Covestro Ag Ord

Welcome to the Covestro earnings call on the second quarter results. The company is represented by Markus 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 IR website. I assume you have read the safe-haver statement. With that, I would like now to turn the conference over to Markus.

Thank you, Ronald, and good afternoon to everybody and a warm welcome to our second quarter call. With the end of today, Covestro's Chief Commercial Officer, Sucheta Govir, will go into her well-deserved retirement after two consecutive terms on the board of Covestro. I would like to express my sincere gratitude to Cecita for her exceptional contributions and her dedication to shaping our company. On behalf of the entire Board of Management, I now have the great pleasure to introduce the new Chief Commercial Officer of Covestro, Monique Buch, to the investor community. Monique is an esteemed top manager with an impressive track record and a long-standing experience in the materials business. In her last position, she served as Executive Vice President non-woven at Lenzing AG Austria. This position had been preceded by various leading positions at Freudenberg and Dow Corning. She obtained a Master in Industrial Engineering and Management from the University of Twente. The other members of the Board of Management of Covestro and I are delighted that Monique will take an active role in improving our business performance while transforming Covestro to the circular economy and execute our Sustainable Future Strategy. Turning to the next page, positive news are coming from our M&A team. We always said that we are looking for bolt-on acquisitions for our solutions and specialty businesses. Now, with the acquisition of Pontacol, a Swiss manufacturer of multi-layer adhesive films, we have done another step in this direction. This move expands our specialty films product and technology portfolio, enhancing our European market presence. The acquisition offers attractive value creation through portfolio, organizational and procurement synergies. The addition of production sites in Switzerland and Germany strengthens our global manufacturing network and improves regional availability of adhesive films. This expansion enables us to deliver more powerful customer solutions, increase competitiveness and grow sustainably. We expect sales growth in the low double-digit Euro-million range by accessing growing applications including security glazing, flexible printed electronics and wind blade leading edge protection. The EBITDR contribution of these attractive applications is expected in the mid-single-digit euro-million range. The closing is expected in the second half of this year. After these encouraging news, let us now turn to the key facts of the last quarter. Turning to next page, the key facts of the second quarter were sales volumes remained stable. We had lower sales of 3.4 billion and they were caused by lower prices and unfavorable currency. We achieved an EBITDR of 270 million, which is in the upper half of our guidance range. The free operating cash flow came in negative at Euro 228 million. Following our July 11th announcement, we adjusted our guidance for EBITDA, free operating cash flow and return on capital employed above WACC. We were the first of several chemical companies that have since revised their guidance in response to adverse market conditions. Turning over to the next page. We are looking at the business and the volume development in the second quarter of 2025. Year over year, global sales volume remained flat, almost balancing negative developments in Europe, Latin America and Asia-Pacific with positive volume trends in North America. Across different industries, construction showed the highest growth with a mid-single-digit percentage increase, mainly driven by regional supply and demand patterns without major import-export trade flows. All industries depend on imports-slash-exports declined. Automotive saw low single-digit decline. Furniture followed with a mid-single-digit decline, and electronics was most affected with a high single-digit decline. Regional performance varied significantly. Europe and Latin America presented a mixed picture. Furniture, wood showed a slight increase, automotive remained flat, while construction declined slightly and electronics dropped significantly. North America's sales volumes, especially in performance materials, increased significantly, driven by strong growth in construction due to gaining market share from competitors relying on imports. Furniture would increase slightly, electronics developed flattish, while automotive showed significant decline. Asia-Pacific maintained a slight sales volume increase due to significant growth in construction, automotive with slight growth, but strong negative trends persisted in electronics and furniture. With this summary of the demand development, I am now handing over to Christian, who will guide you through the financials.

