Covestro AG (1COV) Earnings Call Transcript

[Interpreted] Ladies and gentlemen, welcome to this year's annual press conference at Covestro. My name is [ Jemanzmithi ]. I am from Communications, Corporate Communications and I have the pleasure of taking you through our press conference today. Before we get started, I'd like to make 2 announcements, which are of a legal nature. The first announcement is with regard to privacy. Today's event will be recorded, and then it will be available to download on our website. So please remember that during the Q&A, you will be recorded. I'd also like to say that you will also have your camera on if you ask a question. The second point is forward-looking statements, which will be made during this event. Please remember that we are not required to update such statements or to adapt them to future developments. So that brings us to today's host, Dr. Markus Steilemann, who is the Chief Executive Officer; and Christian Baier, who's the Chief Financial Officer at Covestro. They will be presenting last year's figures and will explain to us what issues are important and will be focused on for fiscal 2026. After that, you will be able to ask them questions. We'll see you again for the Q&A. But now I'd like to hand over to Dr. Markus Steilemann. Go ahead, Markus. Over to you.

[Interpreted] Thank you, [ Mr. Schimmek ]. Good morning from Leverkusen, ladies and gentlemen. I'm very happy that you are participating in our press conference today, and I look forward to the rest of the morning today with you. 2025 for us was a year of active management. And I'd like to touch on why I have couched this in these terms. The market environment in 2025 remained extremely challenging. And with resolution, we address that with transformation, focus and efficiency. We are developing Covestro actively into the future, thereby advancing its future. Our identity remains intact. We are and will remain a pioneer, a frontrunner in the circular economy. We are focusing without compromise on our close customer relationships. At the same time, we're doing our homework, which is operational excellence. Covestro will become leaner, more agile and more resilient at the same time. So you can see that we've already made major inroads on this path. The sustainable future strategy was continued with resolution. And one strategic milestone that we passed is the partnership with XRG and the capital increase in this context that was implemented last year because it creates stability and leeway. Despite the very tense market situation, we continue to invest in modernizing our plants. We have created prerequisites for safety and efficiency, and we are growing in profitable market niches. At the same time, structural efficiency of the company was increased. And as we say, we left no stone unturned, and we will continue to do so. In this context, the big transformation program, strong should be viewed, which is already achieving measurable results. And my fellow Board member, Christian Baier, will go into this in more detail later on. So you can see that we at Covestro are keeping our promises. Now I'd like to ask Christian Baier to come up to the stage. Christian, please.

