Earnings Call: Q4 2019

Feb 19, 2020

Ladies and gentlemen, thank you for standing by. Welcome to the Covestro Investor Conference Call on the Fourth Quarter And Full Year Results 2019. The company is represented by Marcus Stileman, CEO Thomas Tupfer, CFO and Ronald Kohler, Investor Relations. During the presentation, all participants will be in a listen only mode. The presentation will be followed by followed by the hash key on your telephone for operator assistance. I'd now like to hand over the conference to Ronald Kayla. Please go ahead, sir. Yes, good afternoon, and welcome to our 4th quarter conference call and also to offer you the full year conference call. And as usually, we have posted our presentation and as well the annual report on our web page, and you can obviously download it. And we assume you have read our Safe Harbor statement. And with that, I would like to turn it over to Marcus. Thanks, Ronald, and also a very, warm welcome from my side. 2019 was the year in which we saw at expected lower levels of financial performance in a year on year comparison. Still, we delivered every quarter on expectations and achieved our full year guidance despite several headwinds from internal as well as external factors. We achieved a solid core volume growth of 2.0% on the back of the anticipated growth Thanks to a strong volume leverage. And despite a pronounced negative pricing delta, we managed to reach an EBITDA level of 1,000,000,000. On the cash side, the management actions taken to optimize working capital showed positive effects and delivered the intended catch up effect towards year end. Thus, we could achieve a solid free operating cash flow of 1,000,000 for the full year, despite increasing CapEx year on year. For our return on capital employed, we achieved 8.4 percent earning a premium of our cost of capital even in a challenging year. We also intend to return further cash to our shareholders by proposing a stable dividend of €2.40 per share at next Annual General Meeting on April 17th. We now go to page number 3. In 2019, we delivered on our promises and fully achieved all financial targets we set ourselves. These results were possible. Thanks to our agile organization, our reliable asset base, and ordinary motivation and dedication of our employees. All these strengths enabled us to react quickly in challenging situations. On page number 4, you can see that APAC and especially China continued to drive global core volume growth. Despite a negative volume development for automotive, we still achieved high single digit growth rate for China and Asia Pacific for the full year. In furniture, and many other smaller customer industries like medical, we posted double digit growth rates in this region. In Europe, Middle East, Latin America, strong core volume growth in furniture almost counterbalance the pronounced weakness in automotive demand a weakness which affected Germany, especially. NAFTA and the U. S. In particular also suffered from a weak automotive in III as well as the sluggish demand in electronics in 2019. Unfortunately, an unplanned outage at our Baytown plant affecting TDI and Polycarbonates further effective growth in Q4. Strong growth rates in construction combined with positive growth in furniture and diverse other industries were almost able to counterbalance the weak spots. Globally and for the year overall, we achieved a solid growth rate of 2%. Strong growth in furniture and in electronics, coupled with a solid growth in construction, more than compensated a high single digit decline in automotive. I now hand over to Thomas for the full set of financials. Well, thank you, Marcus, and also a warm welcome from my side to everybody on the call. I'm on page 5 of the presentation, which shows you the sales bridge, and it shows you a year on year sales decline of 15.1% for the full year in 2019. As you can see, the main drivers were the deteriorating prices in MDI TDI and PCS, which together reduced our sales by a total of 1,000,000,000. On the other hand, we were able to deliver a relatively small but visible positive volume growth contribution of 1,000,000. And FX effect added another 1,000,000,000, and that is mainly attributable to the US dollar. On the right hand side in the bullets, you can see that, we have listed all the units that we acquired and that we sold over the course of the year, and we also listed the European PC sheets that which will only have an effect in the reporting year 2020. And for 2019, the overall effect of these acquisition and domestic shows was a negative $70,000,000, which we have labeled as portfolio effect in the bridge. So with that, let's turn the page to page number 6 as you can see, and as you know, we have, for the full year, achieved an EBITDA of 1,000,000,000 And as forecasted, the higher competitive pressure in polyurethanes and polycarbonates led to a continued decline in contribution margin, that the negative pricing delta amounted to more than a negative 1,000,000,000 overall. But on the other hand, the volume development translated into an EBITDA contribution of 1,000,000, thanks to volume leverage of 59%. And FX had a small positive effect 2, which is depicted in the bridge. With respect to the other items, the main contributors were the lower bonus provisions