Thank you, Markus, and also a warm welcome from my side. We are on page 6 of the presentation and are coming to the year-over-year sales bridge. Sales for Q2 2025 declined by 8.4% to 3.4 billion euros. This decrease was mainly caused by negative pricing and FX effects. Prices declined by 4.8%, affecting both segments, while the negative FX effect of minus 3.2% was primarily driven by the weaker US dollar, Chinese renminbi, and Mexican peso. As mentioned earlier, overall volumes remained nearly flat at minus 0.4%. However, there was a divergence between the two segments with performance materials experiencing a slight decline while solutions and specialties achieving a slight volume growth. With that, let's turn to the next page where we are showing the Q2 2025 EBITDA bridge. Year over year, EBITDA decreased by 15.6% to €270 million, which falls in the upper half of our Q2 guidance range of €200 to €300 million. The performance above midpoint and consensus was driven by the release of 44 million short-term bonus provisions following the adjusted guidance for FY 2025. Selling prices once again declined more sharply than raw material costs due to the ongoing unfavorable industry supply-demand ratio. The price decline was most pronounced in APEC and EMLA after the tariff announcements of the US government. As a consequence, EBITDA was impacted by minus 100 million euros from a negative pricing delta and additionally adverse FX effects. The small volume increase shows the ongoing shift to reduce low margin business with strong market products. Other items were largely positive due to the aforementioned release of the bonus provision and included restructuring costs for strong of 37 million euros. On slide 8, we break down the details for the different segments starting as usual with solutions and specialties. In S&S, the combination of 3.4% negative FX effects and the year-over-year price decline of 3% led to a sales decline of 5.4%, despite increasing volumes by 1%. Sequentially, sales declined globally, with growth recorded only in APAC, while MLAR and North America declined. The EBITDA in Q2 2025 remained stable year-over-year as the negative pricing delta and FX effects were offset by positive volume development and others, mainly from bonus provision release and cost contingency. The quarter-over-quarter EBITDA decline was caused by a negative pricing delta, while volumes and others contributed positively. The EBITDA margin remained stable. In line with the adjustment of our FY guidance, we now expect SNS to contribute between 650 to 850 million euros to our FY 2025 EBITDA. After solutions and specialties, we now turn to the performance materials segment. Year-over-year sales declined by 11.8%, driven by negative contributions of minus 6.6% from pricing, minus 3.0% from FX, and minus 2.2% from volumes. Quarter-over-quarter sales increased in APEC and North America, while MLA declined. The Q2-25 EBITDA of €149 million is lower year-over-year, mainly due to a negative pricing delta, while positive volume effects from reducing low margin or loss-making business. Sequentially, the EBITDA in Q2-25 rebounded after the Q1 impact from one-time costs related to the closure of our POJV with Lionel. It increased due to positive effects from others, mainly from bonus provision release and cost contingency, positive volumes and pricing delta following the high energy costs during the winter period. We are also reducing the EBITDA guidance from 400 to 700 million euros and now expect PM to contribute between 200 to 500 million euros. This adjustment is based on the low probability of a margin recovery for H2 2025. The next topic is the free operating cash flow development. As you can see from the graph, the free operating cash flow in H1 2025 was negative with 481 million euros, with Q2 FOCF contributing negative 228 million euros. The free operating cash flow declined in H1 year-on-year, driven by lower EBITDA and higher CATEX. Changes in working capital of minus €314 million in H1-25 were mainly due to the seasonal build-up of inventories, however less pronounced than in 2024. H1, 25 capex of €365 million, was higher year-on-year due to phasing. We reiterate our capex guidance of €700 to €800 million for the full year 2025. Income tax paid of €85 million was similar to the previous year. The minus €127 million in other effects mainly comprises the bonus payout, which was slightly reduced compared to 2024. Overall, the Q2 2025 free operating cash flow is seasonally depressed. Our planning assumes an improved but still negative free operating cash flow in Q3, but a strongly positive free operating cash flow in Q4 2025. Let's now look at our balance sheet on page 11. Our total net debt increased by €492 million compared to the end of 2024. The increase was caused by the seasonally negative free operating cash flow of minus 481 million euros and the decrease in the net pension liability to 215 million euros was driven by an increase in pension discount rates mainly in Germany. This comprises pension provisions of 285 million euros and the net defined benefit asset of 70 million euros. Summarizing our net debt situation, the total net debt to EBITDA ratio is at 3.8 times, based on a four-quarter rolling EBITDA of €0.9 billion. Without the significant strong expenses of around €140 million in H1 2025, the increase would have been limited to a ratio of 3.3 times, which would have been an increase year on year of only 0.1 times. Covestro remains committed to a solid investment grade rating, which was just confirmed in April by Moody's, including a stable outlook. That concludes the overview of the Q2 financials, and I'm handing it back over to Markus.