[Interpreted] Thank you very much, Markus, and I too, would like to welcome you here this morning. As mentioned already, 2025 was a very volatile year. And when it comes to demand, and we see pricing pressure in most of our product categories. Nonetheless, our sales was EUR 12.9 billion. This is down by about 9% year-over-year. And this was driven primarily due to the pressure on selling prices because the volumes were pretty stable. EBITDA was at EUR 740 million, and this is below last year's figure, and this was also due to pressure on the margins. And nonetheless, as I said, we took countermeasures, and we focused on transformation and made progress there. Here, we saw a positive effect on our results as a result of our strong program amounting to EUR 275 million. And this is then reflected in the EBITDA, and this was able to reduce the fall in EBITDA somewhat. And also strategic milestones have been achieved. Our partnership with XRG has been completed, and we are focusing on the future here with regard to Covestro's future. We're also taking a look at portfolio changes, for example, acquisitions of Pontacol and Vencorex to show, once again, we have control, both over organic and inorganic growth and other growth opportunities can be taken advantage of. Sustainability is and continues to be very top on our list of priorities. In 2025, we were able to reduce our CO2 emissions by 4.3% and the share of renewables in our electricity mix was increased to 20%. So now let's take a look at this in a bit more detail when it comes to sales, EUR 12.9 billion, that's about a reduction of about 9% in euros. This is with regard to volumes. It was only minus 0.9%. And the reason for this is also the pressure on selling prices so that you can see that in the APAC and in North America regions, we saw that there was a growth in volumes of 1.2% and 4%, respectively. And in the EMLA region, we saw a reduction in volumes amounting to 5.5%. Now if we take a look at the global volumes in industries, you'll see that in the automotive industry, we see that there's been a stable development there, especially due to a positive development in China and India. And on the other hand, we had declines in North America and in Europe. In construction, we saw low growth due in particular to infrastructure programs. And in some regions, we also see recovery in Asia and in the Middle East. In electric and EE&A, electronics and household appliances, we saw that this was somewhat lower than last year due to a reduction in exports from Asia to other regions. In furniture, we saw a slightly negative growth in furniture due to the real estate crisis globally and also due to high prices and increasing uncertainties in customer confidence. We still have trust in our strategy of local for local, producing in the region for incentives for demand. That's now what I'd like to talk about EBITDA, our profitability. And here, you can see that there has been a clear reduction in 2025 from EUR 1.1 billion in 2024 to EUR 740 million in fiscal 2025. What was important here is to say that our competitiveness for our plans and our cost positions as well as our innovation are all intact. And this is something that shows you that the market, however, does not show any stronger growth or EBITDA development. This is driven primarily by what we refer to as the negative price delta. In other words, a reduction in selling prices was stronger than the reduction in the prices for commodities. And this is due in particular to an unfavorable supply and demand situation, and this is also supported by the shift in the flow of goods as a result of U.S. tariffs. Now let's take a look at free operating cash flow. So how does profitability translate into the development of our free cash flow? Here, you can see the relevant reduction to minus EUR 283 million. This is something that we had in our guidance, and this is driven by the reduction in profitability in EBITDA. And here in Q1 to Q3, we had a negative development. And in Q4, we were able to show a positive development of just under EUR 100 million in free operating cash flow. This was driven by consistent working capital management as well as investment management in the appropriate way. And last year, we invested EUR 770 million, and this was also something which was within our guidance. This also stresses the fact that we are showing a great deal of discipline in inventory management and claims management. And here, we can see this is in a difficult time that our cash flow is very consistent with our stable financial situation. Now let's take a look at the statements, and I'd like to begin with Performance Materials. Performance Materials is our commodity-related business, and this is the one that is affected most by the price declines. In 2025, we saw a reduction in sales of 12% and a reduction of EBITDA of 34%. And the reason for this is the unfavorable supply and demand situation, and it's also driven by 2 specific events in the company, the fire in Dormagen in July of 2025 and also due to the closing of our PO11 plant, and this is something that was announced in March of 2025. That was about EUR 100 million with regard to the effect on EBITDA in segment in Performance Materials. So what are we doing here, proactively here? In particular, we are working on the cost base and also on operational efficiency with improved processes and workflows and also progress when it comes to use of artificial intelligence and digitalization in this area, which is close to production. In 2026, our plan is to have an EBITDA within the range of 2025 for Performance Materials. Now let's turn to the Solutions and Specialties segment. Here, you can see that with only 5.5% reduction in sales, here, we saw a stronger structural resilience because larger shares of our products are very closely related to customer-specific solutions that we offer. And here, we have a somewhat higher degree of stability. And this is also with an EBITDA margin, which is about the same as it was last year at 10.3%. And when it comes to volumes, here, you can see 1.2% increase, and this shows again that we have a strong position on the market and also our customer centricity. This segment also has a -- we plan a development, which is within the same range as last year. And it's important for us to note here that both for Solutions and Specialties as well as for Performance Materials that we consider the external factors and the market. They are not working in our favor. And we, as Covestro as a whole, need to take decisive actions moving forward. And this is something that we did for the good of Covestro in 2025. And you can see this on the next slide. Here, you can see the development of the market. It's weak. We have intense decisions on the market, and we can see that there have also been some headwinds there. And we can also see that with our savings, we have been able to achieve EUR 275 million in savings. And we were also able to increase cost efficiency, and we were also able to take opportunities, take advantage of opportunities. And as a result, we cannot control the external results, but things that we do have control over are things that we're working on consistently, and this relates to 2026 as well, which we'd like to refer to now because there are measures that are already taking effect. Let's take a look at the outlook for next year. We are focusing on stabilization. This relates to EBITDA, which we see within the range of 2025. And we also want to say that this is something that can mean a deviation in the single-digit percentage range. And when it comes to free operating cash flow as well as ROCE over WACC, here, we expect a significant increase year-over-year. Our sustainability goals continue to be worked on consistently. We are working on greenhouse gas emissions of between 3.9 million and 4.5 million tons. Our partnership with XRG is a very, very important factor for stabilization as well as for positive developments in our company because together with our partners, a long-term partner gives us additional stability on the one hand, and we also have a great deal of leeway on the other hand. Now let's take a look at our partnership with XRG. This is a process which has taken several quarters. In December of 2025, we were able to close our partnership with XRG. We received all of the approvals that were required. Now to repeat, in 2024, we started with an investment agreement, then we had a public offer for Covestro, and then we had an overwhelming acceptance rate. And in the meantime, XRG now has a total of more than 95% of Covestro AG's shares. So as of the beginning of January, they wanted to have a squeeze out, a delisting, and this was addressed to Covestro AG, and this is something that the Board and Supervisory Board, the Executive Board support. And at the AGM in May of this year, we will be informing the shareholders on this, and they will be voting on this. This is a formal process, and we are working on this with internal and external resources in order to react to this. What is important for us is that Covestro will remain an independent company. We are open. We are addressable, and we are transparent. This was important to us in the past, and that will remain important to us in the future. And as far as the future is concerned, I'd now like to ask Markus Steilemann to give us some more information on that point.

