Covestro : TranskriptTelefonkonferenz 2023 Q1

REFINITIV STREETEVENTS

EDITED TRANSCRIPT

Q1 2023 Covestro AG Earnings Call

EVENT DATE/TIME: APRIL 28, 2023 / 1:00PM GMT

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APRIL 28, 2023 / 1:00PM GMT, Q1 2023 Covestro AG Earnings Call

CORPORATE PARTICIPANTS

Markus Steilemann Covestro AG - CEO & Chairman of Management Board

Ronald Koehler Covestro AG - Head of IR

Thomas Toepfer Covestro AG - CFO, Labor Director & Member of Management Board

CONFERENCE CALL PARTICIPANTS

Charles Webb Morgan Stanley, Research Division - Equity Analyst Christian Faitz Kepler Cheuvreux, Research Division - Equity Analyst Georgina Fraser Goldman Sachs Group, Inc., Research Division - Associate Jaideep Pandya On Field Investment Research LLP - Analyst

Markus Mayer Baader-Helvea Equity Research - Lead Analyst of Chemicals

Matthew Yates BofA Securities, Research Division - Director in Equity Research, Head of European Chemicals Research & Research Analyst

Sebastian Bray Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst

PRESENTATION

Ronald Koehler Covestro AG - Head of IR

Welcome to Covestro's earnings call on Q1 2023 results. The company is represented by Markus Steilemann, CEO; and Thomas Toepfer, CFO. (Operator Instructions) You will find the quarterly statement and earnings call presentation on our IR website. I assume you have read the safe harbor statement. With that, I would now like to turn the conference over to Markus.

Markus Steilemann Covestro AG - CEO & Chairman of Management Board

Thanks, Ronald, and hello and warm welcome also from my side to the results of our first quarter. Today, we published our Q1 details after we had pre-released the headline figures 2 weeks ago. Sales were down by 20% compared to last year to EUR 3.7 billion, clearly indicating the global demand crisis we are currently facing.

Against this trend, we achieved the first quarter EBITDA of EUR 286 million, clearly beating the guidance of EUR 100 million to EUR 150 million given in early March. Free operating cash flow was also better than expected by us despite the usual seasonal working capital build up.

After the positive trend in EBITDA during the first quarter and improved visibility going forward, we are now returning to a quantitative guidance force for full year 2023, with a defined range for our financial KPIs.

Finally, as you recall, in the first quarter 2022, we initiated a EUR 500 million share buyback program. The program was paused mid 2022 due to the recessionary environment.

With more clarity on the outlook, we are now restarting the program in May. Let's turn to Page #3. In line with our vision to become fully circular and to achieve climate neutrality, we successfully completed two milestones and initiated a new project towards simplified recycling.

A major circularity milestone has been achieved with Baytown, our U.S. side, receiving its ISCC Plus certification. We are the first manufacturer of polyurethane and polycarbonate raw materials in the United States achieving this.

Now the Covestro network of ISCC Plus certified plants reaches across 9 major sites spanning across all regions. This network allows us to regionally produce and offer a broad variety of our circular intelligence materials to our customers.

These products contain a minimum of 25% sustainable content and are marketed under the CQ brand. The second breakthrough is related to the EU funded PUReSmart project, for chemical recycling of polyurethane mattresses.

This project has been completed successfully with closing the loop from polyurethane foam to a chemical recovery of raw materials in a high level of quality and purity.

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APRIL 28, 2023 / 1:00PM GMT, Q1 2023 Covestro AG Earnings Call

Now, for the first time, a flexible foam sample has been produced from the fully recycled polyol and TDI. Both raw materials were obtained in Covestro's pilot plant in Leverkusen, which we inaugurated in 2021.

A new governmentally funded project has been initiated by a consortium of industry and science to design future automotive headlamps from a polycarbonate mono material. The project's target is to design lighting systems in such a way that they can be recycled at the highest possible value-added level.

Covestro is the partner of choice for this project as we do not only have extensive expertise in this area, but we also already showcased a visionary headlamp concept a few years ago.

During the 3-year project, the transfer of the results to other applications, like the appliance industry, will be also examined. We will keep you posted on the outcome of this exciting new endeavor.

