solutions and specialties business for the American market. Target industries are local automotive, electronics, and healthcare industries, supplying them with high-quality materials. Our well-established R&D center in Pittsburgh will collaborate closely with the Enhanced Compounding Facility to drive technology transfer from lab to industrial production, supporting major transformation processes like electrification, automation, and digitization. This investment underscores the importance of U.S. sites and market to Covestro's global strategy. Construction is scheduled to begin in 2025, with operations starting by the end of 2026. It is expected to increase our EBITDA by a mid-double-digit million euro amount per year, once fully utilized. In conclusion, this expansion reinforces our commitment to sustainable growth and innovation. We look forward to continuing our journey of success with our customers and partners. 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%. This was driven by the improved availability of our assets, especially in Europe, after resolving the technical issues in Q4 2023, and improved demand in APEC. This led to a sales volume increase of 10.6% in APEC 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 APEC. However, in the second half of 2024, all regions showed a decline, leading to an overall flattish development for fiscal 2014. 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. In electronics, a similar pathway could be observed, and after a strong start in H1, growth rates weakened during the second half of 2024, but also stayed positive. After significant negative growth rates in 23 on construction, construction was the clear champion in 2024, outperforming all other industries by far and exhibiting strong growth in every quarter and in all regions. 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. APEC was the strongest region with all industries witnessing growth. After this summary of the 2024 demand development, we are now diving deeper into the financials. We are now on page five of the presentation. Sales for fiscal year 2024 are only slightly down by 1.4% year on year to 14.2 billion euros. Clearly, the volume rebound is the overall success of 2024. We managed to deliver on our target of a mid to high single digit volume increase after resolving the chlorine issues in Q4 23 and producing also reliably during 2024. This led to a volume increase of 7.4% and a positive almost 1.1 billion euros impact in the sales bridge. However, the business environment was once more challenging and we were burdened with 8% or 1.16 billion euros in lower prices. A negative FX effect of minus 0.8% or 120 million was mainly driven by weaker Chinese renminbi, Japanese yen and the Brazilian real. So with that, let's turn to page six of the presentation where we are showing the EBITDA bridge. As you can see for fiscal year 2024, EBITDA is stable compared to the prior year. Once again, the volume rebound contributed positively and resulted in a 400 million Euro upside. On the other hand, selling prices declined stronger than raw material costs due to an unfavorable industry supply-demand ratio. As a consequence, EBITDA got a hit with 514 million from a negative pricing delta. The FX effect is neglectable. Only other items are largely positive despite restructuring costs associated with our efficiency program strong. Positive contributions came from the insurance reimbursement for the chlorine incident in Dormagen and lower bonus provisions. After the overview of the overall performance, we are now going into the segments. In solutions and specialties, sales decreased by 3.6% to 7 billion euros. Despite a volume increase, prices declined much stronger, leading to the overall slightly negative impact. EBITDA went down by 9.4% to 740 million euros. However, it is noteworthy that the 2024 numbers are affected by the higher comparison from 23 due to a 35 million gain from the sale of the additive manufacturing business and restructuring costs of 28 million euros related to Strong. With these effects, EBITDA performance of S&S would be comparable to 23. For the year 2025, we are expecting an EBITDA slightly above 24 levels. Let's now turn to page 8 and discuss performance materials. Performance materials benefited most from the improved availability. We were able to increase our volumes by a strong 11.9%. However, selling prices followed the market development and declined by 9.6%. Overall, sales increased by 1.4% compared to the year 23. Performance Materials was particularly burdened by a negative pricing delta given the low industry utilization rate and the persistent weak demand. So, overall, the EBITDA in the PM segment declined year-on-year by 1.2% to €569 million. The EBITDA of PM also includes a €55 million contribution from an insurance reimbursement for the chlorine production event in Dormagen. Looking ahead into the year 2025, we are expecting a modest sales volume increase year on year. We are leveraging our cost leadership and pursuing a sell-out strategy, growing our market share. Margin-wise, Q1 2025 will be still challenging, but we expect some margin recovery within the rest of 2025. Based on these assumptions, we guide for an EBITDA range of between 400 and 800 million euros. The next topic is the free operating cash flow development for the year 2024. As you can see from the graph, the free operating cash flow was plus 89 million euros and at the upper end of our guidance range of between minus 100 and plus 100 million euros. Q4 2024 contributed with 253 million euros and as such, we had a strong finish of the year. The fiscal year 2023 capex of €789 million was roughly in line with our full-year guidance of €800 million. Income tax payments were at €164 million less than for 2023, mainly due to a more favorable geographical mix, i.e. reduced losses in Germany. All in all, the fiscal year 2024 free operating cash flow remains positive, and we are happy of this track record in this ongoing weak economic surrounding. Covestro has always managed to achieve in any given year, regardless of the economic