[Interpreted] Thank you, Christian. I think Christian made an impressive and very good presentation as he always does. Despite the challenging situation, the figures demonstrate that the external factors are not in our favor. Nevertheless, Covestro continues to do its homework with resolve, both in the operational business as well as in respect of the clear road map to the future. Then perhaps you will let me outline this road map briefly. We are entering the next phase of our sustainable future strategy. And here, we're focusing on 3 areas. As Christian quite clearly illustrated, we are talking about optimization. We're also talking about growth, which has been touched on as well and the major transformation. And here, I would like to give you a little bit more of an insight into what we're talking about here. What does optimize mean actually? Well, for example, focusing on operational excellence and plant availability. Specifically, we want to improve our plant availability throughout all our segments through leaner processes, resolute implementation, and we are taking everything a step forward with respect to more energy-efficient plants, and we want to streamline our portfolio even more. And one thing is indispensable here. It's our customer centricity, proximity to the customer. And that is because together with our customers, we develop special solutions that go above the sum of the parts. We also launched a digital tool for the real-time determination of CO2 impact along the entire polyurethane value chain. It's very well received. It helps with respect to the reporting requirements and sustainability ambitions of our customers, and it will make sure that we are better tomorrow than we are today. What are we doing specifically in the field? Now with respect to growth, in that area, we made targeted investments in growth markets. The task at hand here is to be sustainable and profitable as we grow. The acquisitions that were mentioned by Christian, Pontacol and Vencorex are a good example of this, but there were also investments in January of 2026 in our thermoplastic urethane business, where an entirely new production site was opened in Zhuhai in China. This demonstrates that we're investing despite the economic headwind that we're facing. But at the same time, we are looking beyond our backyard. The Covestro products will and will continue to serve mega trends. because new growth markets are emerging to mention a few robotics or material solutions for data centers. And now we come to the very long-term project, which is the transformation of the entire group. What we're talking about here is to develop future areas. We want to shape the chemicals of the future. Aligning ourselves with the circular economy is indispensable to this end because there are 2 options. You can produce with low CO2 and also use fossil fuel-free commodities. And Covestro supplies these materials. In Brunsbuttel, we are building the heat battery. This is an innovative storage technology for steam from renewable energies. And the commissioning will occur in 2026. Innovations and partnerships for us are a clear, symbol and competitive advantage. And therefore, it is very, very decisive to our transformation that we place our chips on digitization and artificial intelligence. By 2028, we expect a value contribution in triple-digit million euros, yen. The transformation is taking place at all levels and is in full swing. And I would, therefore, like to summarize it for you. The market environment is and remains extremely challenging, and it can only be changed to a certain degree. But Covestro is meeting this market environment with a very clear plan. The next phase of our strategy has been ushered in. Our priorities have been set clearly. The partnership with XRG gives us more stability and accelerating power and our ambition is and will remain clear, and that is to make Covestro more efficient, more profitable and more sustainability in its setup. And now I would like to hand over to my colleague, [ Schimmek ], so that we can segue over into our Q&A. Thank you very much.

