 A Leading Supplier to the Specialty Chemical Industry Covestro AG (CVVTF) Q1 2025 Earnings Call Transcript
May 06, 2025 3:06 PM ETCovestro AG (CVVTF) Stock, COVTY StockCVVTF, COVTY
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Covestro AG (OTCPK:CVVTF) Q1 2025 Results Conference Call May 6, 2025 9:00 AM ET
Company Participants
Ronald Koehler – Head of Investor Relations
Christian Baier – CFO & Member of Management Board
Carsten Intveen – Investor Relations Director
Christian Baier
Thank you, Ronald, and hello, and a warm welcome also from my side to our first quarter call.
The key financials of the first quarter were as shown on this page. Volumes developed flattish year-over-year. Sales also came in at stable €3.5 billion. We’ve achieved an EBITDA of €137 million, approaching the upper end of our quarterly guidance range. Free operating cash flow shows the usual seasonal dip with minus €253 million and we are reducing the upper end of our EBITDA guidance.
Let us look at the volume development in the first quarter of 2025. The global sales volume was stable with minus 0.4%. North America exhibited slight growth. EMLA developed flattish and APAC was negative. The dip in Asia was caused by our portfolio pruning as we cut loss-making or low-margin businesses.
Going through the different industries. Demand in construction and furniture was stable. Auto showed a low single-digit percent decline and electro followed with a mid-single-digit percent decrease.
Taking a deep dive into the different regions, starting with EMLA. EMLA benefited from significant growth in furniture, wood and a slight growth in construction. Auto and electro on the other hand, had a slightly negative development. Sales volumes in North America also increased significantly in furniture, wood, electro and construction. Automotive continued the negative trend from past quarters with a significant decline. APAC experienced a slight increase in auto but all other industries showed a clear decline.
We’re now on Page 4 of the presentation. Sales for Q1 2025 are stable year-over-year at €3.5 billion. The negative pricing and flat volumes were partly offset by positive FX. A negative impact of €40 million was coming from 1.1% lower prices. The prices in the business segment Performance Materials increased by 0.7% and while Solutions & Specialties was affected by 3% lower prices. Volume was flat with minus 0.4% or minus €14 million year-over-year. Excluding the portfolio pruning, volumes would have been 2 percentage points higher.
The Solutions & Specialties volumes increased by 1.2%, while the segment Performance Materials experienced a 2% decline. The positive FX effect of 0.6% or €21 million was mainly driven by the stronger U.S. dollar and Chinese renminbi.
With that, let’s turn to Page 5 of the presentation where we are showing the Q1 2025 EBITDA bridge. As predicted in our full year call, EBITDA decreased by around 50% to €137 million due to costs of €108 million related to our transformation program strong. Within this amount, €88 million are related to the announced closure of our joint propylene oxide operation with LyondellBasell. However, — the EBITDA came in towards the upper end of the predicted range of €50 million to €150 million.
Lower selling prices due to unfavorable supply and demand in combination with high raw material and energy costs, especially in Europe, led to a negative pricing delta of €73 million. The volume increase could only absorb a part of the negative pricing delta.
As I said before, we reduced loss-making business, especially in polyols and increased sales in areas with strong margins. FX was positive. Other items were burdened by costs associated with our transformation program strong that mainly includes the previously mentioned planned closure.
On Slide 6, we are breaking down the details for the different segments. As usual, starting with Solutions & Specialties. In Solutions & Specialties, the year-over-year price decline of 3% was leading to a sales decline of 1.2% despite increasing volumes of 1.2% and positive FX of 0.6%. Sequentially, sales growth was only recorded in APAC, while North America and EMLA were declining.
The EBITDA in Q1 2025 was lower year-over-year due to a negative pricing data. The quarter-over-quarter EBITDA increase was caused by higher volumes, mainly in our Coatings and Adhesives business after the winter break. With that, the EBITDA margin increased to 10.8%. Despite the narrowing of our full year EBITDA guidance, we are confirming our guidance for S&S to contribute slightly above the 2024 level.