Thanks a lot, Christian. We are continuing with the outlook for Covestro's core industries on page 12 of the presentation. Global GDP forecast has decreased to 2.5% from February's 2.8 outlook. This reduced global outlook also affects most of Covestro's core industries. Automotive growth forecast decreased to 0.6% from 2.7%, primarily due to U.S. tariff policies disrupting global supply chains and demanding weakness in Europe and North America. EV and battery electric vehicles outlook remains strong at 24% growth. Construction industry growth forecast increased to 0.6%, partly due to stabilization in the Chinese housing market, though ongoing conflicts and political uncertainty limit further growth. Furniture industry growth forecast decreased to 0.5%, which is one percentage point below earlier forecast, mainly due to weaker production APEC and North America regions. Electronics industry growth forecast is now at 3.7%, with persistent uncertainty regarding U.S. trade policy and potential tariffs affecting investments. Household appliances show slightly higher expected growth at 2.4%. Let's turn to the next page. As already mentioned, we have adjusted our guidance as published on July 11th due to downgraded industry growth expectations following U.S. tariff announcements and the lack of substantial margin recovery prospects. The EBITDA guidance is now between 700 million and 1.1 billion, down from 1.0 to 1.4 billion after the first quarter. The free operating cash flow guidance has been adjusted in line with EBITDA and is now expected between minus 400 and plus 100 million euros. Accordingly, return on capital employed over weighted average cost of capital is now projected at minus 9 to minus 5 percentage points instead of minus 6 to minus 3 percentage points. The current mark-to-market estimate is approximately at 900 million euros based on July forecast assumptions flat forward, so on midpoint of our current guidance. Greenhouse gas emissions forecast remains stable at 4.2 to 4.8 million tons. Unfortunately, the day after our ad hoc release, we were impacted by a fire in the transformer station in Dormagen, owned by the chemical site operator Corenta. The sudden lack of electricity led to a shutdown of our poly-oil plants, but mainly damaged our chlorine production, which subsequently impacts our TDI as well as several solution and specialty value chains. We are still uncertain about the full financial impact. However, first preliminary evaluations revealed a possible high double-digit to low triple-digit million euro EBITDA burden for the full year 2025. we are still trying to mitigate the effects of the incident as much as possible. Beyond that, additional financial expectations are Covestro sales are estimated between 13 and 14 billion euros. Our Q3 EBITDA is expected in a range between 150 and 250 million euros, including our preliminary assessment of the dormant impact of a mid-double-digit euro burden. The financial results range was adjusted to minus 140 to minus 180 million euros. All other financial expectations remain unchanged. As the guidance adjustment has been significant, I would like to quickly hand over to Christian for a detailed view on the external market headwinds leading to the revision.

Thanks, Markus, and let me just provide transparency on the key factors that led to the adjustment of our EBITDA guidance. The midpoint of our initial February guidance was €1.3 billion, which we now have revised to €900 million. The primary driver is the absence of the margin recovery perspectives, which we anticipated for 2025, resulting in a negative pricing delta of approximately €550 million. We also expect a low triple-digit million euro volume decline and unfavorable exchange rates for US dollar and Chinese renminbi with a mid double-digit euro million impact. Combined, these external market developments total around 700 million euros in negative impact. To counter this, we have launched short-term cost contingency measures expected to deliver up to 275 million euros in savings. Positive effects from our strong transformation program were already included in the initial guidance. Other savings of around 100 million include reducing short-term bonus provisions for FY 2025. Our internal measures can offset approximately 300 million euros of the roughly 700 million euros negative impact. Despite these comprehensive efforts, the remaining 400 million euros difference explains the EBITDA guidance adjustments announced between February and July. We remain committed to driving our transformation and will continue to pursue every opportunity to improve our performance throughout the remainder of 2025. Back over to you, Markus.