[Interpreted] Thank you very much, Christian. Thank you, Markus. So that brings us to the Q&A. And I'd like to explain the procedure to you before we get going. [Operator Instructions] Please remember that we will first take the questions in the German language call and then we will move on to the questions in the English call. So I'd now like to take a look at the technicians and see that the first question comes from Mr. Finke from Suddeutsche Zeitung.

[Interpreted] I would like to ask you, is this your last annual press conference that we'll be having in a virtual mode? And can you see how things will continue in the future? Will Covestro, after its delisting, still be transparent, et cetera, when it comes to information on the figures? Or is this just work in progress for right now? And the second question is, what about your guidance for 2026? Are there -- or can you see when Covestro will have a profit? And when will the shareholders be receiving a dividend? That's what I would be interested in hearing about the dividend.

[Interpreted] Thank you, Mr. Finke. Let me begin with your first question, and Markus Steilemann will then answer the second question. The first question is on transparency. The annual press conference. This is very important to us. As we mentioned in our presentation, we want to communicate openly with members of the media and for the employees and the shareholders. The format that we'll have in the future after a possible delisting and what we will do this with external stakeholders, this is something that we're still working on. But you can assume that we can be approached at all times, and we will be transparent to the public with the major activities at Covestro.

[Interpreted] Thank you, Mr. Finke, for your question. And the second question, it is our claim this company is to be profitable, and we also want to show financial strength once again. And that is exactly what we were trying to show you in the last 20 minutes, showing you what we're doing to achieve this operational excellence. And at the same time, we want to see to it that we can have additional growth areas and transformation should not be forgotten. Technologies for the future, how we can use artificial intelligence, green energy, sustainable raw materials so that we can be profitable and also in order to create value for our stakeholders. And we see that we have a great potential here, and this is our potential. We, on the Board of Management, want to have this for all 17,000 employees, and we stand for that, and that's what we continue to work on.

[Interpreted] The next question is [ Mr. Ben Freundorf ] from the Huntsworth.

[Interpreted] I hope you can hear me okay. I would like to ask about the economy. We can see that there is a slight recovery of the economy ongoing now in Germany? How do you see that? Mr. Steilemann, can you feel that? Do you see that already? What about the infrastructure packages, for example, or also in [ chemistries ], do you see and can you recognize recovery here at the beginning of the year? And we'd also like to take a look at the different regions. You talked about 2025 and China, for example. Could you give us a bit more information on that, please, for the future? And the third question is tariffs. We see a new development now out there on the market over the last couple of days. What kind of an impact does that have for Covestro overall? And we'd like to hear your information on that.

[Interpreted] Mr. [indiscernible], thank you for your questions. I'll take the first 2 questions, and Christian will then answer the question on tariffs. So to be very open with you, we can see very slight signs of economic development, but this is something that is not strong enough, and these symbols are not in the industries which we are mainly active in. We are active in the automotive, constructive industry and also furniture, electronics, et cetera, in some niche economies such as medicine. And in Germany, we can say that there is no long-term trends that we can recognize right now. We would be amongst the first, of course. And we have heard that there are some slight signs of recovery, but we have not noticed this with our sales and volume figures. We do not see that yet. So in Germany, the situation does not show any of this so far. And this is the case for Covestro as well. Internationally, let me put it like this. We are active all over the world where we have a very difficult situation in terms of demand. And we have a lot of overcapacity in many areas. And this is something that is distributed only to a certain extent differently. And for example, in the United States, for example, we see that this is driven by the share markets in certain industries, technology industries, for example. But if you take a look with regard to the industrial sector, then you'll see that the situation is not good. And you can see that in certain industries, for example, real estate or China, here, again, we see that there are structural crisis in these sectors. And the same also applies in Europe. Here, too, apart from a few individual markets and individual countries, but they're too small all in all, to lead to a European recovery. So taking all into account, you can say that per sector and per region, the economic situation and the demand situation is very, very tense.