and the positive effect of EUR 131,000,000 linked to the adoption of IFRS 16, which we adopted in 2019. And obviously, the progress of the prospective cost cutting program could not fully compensate the higher cost driven mainly by an increase number of employees for production and CapEx programs as well as investments into digitalization. So please turn the page for the individual segments and Marcus will guide you through those. Thanks, Thomas. Thomas, looking at our polyurethane segment on Chart number 7. Over the course of 2019, we recorded solid call volume growth of 2.3%. Overall, industry utilization stays at a low level due to additional capacities added during the last 18 months. Industry demand growth is expected to remain solid at our predicted long term trend of around 4% to 5%. In MDI, 2019 was characterized by few ramp ups, but no new start up leading to a slightly lower average industry utilization due to the Currently low visibility on demand, we stay cautious about the further development in the short term. Midterm, we expect that current overcapacity will be absorbed by growing market demand. For 2020, the only new NII facility being added to the industry seems to be ours in Brunspittle, Germany. We are glad to confirm that we started the plant in December and had the ramp up of the 200,000 tons nameplate capacity has been growing smoothly since January. In TDI, The simultaneous ramp ups of 3 world scale plants have increased supply pressure and continued to lower average utilization in 2019. From current margin levels, which are at historical trough, we see rather limited further downside risk as we believe that high cost producers are currently operating at or below cash breakeven levels. Potential upside would, for example, come from closures of high cost plants. Recently, we have already seen the temporary closure of some smaller plants in Asia with around 200,000 tons nameplate capacity. As announced and awaited for some time, One Mid scale plant is announced to close down in Eastern Germany beginning of second quarter 2020. Finally, margin in polyether polyols continue to be below the long term average. Overall, the EBITDA margin of 11.2% in PUR in full year 2019 was clearly below last year's level, primarily driven by significantly lower MDI and TDI margins. Let's turn to page number 8. In polycarbonates, we recorded a solid call volume growth of 2.7% for the full year 20 team. The ongoing demand weakness in automotive was compensated by strong volume increase in construction, electronics, medical, and other smaller industries. Thanks to our position in the industry, we have some flexibility to switch sales from one application and industry to the other, thus helping us to counteract any short term weakness in one industry. Net sales decreased by 14.3% year on year, driven by further price declines. The EBITDA margin of 15.4 percent in full year of 2019 was clearly below last year's level. Primarily driven by the pronounced negative pricing delta. Taking a quarter on quarter perspective, the decrease reflects to continuing price pressure and seasonally lower volume leverage. Let us take a short look at the overall industry prospects. Due to the automotive weakness accounting for roughly 20 percent of the industry demand, we estimate that the overall polycarbonate market growth was relatively low at around percent in 2019. On the other hand, we saw capacity additions of around 6% in the same period. Thus capacity utilization came down from 87% in 2018 to 83% in 2019. More than 10% additional capacity has been announced for 2020. This is expected to lead to a further declining industrialization. However, over to FICO, we are convinced that polycarbonates remains a highly profitable business for us with an attractive growth profile. If you turn to page number 9, you will see the holdings adhesives and specialty business development. The impact from globally weaker affected our coatings and teasers and specialty segments during the whole year 2019. As expected, volumes declined in almost all customer please, lastly, recorded and negative call volume growth of minus 1.0%. Accordingly, Net debt in Europe were affected by minus 2.1 percent from the volume decline and by minus 1.1% from lower prices. This was compensated by positive effects from currency and the portfolio impact from the DCP acquisition. For the full year 2019, the sales development was kept stable. The EBITDA margin full year 2019 was comparable to last year's level. EBITDA suffered from the negative volume leverage and slightly negative pricing delta. Lower selling prices were not balanced out by decline in raw material prices and therefore cut into margins. Decreasing costs and the one time gain from consolidated DCP had a positive effect on EBITDA. Taking a quarter on quarter perspective, the decrease reflect a seasonally lower volume leverage. Of serving the car market economic environment, we do not expect a fast recovery of the coatings and the teasers market. In addition, a tougher competitive environment could further increase the pressure on prices. Thomas will now explain more financial details. Yes. Let's please go to page number 10, where we have the capital development and can see the declining EBITDA, the higher CapEx at a 350,000,000 