Thanks, Christian. And before summarizing the second quarter, I would like to give you an update on the XRG transaction. Regarding the European Foreign Subsidy Regulation, we have been informed about the conclusion of the Phase 1 review and our entry into a Phase 2 investigation. This Phase 2 referral was expected, given the size of the deal and its significance, as it is the first FSR review involving a national oil company, as well as the first complete takeover of a German blue-chip company by a Middle Eastern company. This in-depth Phase 2 investigation can last up to 90 working days. On merger control approvals, we have now advanced to a 90% approval rate, with only Vietnam remaining prior to closing. We reiterate our confidence to close within the second half of 2025, most likely in Q4, with the subsequent payout of €62 per share to Covestro's shareholders. Let's turn to the next page and allow me to quickly summarize. We have seen in the second quarter flat volume development that was burdened by economic and geopolitical uncertainties. Sales came in lower at 3.4 billion, mainly caused by lower prices and unfavorable currency effects. The EBITDA for the second quarter of 2025 of 270 million was above the midpoint of the guidance range and was helped by internal measures. The full year guidance for the year 2025 has been adjusted with an expected EBITDA now of between 700 million and 1.1 billion euros. And the XIG transaction is on track with expected closing in the second half of 2025. And now, Christian and myself are happy to answer any questions that remain open. And with that, I hand it over to Carsten, who will guide us through the Q&A session.

Thank you, Markus. 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 Veits from Kepler Chevrolet. Christian, please unmute your microphone.

Right, good. Sorry, it was unmuted for me, and I tried to unmute it again, so I'm muted. Hope you can hear me. Good afternoon.

Good morning.

Markus, Christian, and Ronald and team. Two questions, please. First of all, at the low end of your APTA guidance for the material segment, you're not expecting much of a positive contribution in H2, so just about 40 million euros at best, I guess. Kind of a H2-22 situation. What are the assumptions for this lower end? And I take it this includes the force majeure effects, correct? And the second question would be, are there any signs of a demand revival into Q3 from any key customer industries, furniture, electroelectronics, automotive?

Yeah, thanks, Christian. This is Markus speaking for your questions. Let me start with the second part or second question, the revival science of any industries going into the third quarter. I hope we could provide you with an overview about where the different industries in terms of overall industry outlook look like. And I'm here specifically referring to one of the slides that we have in our presentation that supports the respective call. And there you see that many of the industries that we are serving mainly take automotive, construction, furniture, electrical, electronics. There is a positive growth outlook for the full year 2025. However, in general terms, we have to say that this industry growth outlook has been revised downwards for some major industries and that downwards revision having now Q1 and Q2 behind us for sure would impact the second half of this year stronger So, if you do the math, you would figure out that currently there is limited to no signs of a significant uplift. It might be regionally slightly different here and there, but in general terms, we have to say that the world is still challenged, and one of the major reasons is the ongoing uncertainty due to ongoing negotiations of U.S. tariffs. So, that is the underlying And that all comes on top of the uncertainties that we have seen so far and the prolonged crisis. And I don't want to reiterate it since when we already have consecutive crisis going on 2021 with Corona energy peak and so on and so forth. So long story short, the market currently is in a very challenged overall situation. So that means for second half, I personally would not see significant broad-based across-the-board uplift in demand. And once again, there might be here and there some regional differences by industry or in general, but I do not think that this is sufficient to provide a broad positive overall uplift of the markets for our industries and for our main customers so it's a very broad answer but before we now go into details and then it's maybe seen as oh there's a positive sign here positive sign there broad basis from today's perspective the markets will remain very challenging so to summarize it front end here with the front end being behind us Well, let's not forget, let's not forget, Provesto is doing a lot on self-help. We have just and have been mentioned today is this program strong. We also have made it very clear where we stand in terms of the rest of the year outlook with our updated guidance. And now coming back, let's say, to your first question, the costs are that we had to digest this year For example, restructuring costs for PU11 are non-recurring then, let's say, for the next year, most likely. And the Dormagen case that I just mentioned has not been included in the midpoint, but should be covered at the low point. So there will be ongoing margin pressure also for materials like polycarbonate and polyols. So it will remain a challenging year, and at the same time, We have to also make clear that we do everything that is in our own power to make sure that we deal with the current situation. So the underlying is relatively stable, yet at, for us, also low levels. And therefore, we would expect that Q3 is therefore similar to the second quarter, but excluding the Dormag incident. So I hope that gives you somewhat a picture and a flavor.