[Interpreted] Thank you very much, Mr. [indiscernible] for your question on the tariffs. And I would also talk about the direct impact on Covestro and indirect impact. As you said, especially for 2025, here, due to our local-for-local strategy, here, we see that indirect impact from tariffs is only to a certain very slight extent. We saw that we were not really focused on that. The financial impact of this because this is something that is basically relatively slight when it has a direct impact on Covestro. What much more intense in 2025, and this is much more of a burden and also will have the effect on 2026, and that is the indirect impact of the tariffs. And these result from uncertainty amongst all of the different partners that we work with. It's not clear what tariff will apply where. And this uncertainty is something which we clearly notice -- and noticed in 2026, this was a negative impact. And for 2026, it seems that this will also continue to be something that leads to a high degree of volatility, which may not suffice for us to eliminate these uncertainties. And of course, we would like to have stability here so that we can plan properly for all of our partners. This could also have a positive effect should stability and predictability be returned.

[Interpreted] This brings us to the next question from [ Mrs. Annette Becker ] from [indiscernible].

[Interpreted] Yes. I hope you can at least hear me.

[Interpreted] And yes, we can hear you and see you now.

[Interpreted] Okay. Great. I have some questions with respect to plant capacity utilization. You have said that there is a massive underutilization in industry, but I'd like to know what the situation is with Covestro. Mr. Steilemann, you spoke of the fact that plant availability needs to be increased. What exactly do you mean by this? I think the next topic has already been addressed. And then I wanted to ask you about the transformation. You said that it was a long-term process. Now you, Mr. Baier, in September, and you, Mr. Steilemann, by May 2028 will leave the company. How do you think you can get everything -- everyone on board despite the fact that you will not remain with the company over the longer term and therefore, assume responsibility over the longer term? Now the next question, you mentioned free cash flow per segment. Doing the math, I do not arrive at this big negative figure. Could you tell me why this is the case?

[Interpreted] Thank you, [ Mrs. Becker ]. I'll start by answering your questions. I will then with -- respect to staff and the switch at the helm, I think the 2 of us can say something and FOCF is something that Mr. Baier will then address. Capacity utilization in the chemical industry remains at a 30-year low as of information we have available today. Since the 1990s, we haven't seen this type of situation. And without going into detail, we have very, very low planned capacity utilization, which is challenging at Covestro in certain segments. To a certain degree, this was due to, for instance, the fire event that we had at a central power supply in one of our major sites in Germany. A partner is responsible for that. And this segues me over to what we mean by plant availability. Well, specifically, we want to invest, we want to take measures that address such outages that we may have alone or with partners so that we can minimize the impact. In other words, we want to make the plants much more resilient, for instance, by investing in redundant structures, by conducting predictive maintenance, by optimizing operating parameters so that plant operation is secured and is stable 24/7. There is a whole series of options that we can avail ourselves of in order to make the plants constantly available. This is in the interest, not just of safety, but also a sustainable increase in profitability because plants that are stable and can run without interruption, deliver more products. And then we have economies of scale. We reduce fixed costs, and we can drive up volumes. That's why we're working on this. And by the way, this also applies not only to the Performance Materials segment. But of course, we have different levels of complexity there, and it does have an impact on the earnings of the Specialties segment. If you can make more product, you can earn more money. And this goes back to the question asked by Mr. Finke. We want to make sure that our business reaches the profitable area as quickly as possible. Now with respect to the transformation, which is important with respect to the sustainability and long-term orientation of our company, we also have to look at succession processes. They have to be planned far in advance in order to ensure that strategies that may extend beyond the terms of Board members, which, by the way, is normal, can continue to be pushed forward. That's why it is so important to ensure that you have the right successors in place early on so that you know who is going to continue implementing the strategies. That doesn't change anything to the value, the contents or the focal points of the strategies. The people at the helm don't really change that. You may remember [ Mrs. Klausvitz ], some people are told that they have a whole house of indispensable people, but that's not really true. And now I'd like to hand over to Christian Baier. Christian, please go ahead.