cash out for the 2018 point timing were the main drivers for the free operating cash flow development in 2019. We managed to improve the free operating cash flow significantly during Q3 and 4 after we had digested the negative phasing effect, which occurred in the first half of twenty nineteen. And additionally, effective countermeasures reduced our working capital. At the beginning of 2019, we initiated working capital optimization program, which brought the expected cash benefit so that for the full year 2019, we delivered €411,000,000 positive positive from changes in working capital to our free operating cash flow. So that we were able to generate a positive free operating operating cash flow of EUR 473,000,000 for the full year, which is at the upper end of our narrowed guidance that we have given. Please turn the page to number 11 where you have the balance sheet. As you can see, overall on December 31, 2019, our total net debt level increased by 1,000,000,000 to around 1,000,000,000. In combination with a lower EBITDA, these developments led to an increased ratio of our total net debt to EBIT to 1.8x at the end of December 2019 compared to 0.6x at the end of 2018. However, of the increase around EUR 1,100,000,000 are triggered by accounting effects, and therefore, we continue to regard our balance sheet as being solid. So on the 1,100,000,000, firstly, the new IFRS 16 accounting standard less than an increase of 1,000,000 net financial debt by the year end and you find that item in the bridge. And secondly, the pension provisions increased by EUR520,000,000 over the course of the year, due to the decrease in the pension discount rate specifically in Germany. So we continued in our tradition to return a high amount of cash to our shareholders and repaid our dividends in the total amount of 1,000,000 over the course of 2019. With that, let's go to Page 12 and the chart highlights the 2 major effects driving our EBITDA development. Firstly, the volume growth and secondly, the pricing delta, whereas the volume growth can be controlled by management action, unfortunately, the pricing delta is termed very much by the supply demand balance in the global industry. So on average, we generate a strong volume leverage of around 50% and based on CapEx plans allow for a planned volume growth of 3% to 4% CAGR for the next year because we need to invest around for adding one additional ton of capacity. And this said, we need around 1,000,000,000 or roughly 1,000,000 of growth CapEx per year on top of the maintenance CapEx to support this growth. At this rate, we expect volume leverage continuously contribute to EBITDA every year. And this also applies to 2020, even if the magnitude may be somewhat subdued in light the current challenging environment. Now outside of management control is very much the fluctuation of the pricing delta, which highly correlates with the global industry utilization, and Covestro was benefiting from a favorable pricing delta development between 2014 and mid-twenty 18 due to strong demand and limited new capacities coming on stream. However, in 2019, as presented earlier, EBITDA decreased by more than EUR 2,000,000,000 costs entirely by the pricing delta. Now applying the latest mark to market analysis, we assume to EUR 700,000,000 for 2020. And if you take it all together, we expect that the cumulative volume growth contribution will be almost offset by the cumulative pricing delta contribution if you take all the years that are depicted on the chart. So based on this, I can tell you that we focus our management efforts to continuously grow. And at the same time, we are absolutely focused on increasing our efficiency of the company. So therefore, if you turn the page number 13, definitely one key pillar to drive Covestro's efficiency is to reduce costs and represented the prospective program to you in 2018. And this savings program includes around 900 flat headcount reductions and a deep screen across all the areas of the group for possible savings. So that by the year in 2018, we were already slightly ahead of plan with additional EUR 8,000,000 And in 2019, we even slightly further accelerated the pace of perspective so that we realized cost savings of cumulated 1000000, 1000000 more than the upgrade than the upgraded plan at the start of the year 2019. For 2020, as you can see also on the chart, we expect cost savings to reach an increased target of 1,000,000 which is 1,000,000 more than originally we had foreseen. And overall, we continue to target 1,000,000 in overall savings by the end of twenty 21. Please turn to Page 14. Obviously, in light of the situation where the economic situation deteriorating, we have put even more focus on reducing costs in the short term and reducing costs is closely linked to reducing headcount. And as a result of the prospective program, we already realized a decrease in FTEs of 8% in the marketing and general administration area in 2019. On the other hand, as planned, FTEs increased at the same rate in the production to staff the expanded production facilities and to accompany the growth project. Overall, and including the R and D department we bought, we recorded therefore a slight increase of FTEs of 2.7% in 2019. Now as I told you, we are very much focused on this so that I