Let's turn the page to Page #4. Despite a reduced CapEx plan for 2023, we, nevertheless, plan to spend almost EUR 400 million for growth projects with a focus on Solutions and Specialties.

During the first quarter, we announced two important projects: Firstly, our business entity, Thermoplastic Polyurethane will be built its largest site in Zhuhai, China, with an overall capacity of 120,000 tons. It will be constructed in three phases until 2032.

The mechanical completion of the first phase with a capacity of 30,000 tons is estimated for the end of 2025. The total investment lies in the low 3-digit million euro range. This will also be the company's largest investment in the TPU business.

The site will furthermore utilize the most advanced production technologies and will be run on 100% green power. We expect the EBITDA contribution to be in the range of a low to mid double-digit million euro.

TPUs are a highly versatile plastic material, offering a broad range of properties for a diverse set of applications. Most prominent applications are the IT, consumer electronics, footwear and automotive industry.

The second example comes from our business entity Specialty Films. The high double-digit million euro investment into new extrusion lines at the Map Ta Phut site in Thailand will be completed by 2025.

The added polycarbonate films production is an answer to the increasing demand and supporting our expansion of future technologies and industries.

Our Makrofol and Bayfol product range is used primarily in the identity documents, medical and electronic industries. The EBITDA contribution we are expecting lies in the low to mid-double-digit million euro range. Both investments have in common that we are also expanding our sustainable CQ product range with at least 25% alternative nonfossil raw materials.

Now let's turn to Slide #5. We are now coming to the volume development in the first quarter 2023. Year-on-year, the global sales volume decreased by 17%, caused by significantly weaker demand across all regions and limitations in our internal availability.

The region, Europe, Middle East, Latin America has seen significant decreases in almost all industries important to Covestro and was again clearly the weakest region. Part of the volume weakness was caused by our production limitations in Germany.

We plan a gradual ramp-up of the production during the second quarter and third quarter and then return to a normal output in the fourth quarter of this year. Asia Pacific, is also showing a clearly negative volume development across all industries with a modest pickup after Chinese New Year.

Electro, automotive and construction declined significantly and Furniture slightly. Sales volumes in North America were also declining,

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APRIL 28, 2023 / 1:00PM GMT, Q1 2023 Covestro AG Earnings Call

but with a more mixed picture.

Construction is showing a considerable decline. Electro is still with a slight decline, but we observed an end of destocking in furniture/wood with slight increases and also a slight increase in auto and transport. That concludes the overview on the demand development, and I'm now handing over to Thomas, who will guide you through the financials.

Thomas Toepfer Covestro AG - CFO, Labor Director & Member of Management Board

Yes. Thank you very much, Markus, and also from my side, a very warm welcome to everybody on the call. I'm on Page 6 of the presentation. So let's start with the sales bridge.

As you can see, our sales declined 20.1% to EUR 3.7 billion, and Markus already mentioned the negative volume growth of 16.8% that is almost equally spread across both segments, PM and also Solutions and Specialties.

You can also see that our sales were affected by 3.9% lower prices. That, however, was mainly coming from Performance Materials with a negative 7.1% and only negative 0.5% decline from Solutions and Specialties. And you also see there's a small FX effect of 0.6% year-on-year, driven by the stronger U.S. dollar and stronger Chinese RMB.

So let's go to Page 7, and you have the EBITDA bridge. Also here, of course, volumes in Q1 significantly affected our EBITDA, and that shows that we are still in a very weak demand environment.

You could also see the negative pricing delta with price decreases as an effect of the low demand and the ongoing destocking. And in Q1, raw material energy price increases contributed to the negative pricing delta.

However, as of Q2, we do assume a year-on-year tailwind from lower variable costs. You see also a positive development from other items and behind us a significant cost savings, which we realized, especially in the Performance Materials segment.

So that overall, EBITDA came in at EUR 286 million, clearly above the guidance of EUR 100 million to EUR 150 million, which we had given and the better-than-expected results are driven by, as I said, strict control of fixed costs and the lower-than-expected burden from the pricing delta.

So let's look at the sequential development on Page 8. As you can see on the upper side of the page, sequentially, we see a slightly negative sales development, which is due to minor reductions in price and also currency, but I would like to highlight that we are looking at stable volumes sequentially.