After Solutions & Specialties, we are now looking at the segment Performance Materials. Year-over-year, sales were stable with minus 0.7%, driven by minus 2% from volumes, flat pricing and plus 0.6% from FX. Quarter-over-quarter, sales in North America were flattish while APAC and EMLA declined. The Q1 ’25 EBITDA of €13 million is lower due to the before mentioned provisions for the joint propylene oxide operation closure. Without this onetime effect the EBITDA would be comparable to Q1 2024. Sequentially, the EBITDA in Q1 ’25 decreased based on negative onetime effects and the negative pricing delta due to higher energy prices, mainly in Europe during the winter period. For PM, we are reducing the upper end of our EBITDA guidance range by €100 million and are now expecting a range from €400 million to €700 million.
On March 18, we have announced the decision to permanently close the propylene oxide styrene monomer joint operation of Covestro and LyondellBasell at the Maasvlakte site in the Netherlands. Contributing factors to this decision were the global overcapacity is on propylene oxide being built up in China, leading to low utilization rates and thus low margins. Higher feedstock cost and increased imports from Asia made the production of PO in Europe very challenging. As we have announced during our full year call, this consolidation is part of the ongoing transformation program STRONG, impacting our Q1 EBITDA by €88 million.
The overall effect for FY 2025 is expected to be in the low triple-digit Euro million range. And however, starting 2026, there will be a positive mid-double-digit Euro million effect on EBITDA and free operating cash flow. Our sales will be affected by a mid-triple-digit Euro million amount, mainly caused by the sales of styrene. And this with immediate effect as a plant has already been mothballed since end of 2024.
Covestro continues to support its customers and remains committed to the European market despite this closure and therefore, our existing supply network for PO and polyols we are supporting this. The transformation of Covestro is in full swing, and we are walking our talk when it comes to delivering on our targets.
So let me update you on our transformation program STRONG. Gross savings are now at €152 million, adding €33 million from Q1 ’25 to the €119 million achieved in 2024. With 3 quarters to go until year-end, we expect this amount to rise to about €250 million. However, the flip side are the announced onetime costs of €300 million, of which €100 million incurred in Q1 ’25 and a similar amount is to be added during Q2 to Q4 2025. This means that STRONG with overall burden reported EBITDA in 2025 by around €70 million compared to 2024.
As discussed before, the announced closure of the PO production marked an important step in our ambitions for 2025. It hit our EBITDA with the already mentioned €88 million in Q1 ’25, whereas the additional benefits will ramp up over time starting from 2026. Nevertheless, the ambition is clear. With STRONG, we want to achieve €400 million of annual savings or slightly below 10% of our annual fixed cost by 2028. The program consists of various smaller and larger projects and involves the broad rollout of digitalization and AI and we remain focused on fully delivering on this ambitious target.
The next topic is the free operating cash flow development for Q1 2025. And as you can see from the graph, the free operating cash flow in Q1 ’25 was negative with €253 million. The free operating cash flow is significantly lower year-on-year due to the lower EBITDA and higher CapEx. Working capital typically experiences a seasonal increase, however, in Q1 2025, the impact was relatively lower at minus €172 million, primarily due to stringent working capital management.
Q1 CapEx of €180 million increased year-on-year due to higher investments among others, mainly in efficiency and growth projects of our Performance Materials segment in the chlorine production in Leverkusen, Germany and the Aniline project in Antwerp, Belgium. Despite this increase, we remain vigilant about our spending and confirm our CapEx guidance of €700 million to €800 million for FY 2025. All in all, the Q1 ’25 free operating cash flow is showing a dip related to lower EBITDA and higher CapEx.
Let’s now look at our balance sheet on Page 11. Our total net debt slightly increased by €315 million versus the end of 2024. The increase was mainly caused by the seasonally negative free operating cash flow of €253 million and negative others. The decrease in the net pension liability to €247 million was driven by an increase of the pension discount rates mainly in Germany. This comprises pension provisions of €315 million and net defined benefit assets of €68 million.
Summarizing our net debt position. The total net debt-to-EBITDA ratio is at 3.4x based on a 4-quarter rolling EBITDA of €0.9 billion. Without the strong provisions of around €100 million in Q1 2025, the increase would be limited to a ratio of 3.1x. Covestro remains committed to a solid Baa2 investment-grade rating that was just confirmed last week by Moody’s.