can tell you that until the year 2020, we target reduce our overall FTEs to the 2018 level through further execution of our prospective program and you have full commitment that by the end of 2018, we want to be at around 16,800 employees, so the same level as in 2018. With that, let's turn to page number 15, where you can see the EBITDA development and our EBITDA suffered from a pronounced negative pricing delta in 2019, as I just said, this will continue to 2020 as we start the year on historical trough levels in most of our supply demand driven businesses. And as I already explained, we calculate a mark to market year on year pricing delta of a negative EUR 600,000,000 to EUR 700,000,000 in 2020. We, as the management team, will do the utmost to mitigate this external pressure via cost reductions and a positive volume effect. And we're confident that we can achieve a low single digit core volume growth in 2020 by running our plants as reliably as possible, as well as on the back of additional Kilotons from our new MDI plant in Brunsborough, which came on stream as planned at the beginning of this year. So this would translate into an EBITDA contribution of around positive EUR 100,000,000 in 2020. In addition, our EBITDA is expected to benefit from additional short term cost savings of 200,000,000 in 20.20, half of the savings are driven by cost avoidance versus the original budget. For example, lower CapEx related operational expenses and the other half comes from various measures like reduced consultancy costs, travel restrictions and other expense cuts. So overall, this leads us to a guidance of EUR 1,000,000,000 to EUR 1,500,000,000 for the EBITDA 2020. And you, of course, may consider this guidance range as rather wide. However, it just reflects a usual the very volatile economic environment that we're currently facing. Now we also give you, some guidance in terms of mark to market and based on our latest mark to market analysis and average margins as of January 2020, the EBITDA would amount to EUR 1,100,000,000 in 2020, if you multiply it out with our expected volumes. So in order to achieve the midpoint of our EBITDA guidance, we need to see some price improvements over the course of the year. Chart, 16. As you can see, we assume a low single digit percentage core volume growth in 2020. Declining EBITDA and a stable CapEx of around SEK 900,000,000 is expected to reduce our free operating cash flow in 2020, and we guide for a range of the EUR 400,000,000 to EUR 400,000,000, and we guide for ROCE after tax between 2% 7%. For the first quarter of 2020, we assume an EBITDA of between EUR 202,080,000,000. Now this guidance includes the so far visible impact from the coronavirus on our business in China, And we assume that we will lose roughly 50% of our sales in China in February due to the prolonged holiday season and a lot of logistical challenges, and we expect a smaller but still visible effect in March. So this said, we expect volumes should slightly decline on a year on year comparison in Q1 2020. And accordingly, our EBITDA guidance includes a direct impact from the coronavirus outbreak of around 66 1,000,000 in Q1 2020. For the other quarter, so Q2 to Q4, our guidance is based on a normal business environment and the further development for us is not foreseeable. With that, let's turn the page and look at the use of cash and the main use of cash remain unchanged. We are committed to our progressive dividend policy where we target to increase the dividend per share every year or at least keep it stable also in difficult times, like now. We continue to invest in a focused way in our businesses by executing our CapEx program since this is the most value creating use of cash and we are disciplined and we carefully wait these right times. And therefore, we have postponed, as you have seen in our press release, our MDI WorldScout plant in Baytown by 18 to 24 months. Opportunity base, we continue to screen the market for potential acquisition targets. And finally, in case of excess cash, we we could kick off a new share buyback program with the necessary shareholder authorization place. And we have put on the page for you that since our IPO, we think we do look back on an impressive track record in terms of the fee use of free cash. So we paid 1,000,000,000 of dividends, including the proposed one for 2019. Did reduce our net debt and funded our pensions with roughly 1,000,000,000. We invested a total of 1,000,000,000 in CapEx And finally, we also bought back shares for 1,000,000,000, as you can see on the right hand side. So with that, please go to the next page. Where you can see there's a dividend. Since our IPO, we have built a track record of increasing and stable dividends. We limited we limited our dividend increases in the years 2017 2018, taking into account our usual cyclicality, and the low payout ratio in this year strengthened our balance sheet. And looking forward, we would be willing to also bridge a year with below mid cycle earnings low cash flow generation to pay a stable dividend out of the balance sheet while at the same time maintaining a solid investment credit rating. That for 2019, we propose a stable dividend of per share, and this corresponds to a dividend yield of point 1 percent based on a share price