development, a positive free operating cash flow. Let's now turn to the P&L items below EBITDA. DNA is in line with our guidance of 850 million euros. However, in some cash-generating units, we had to revise the outlook due to demand weakness and significantly increased supply. The impairment test in the units polyols and coatings and adhesives was the main driver resulting in impairments of 142 million euros for fiscal year 2024. I would like to highlight the P&L income tax expenses of 245 million euros due to incurred losses in Germany. In the rest of the world, the positive results are taxed with the national tax rate in the respective countries. Overall, our net income is negative at minus 266 million euros and with that earnings per share amount amount to 1.41 euros minus. According to our dividend policy of a payout of 35% to 55% of net income, the dividend will be, as also reflected in the consensus, consequently zero. Let's now look at our balance sheet on page 11. Our total net debt, defined as net financial debt plus pension provisions, is roughly stable. Net financial debt increased slightly while net pension liabilities went down. Net financial debt increased as the sum of free operating cash flow, net interest, and others were slightly negative. The decrease in the net pension liability was driven by an increase in the discount rates in the U.S. and Germany. Summarizing our net debt situation, the total net debt to EBITDA ratio is stable at 2.7 times. As stated in the past, Covestro remains committed to a solid investment-grade rating, and Moody's confirmed our BAA2 rating with stable outlook in Q2 2024. That concludes the financial review of fiscal year 2024, and we proceed to the industry outlook. 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 remain 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 and 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. In mid-2024, we informed you about the launch of the transformation program STRONG. The program will shape our sustainable competitiveness with effective structures and efficient processes with customer focus and supported by the broad implementation of artificial intelligence solutions. With Strong, we want to achieve 400 million euros annual savings by 2028. To put this into perspective, this is slightly below 10% of our annual fixed costs. And this requires around 300 million euros of accumulated restructuring costs. Now, half a year later, I'm happy to confirm that we are fully on track. The program consists of various smaller and larger projects. Some highlights are the streamlining of the go-to-market organization in solutions and specialties. This reflects, among other things, the shift of personal customer visits to virtual meetings. In addition, we announced the closure of a coatings and adhesive site in Augusta in the U.S. In 2024, we achieved gross savings of €119 million, partly counterbalanced by one-time costs of around €50 million. So overall, Strong contributed around €70 million to our reported EBITDA. In 2025, we expect additional savings of around €130 million, leading to accumulated and sustainable savings of around €250 million. However, we also assume one-time restructuring and implementation costs of around €200 million. This means that Strong will overall burden reported EBITDA in 2025 by around €70 million compared to 2024. Already in Q1 2025, we expect to book restructuring costs of around 100 million euros, whereas the additional benefits will just ramp up over time. On page 14, we are now coming to the outlook for fiscal year 2025. The expectation for the EBITDA is similar to the year 2024, between 1 billion and 1.6 billion euros. The free operating cash flow is forecasted to come out at 0 to 300 million euros. The range is smaller compared to the EBITDA range, as we expect that working capital will breathe related to the economic development. In the case that the economic growth accelerates during the year, then this would lead to a build-up of working capital and vice versa. The ROC above WEC is expected at minus 2 to minus 6 percentage points, and the greenhouse gas emissions in scope 1 and 2 are estimated to be between 4.2 to 4.8 million tons. The expected increase in volumes will lead to higher emissions, which should be offset by the before-mentioned increasing renewable electricity share and further efficiencies in production. Sales are expected to come in between 14.5 and 15.5 billion euros. In Q1 2025, we expect an EBITDA between 50 and 150 million euros. Please note that this includes the previously mentioned one-time restructuring costs for the project strong of around 100 million euros. Q1 free operating cash flow will be impacted by significantly higher inventories due to pending turnarounds in our plans. CapEx is expected to be slightly lower than in fiscal year 2024 at around 700 to 800 million euros. Out of that, we assume an expansion CapEx of around 300 million euros, mainly for strategic expansion projects. 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 startup 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 offer of 62 euros 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 one-third 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 timeline. We are confident that 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 euros, which was caused by lower prices and an unfavorable FX, while positive volumes were pertaining. EBITDA for fiscal year 2024 of 1.1 billion euros 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. The positive 2024 free operating cash flow of 89 million euros was at the upper end of the guidance range. For fiscal year 2025, the guidance is announced with an expected EBITDA of 1 to 1.6 billion euros. And the AdNoc takeover bid was successful with an aggregated above 95% share ownership and regulatory proceedings well underway. And now Ronald and I will be very happy to answer any of your questions. With that, I hand it 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. And the first question comes from Christian Faltz from Kepler Chevreux. Christian, please unmute your microphone.