And if you look at the lower part of the page, you can see that our EBITDA is coming back into positive territory from the historical low point, which we had in Q4 last year.

And also with that, of course, we have finished the negative trend in terms of our EBITDA margin, and we're returning to a positive 7.6%. And therefore, I think with this, we do see that Q4 actually represents the trough of the cycle.

So let's look into the segments and go to Page 9, where you have Performance Materials. Overall, sales declined sequentially. This is driven by a strong sales decline in APAC because of the Chinese New Year, followed by a slight decline of sales in North America.

However, we've seen slight sales increases quarter-over-quarter in Europe, Middle East and America. And in Q1 2023, if you look at the lower part of the page, EBITDA of EUR 173 million is significantly below last year, but however, it is significantly better than expected and also increasing sequentially.

So the year-over-year decline is driven by the volume decline, the negative pricing delta, which was counterbalanced partly by positive fixed cost development.

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APRIL 28, 2023 / 1:00PM GMT, Q1 2023 Covestro AG Earnings Call

If you look at the EBITDA sequentially, we are returning to positive numbers, driven by the fixed cost savings, the positive pricing delta quarter-over-quarter and additionally, of course, the usual seasonal inventory buildup.

So let's now go to our segment, Solutions and Specialties on Page 10. The year-over-year demand weakness also here is a major factor for the sales decline.

If you look at the upper side of the page, you see sequential sales growth in EMEA, benefiting from positive volumes, but slightly negative pricing. And the regions, APAC and also North America are still declining.

If you look at the lower part of the page, you see that our EBITDA for Q1 '23 is below our Q1 2022. And we have a positive pricing delta, which I would like to emphasize both year-over-year and also quarter-over-quarter.

And the EBITDA margin of 8.8% is still depressed by destocking. So we do continue to see significant margin upside going forward. Let's go to the next Page 11 and talk about the free operating cash flow.

So first of all, if you look at the graph, you see we came in at EUR 139 million negative, which is below previous year, and, of course, mainly attributable to the lower EBITDA year-over-year.

What I would like to emphasize is there was, of course, a negative cash contribution from trade working capital buildup of EUR 257 million. But as you can see in the highlighted line item in the table, this is a purely seasonal effect.

So I can reassure you that we run a very stringent working capital management, and we will limit this clearly to the seasonal rebound so that, overall, and you've seen our guidance, we're targeting a positive free operating cash flow for the full year.

Also, if you look at the table, our CapEx is absolutely in line with our budget and the full year guidance. And you do see a negative income tax payment of EUR 22 million, mainly driven by payments in China.

So I would like to remind you that for the full year, we're expecting cash tax payments of between EUR 200 million to EUR 300 million for the full year. On Page 12, I would just like to explain two onetime effects, which are affecting our P&L, and therefore, also our net income.

So first of all, and you see it highlighted, we had D&A impairments in Q1 2023 at minus EUR 33 million, EUR 30 million of this relate to the discontinuation of our nonstrategic and loss-making Maezio product line and the closure of the site in Markt Bibart. It's a noncash item, but as I said, of course, it affects our P&L. And secondly, I would like to talk about the DTA adjustments.

So last year, we adjusted our deferred tax assets in Germany. And as a consequence, based on the IFRS rules, we are no longer allowed to activate our tax loss carryforward in Germany as the accounting projections expect further losses in Germany in the full year 2023.

So the tax rate will continue to be affected by the regional profit mix. And currently, we assume a P&L income tax of EUR 150 million and EUR 250 million for the full year.

What I would like to emphasize, though, is that in contrast to the IFRS rules based on German tax rules, the tax loss carryforward can be used indefinitely. So this means we are confident that in the future, we're able to use the tax loss carryforward in order to lower our tax rate and we're economically not making any losses by the IFRS rules.

And as you can see, the impairments and the income tax together then caused the net income to be negative, which came in at minus EUR 26 million.

So let's go to Page 13 and look at our balance sheet. And let me start by saying our balance sheet remains very solid. The total net debt increased by EUR 215 million versus the end of 2022. You see a decrease in net pension liabilities of EUR 26 million, driven by the

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