of which was the closing price yet. So please go to the next page where you have our CapEx program and our guidance with respect to CapEx. And we went through a thorough analysis of all projects in the last month. And we cut some plant investments and we reviewed certain timings as we now plan to keep our capital expenditures stable over the next 2 years at around EUR 900,000,000 per year. Which is a reduction versus the previous guidance by 1,000,000 over the course of 20202021. And it does give us some more financial flexibility. We have shown or we are shown on this page that we have a maintenance CapEx budget of around €350,000,000 per year. And I can also tell you that the top 10 projects on hold is represent roughly 1 third of our total CapEx budget and they include the new chlorine plant in Taragona and the new animal plant in Antwerp. And this pet it's also true that we have today around 100 projects with CapEx of more than 10,000,000 each with the spending divided by several years. And these projects should all generate a return on capital employed well above our cost of capital. So next, to our comprehensive MDI program, another focus is our coatings, adhesive and specialty segments, where we are investing into a new code extrusion production line for quality specialty films in Germany, in Thailand and in China and the start up as planned for 2021. And in polycarbonate, we continue to debottleneck our existing production lines in Celgene in China, which is an opportunistic and therefore, optional approach and we have optional expansion plans to increase the output to up to 600 kilotons in multiple steps until 2024. And with that, I would like to hand it back to Marcus who will give you the strategic outlook. Next numbers, and we're going to page number 20. Prior to the close of the presentation with our summary, allow me to highlight the main strategic pillars where we made further progress in 2019. We see healthy long term demand for high-tech plastics to enable sustainable development across a wide range of different key technologies. Therefore, besides the traditional expansion of our production network, we already spoke about We are consistently gearing our business towards circular Economy. In 2019, we launched the global strategic program to implement Circular Economy in all corporate divisions going forward. In particular, the company aims to use the alternative raw materials and develop innovative recycling linked to this and to increase the share of green electricity and production we signed a 10 year corporate power purchase agreement with Erstedt in December 2019 by the output of 100 Megawatts from the planned Vorkum Rifgrand 3 Offshore Wind Farm. With regard to our portfolio optimization, we divested several low growth and low margin business in 2019 amounting to around 1,000,000 of sales. Finally, the dedication of Covestro to innovation remains unchanged. One highlight exhibit of the K Fair was an interior concept for future mobility that Covestro developed together with partners along the automotive value chain. The main features were newly designed services that allow 5g communication the integration of ambient lighting, the latest infotainment systems and forward looking seating concepts. Allow me to now summarize and flip to page number 21 because this brings us to the end of the presentation. 2019 was marked by a number of geopolitical and macroeconomic uncertainties. Nevertheless, demand for our materials remains intact, which confirms our view that plastics are more valuable for the future than ever. On the back of a more challenging economic environment, as well as less favorable industry balances, we delivered earnings below mid cycle levels. The management is clearly not satisfied with that. However, we did our utmost to counterbalance the market and price pressure with internal measures. Based on our global cross leadership, we are convinced we will come out even stronger once the cycle terms. We thank you for Thank please press Your questions will be answered in the order that they are received. Please ensure that the mute function on your telephone is switched off And the first question comes from Mr. Christian Faitz. Calling from Kepler Cheuvreux. A couple of questions, please. First of all, thanks for giving us a number for the coronavirus impact for Q1. It's very helpful. Could you qualitatively describe the situation in China a bit? What I mean is how impacted is the logistics chain at present for the precursor material that you need And how impacted do you see current and demand in China and potentially also affecting customer productions for China produce products geared to international markets? And then second question, your reported tax rate has risen 2 years in a row now. What would be a good tax rate assumption for 2020? That's it for now. Yes, Christian, good speaking to you again. As Marcus speaking and I can not give you the complete picture that you're asking for. I have the slight suspicion that you asked me to explain the overall situation for all industries in this context. But I try to do, let's say my best, to provide you with anecdotal evidence for the situation that we have. So 1st and foremost, as usual, over the Chinese New Year, we have had normal shifts in place, which