Now we are moving away from the actual business figures of Covestro and are trying to analyze the effect of the tariffs announced by the U.S. government beginning of April. When looking at the trade balance for our core products, MDI, TDI and polyols, we can see a growing dependency on imports to supply the North American market. This is most pronounced for MDI already since a couple of years with imports of around 500-kilo tons. These imports are mainly coming from near originating to 70% from China and to 30% from Europe.
On TDI and polyols, we see a growing trend towards imports. However, for TDI, most external supply is coming from Europe to avoid already existing tariffs from China to the U.S. On both isocyanates the tariffs are at 177%. Import streams on polyols from APAC represented less than 30% of the imports in 2024. The highest share here is coming from Mexico. Tariffs on polyols are though significantly lower with 52%.
Looking at the supply picture of Covestro, we see that our regional production exceeds sales indicating that our production in the region for the region holds true. We are entertaining 9 sites for local U.S. production with a major hub in Baytown near Houston, Texas with assets for production of MDI, TDI polycarbonates and aliphatic isocyanates. Despite the vast majority of our products sold coming from the U.S., there is an import volume of around €500 million, mainly being imported from Europe into the U.S. These volumes are to support the region on specialty products, scars products and safeguarding supply of our customers during turnarounds.
In general, we expect market prices to increase on the back of higher import prices. However, there are underlying risks that the tariffs could be having a detrimental effect on the regional GDP development and thus on the global GDP. Drilling it down into the core industries, we would expect a dampening on the demand in all our core industries, automotive, construction and electro, especially furniture/wood is already impacted by imposed antidumping rates on mattresses and furniture and additional tariffs bear the risk or further slowdown.
Next to the implications on GDP, we might see a diversion from established trade flows. China is the global workbench for electro electronics and other labor-intense products as well as holding the biggest capacities of MDI and TDI. Tariffs, as announced, might reduce imports into the U.S. So the remaining products might then stay in APAC or end up in Europe with negative effects on prices and margins. Overall, this is a very mixed picture with risk but also with opportunities. However, there are so many erratically moving parts so that it is almost impossible to have an exact prediction of the outcome. From our side, Covestro remains agile and responsive to accommodate any new developments but we need to wait it out until we see a clear direction, this tariff escalation will take.
We are now coming to the outlook for Covestro’s core industries on Page 13 of the presentation. The global GDP expectation is almost unchanged at 2.6% compared to the outlook of 2.8% we presented end of February. Looking deeper into regional GDPs, we also see a steady growth prediction of 1.7% for EMLA and 3.9% for APAC and around 4.5% for China. However, the U.S. economy has seen a slight downward momentum from 2.6% to 2.0%.
Growth expectations for most of the key industries for Covestro have only seen insignificant changes with the exceptions of a slightly declining trend for furniture and a 2.6% downgrade for electro-electronics but a 3.7% upgrade for the subcategory of appliances. However, all these growth predictions do not incorporate the effects of the spreading trade war initiated by the tariff announcements by the incumbent U.S. government early April.
For example, the automotive industry is still expected to grow slightly at 2.4% and a stable growth of electric vehicles of 22.4% is predicted. As mentioned before, erratically imposed and then lifted or delayed tariffs are fundamentally disturbing a rational evaluation of the consequences of these actions and in absence of new reliable data, we are sticking to the known facts and remain vigilant to new developments. Currently, none of the growth indications for our core industries is reflecting the increased uncertainties and risks in the global economy that it is facing and this has been also influencing our guidance for FY 2025.
After the economic outlook, let us now discuss the guidance for Covestro, taking into account the fundamentals of the last slide. Despite increasing uncertainties, it is not clear whether the world or more specifically the U.S., will incur a recession. In the absence of clear indications in that direction, we are keeping our guidance aligned with the currently available data and not draw a doomsday scenario. However, we see the risks to the global economic development outweighing the chances of an optimistic scenario and as such, have decided to narrow our guidance from the top end by €200 million to now €1.0 billion to €1.4 billion. This narrowed range is due to the consistently low margin level in Q2 whereas our previous assumptions anticipated the beginning of margin recovery from Q2 onwards. The effects of the volatile environment on GDP and exchange rates are not included in our FY guidance.
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