[Interpreted] Yes. Now the microphone has just been switched to you. Let me know perhaps if you can't hear me. Free operating cash flow is what you asked about. We have 2 effects, which basically should answer your question. The sum of Performance Materials Solutions and Specialties and the other segment gives you the minus EUR 283 million in free operating cash flow. That means that in the other segment, we have other parts of administrative and selling expenses, which cannot be specifically attributed to either of the segments. It also contains the segments, for instance, in IT systems, which essentially belong to the other segment. And then we have a more technical factor that plays a role here. In order to map the operative performance of the segments, we used standardized control parameters that we allocate to the segments. And in years where the tax rate for the overall company is higher, the FOCF of the segments are a little higher and in other years, they are lower. So these 2 effects lead to the addition and the sum total of free operating cash flow.

[Interpreted] We would now like to receive the next question. It's from Ulf Meinke from Westdeutsche Allgemeine Zeitung.

[Interpreted] Can you hear me?

[Interpreted] Yes, we can hear you and see you very well.

[Interpreted] I would like to address the market situation. Do you also plan to cut jobs? So redundancies? And do you plan to close plants, any further plants? And with respect to your motivation, you said you would both be leaving the company. You cited Klaus. Now I would also like to know from you why you believe the time has come to leave the company. And also, I would like to know why you're leaving the company so early and you're announcing it so early because 2028 is still quite far into the future. Mrs. Becker addressed that. So why are you doing this so early? Could you perhaps also give us a summary from a personal point of view, Mr. Steilemann, at the beginning of your work here, did you think that things would come to such an end?

[Interpreted] Well, Mr. Meinke, first of all, thank you very much for your questions. You addressed the job situation and plant situation. As I said before, we on the Board of Management constantly work on making sure that the overall structure is adapted to new circumstances and changes, and this is why we launched a big transformation program, as we mentioned earlier. Part of this transformation program involves time and again looking at the plant structure to make sure that it's a good fit. Right now, we don't have any specific plans to change that. But at the same time, we have to say that it is our task to constantly monitor this. And if there's any news on this, we will communicate it in due course. What is important to note now, however, is that we maybe unlike other companies, constantly work on making sure that we have the right headcount at the various sites and regions in which we operate. Last year, indeed, we had a very stable headcount, and it actually rose slightly. And this is because we launched acquisitions. So a lot is being focused on transformation and operational excellence, but we're still on course for growth, especially in those areas where we have demand and growth is possible and where we can always gain an advantage because of our customers. When we speak about transformation, and this is important, we also speak about growth, but we also talk about future orientation, artificial intelligence and research and development, and that's our ambition. We always want to strike the right balance here. I hope that covers all the points that you raised. This brings me to the next question you asked. And I think you basically answered it yourself. If -- you told me you've been here with the company for a while, what would you say looking back? And by saying that, you may realize why it's so important, again, against the backdrop of a sustainable company management, we are trying to figure out early on how to continue implementing the strategy successfully over the long term. Now in 2028, I have been at the helm for 10 years, and I have been on the Board for 13 years. During this period, I got the opportunity of following the company from the original parent company into its independence through at least an entire cycle throughout the industry, through the pandemic, through the energy crisis, through the demand crisis, and I can't stop counting all of the crisis. And not a single day has passed that was boring. And it may have been a hard time, but that's what happens when you're a manager. We don't do things just because it's fun, but we do things because we can make a difference, we can change things. And at some point, you have to figure out when you should start in a structured manner to look and plan for a successor. And against this backdrop, it's always important to keep your eye on the strategic longevity of the company. And therefore, personnel issues have to be addressed early on. And vice versa, you may be familiar with this. Sometimes you have some turbulence, sometimes you have pressure. And against that backdrop, I think it is important to address these topics with farsightedness in calm and strategically. And this is why we thought it was time to initiate this process for the benefit of the company. And here again, for the benefit of the company, we want to make sure that we act properly from a strategic point of view. So that is the backdrop to all of that.