were, let's say, running our continuous processes in the main your sites, that it's not only Caojing, but also sites, for smaller productions in South China, and some of them in the western part of sorry, in the eastern part of China, a little bit more north of Shanghai. And we were able to continue running almost all plants at a reduced rate, for the entire time. And now we see, that some of the plant are going back to, let's say, full operation in recent days. And that applies for our continuous process plants, but also for smaller system housescompounding plants and film plants that we have. So overall, we are trying to get back as quickly as possible to normal operations and we currently seem to be successful in that from all we hear from our Chinese colleagues. The logistics situation remains a true challenge. And that is sometimes very small items like, packaging, for example, barrels that we need to have, but also palettes that we need to have. And then, another challenge, is the drivers, actually the truck drivers. So even if you are able to produce, even if you're able to package then you need to have truck drivers, which are shipping stuff to the customer. And then some of the customers actually do not have resumed operation. That means it's difficult to ship the materials to them because nobody's reset the receiving end. So there's lots of bits and pieces. So the overall supply situation will remain at least from our perspective for some time quite fragile. And, that describes a little bit, the overall situation in China, and I do not assume that this situation is different in most of the industries that we are currently delivering to. And that's why I also, and we have done that confident that the current estimate for the first quarter and the current guidance, is reflecting the picture pretty well However, to look beyond what will happen then, beginning of April for us today is simply impossible, and that's why this is also not included. By any means in the full year guidance, everything that goes beyond end of March. And that's, from my perspective, the current situation good as I can describe it, but please feel free to ask any additional question. With that, I would like to hand over to Thomas to help you deal with the tax rate. Yes. On taxes, I mean, we had a P and L tax rate of 26.8 percent in 2019. Our guidance 2020 would be that our ETR swap P and L tax rate should be in the range between 24 26%. However, be aware that our cash cash tax rate will be roughly 15 percentage points higher than that. But that is in line also roughly with the guidance we had given, for 2019 before because the cash tax rate is expected to be above the EPR, simply because of phasing effects. So, I think fundamentally no changes to what the ranges have been taken out for 2019 going forward. K. That's very helpful. Thanks, Marcus. Thanks. Thank you. The next question comes from Mr. Thomas Swaboda calling from Societe Generale. Over to you. Good afternoon, gentlemen. I have two questions, please. Firstly, on supply demand and price stabilization if you see any. I mean, if we look through the corona, the virus challenge do you see normalizing, stabilizing, supply demand and stabilizing pricing already or up prices still coming down as we speak. Could you just please go through the major product lines if possible. That's the first question. And the second question, sorry to come on come back on the dividend I perfectly understand that the dividend for 2020 should be safe. You have a strong balance sheet That's not a problem. What I would like to understand is what would be the main quick key area for you to, to consider changing your dividend policy going forward. If it should become necessary, just if you could share your thoughts on how do you look at your dividend guidance at the major criteria behind it? Thomas, thanks for the question. I am happy to take, let's take a question on supply demand before Thomas then we'll talk further about the dividends. As many factors that flow into what I'm about to say, and I do not want to bother you with too many details in this context, If you look at the current picture, as we look at it, despite, let's say, all the temporary shutdowns that we're seeing availability of plants, coronavirus effects, and so on and forth. I think bottom line is that for the 3 major products, polycarbonates, MDI and TDI, we see that all are at or close to trough levels from today's perspective. So if you would like to sum it up, we see that prices are stabilizing on very low levels and we do very, we see very limited opportunities for further decline in prices, and as a way of hope, if there's any product where we could potentially see at some point in time a potential upward trend that would be an MDI because in TDI and polycarbonate, no matter what you take long, mid or, sorry, short or midterm effects, there, the market remains long, whereas for MDI days, at least with the normalization of demand, some of unity that, supply demand will balance out. So from that perspective, there might be some support for potential price increases though It is very difficult to foresee when that might happen. With that, I would like to hand over to Thomas. Yes, Thomas. On on the dividend, I mean, obviously, we are in a cyclical industry, and