Yes, thanks very much, Markus.

And the next question comes from Jov here from UBS. Jov, please unmute your microphone.

Yeah, good afternoon. I was wondering if I could ask Marcus if he had any comments on this policy in China, this anti-involution policy, and what impact and the timing of it might have on the chemical industry as a whole. And also, and I'm aware of obviously your other hat that you wear with the VCI, but also what you make of the action plan from the EU that has been announced.

I'll say, okay, sorry, Joff, I have to repeat it because I forgot now to unmute myself. After 40 quarters of reporting here, so finally that also happens to me. So wonderful. So the anti-involution policy, we currently do not see any direct effects on our businesses for the time being, to be very clear. And with regard to the current conversations on European level, is it on countermeasures or is it more the general, let's say, because you talked about VCI, I'm not sure, Jov, can you just clarify, because I understood you that you say how do you look at the energy out on the European, let's say, overall policies, but not as potential countermeasures, is it?

No, I was just wondering, obviously, the action plan that the EU announced, and all I meant was I was aware that you obviously have other responsibilities, but I was wondering what impact you think that could have on the chemical industry in Europe, and also do you think that the anti-involution policy may result in old capacity being taken out. I'm aware not for Covestro, but for the industry more as a whole.

Yeah, as I said, with regard to involution policy, let's see. Once again, we currently do not see any impacts, at least not short term, and I also have not seen, let's say, any announcement that would support, let's say, that thesis that old capacity would be taken out. On Europe, the European Chemical Action Plan, First and foremost what I am positive about also in my role as a VCI president is that finally that new economic reality has obviously arrived in the Brussels offices and therefore also has now led to action that seems to me a more balanced approach towards economy and the ecology. So whereas climate was on top of the list let's say, maybe only on top of the list for the last administration. I now see that it's a more balanced approach being taken, and that in itself I see as a very positive sign. Yet, the effects, whether it has really positive effects, whether it makes the EU and its industries more competitive, that remains to be seen, and therefore more actions and more swift actions have to be taken, and without repeating myself, that is, let's say, lowering bureaucracy, doing something on tax, tackling the high energy prices in Europe, and so on and so forth. So a good start, but way too little to really turn now the tides.

Thank you.

And the next question comes from Chris Cooneyhan from Jefferies. Chris, please unmute your microphone.

Yeah, thanks so much, and good to hear you, Marcus. I just wanted to ask about door margin and specifically how long you expect the plant to be out for, firstly. Obviously, you've given a financial impact, but just I wasn't sure if I heard how long you expect it to be on force majeure for as at today. And then secondly, obviously, that's about a third of your TDI capacity. If I look at my supply demand, Is there the potential for the other two-thirds to benefit from the market being a bit tighter?

Yeah, Chris, thanks for your question. Very roughly speaking, we expect Dormagen to be out for several months. And now comes the big but. What is mainly affected for these several months is the chlorine supply. The chlorine supply is absolutely essential to run the TDI plant. However, there's other chlorine customers internally as well as externally, and that's why we also issued that force majeure. because there is an opportunity to gradually at least bring back some of the other internal value chains for example in the solution and specialty area but that will also be a matter of weeks so not days but really weeks so gradually we expect that more and more plants will come up on stream but the big volume and also margin contributor TDI that is definitely out from today's perspective for several months. With regards to your second part, we have just observed that Asia prices have rebounded based on the prices that were quoted by traders. First, we have to take a look at it. Is it sustainable? And in the US, we have, let's say, in the entire industry, not so fast moving prices due to contractual basis and I'm talking more about what I perceive as a general industry pattern rather than our own situation and therefore we have not seen any reaction so far and also please bear with me we're not going into any further details because the TDI market It's a very, let's say, narrow market. And therefore, anything I say could be one word too much around this. And from that perspective, please allow me that I leave it with that.

Of course. Thanks so much.

Josh, there seems to be a follow-up question. No. Okay, then... There are no further questions at this time, so handing back to Ronald.

Okay. Thanks for your question. I know it's a busy day for you today with a lot of reporting, so if you have any follow-up questions, don't hesitate to contact the IR department. And with that, I would thank you for your interest, and see you next time. Bye-bye.