we have said, and I can just repeated, we would be and will be prepared to bridge the dividend and pay it out of the balance sheet in the short term, if need be, But, of course, in the medium to long term, the company, has to be in a position to earn the dividend. Otherwise, we would lose our investment grade rating and therefore, the management is putting in place all the actions that that we have to put in place that so that we make sure that in the medium to long term, the dividend is fully covered. Thank you very much Thank you. The next question comes from Lawrence Alexander calling from Jefferies. Please go ahead with your question. Good afternoon. Two questions. First, can you characterize what level of year over year change in the bonus pool is embedded in the free cash flow bridge Yes, first question. It's roughly 300,000,000. In the free cash flow, that isn't embedded in the cash flow statement or in the cash flow assumption for 2020. Okay. And then secondly, on the, on your movements towards the circular economy, how would you characterize current benchmarks for how much alternatives feedstocks are as a percentage of your total, input stream And how much of your products are recyclable of the ones that can be, that are physical or or that are solid as opposed to liquid? To be very clear, the Circularity topic is a decade topic or multiple decade topic. So, why do I emphasize that so much because you have to start very early, which we're currently doing to do fundamental research, but also have some of the major products being, investigated to have with which methodologies, because this is a huge undertaking in terms of transforming the way how we are doing business. And that's why we are just at the very beginning, of this undertaking. However, it will mean that we will have to take as of today some major steps and major decisions because otherwise, we will not make any progress in that. Let me explain, what I heading at, if you, for example, would be willing to enter into a circular economy, at one point in time, you must overtime switch from oil, gas, and coal based, carbon feed stock that you need for the production of polymers, into, for example, carbon dioxide as a feedstock into, for example, bio based materials and into, for example, recycled plastics as a feedstock And that decision would require that you also work with industry partners, on the supply side, and they have to switch the entire supply chain. On the recyclability, you have to talk to your customers because most of the high-tech materials that we are producing and that they are producing and using in their applications cannot be, as experts, would say, mechanically be recycled. That means you cannot just drop them heat them and produce same quality of plastics with that. That means you have to decompose them and use them in a different way. One of those ways is what we call chemical recycling. That means you break it down to the molecular structure. Sorry for being so detailed. But it would mean that in the end of the day, you go down to molecular levels, and then you can use this as a perfect drop in feedstock and produce exactly same quality plastics for same applications like they have been used before. That is just one of the aspects you have to consider. Long story short, This requires a lot of fundamental research. It requires collaboration across the entire value chain, including customers who return the materials at one point in time, That also would require that you entirely manage to switch from a linear to a real circular model. So this is a many, many year undertaking However, first steps you need to take today where you say you switch your R and D portfolio entirely towards Circular Economy And Search Circular Economy Applications. It would mean that you build your entire electricity supply from today, coal, and gas and whatever type of electricity towards renewables, which we already have undertaken. So today, we take the steps Today, we decide on resource allocation that will benefit us in the next 5, 10, 15, or even only 20 years. What does that mean in terms of your question? Today, there's only a fraction of our feedstock that means way below 1%, not crude order based. And today, there's only a fraction of the materials that we can mechanically recycling. However, we made very promising first attempts and have very promising first research results that say that our materials can be entirely recycled by different means, for example, chemical recycling, but the percentage of recycled grades that we are using based on our own products is also way below 1% in total. With that, I would like to give, back to the operator. Yes. Thank you. The next question comes from Markus Mayer, who's calling from Baader Bank. Please go ahead with your questions remaining. First one on the free operating cash flow guidance for 2020. Can you help us to understand what kind of oil price or a raw material cost movement is also net term capital potential reduction you have taken into the free cash flow guidance. That is my first question. I think we don't give out a specific guidance for the oil price. What I can tell you is that we have, obviously, for the EBITDA, assumed a negative pricing delta, which is roughly the $600,000,000 to $700,000,000, which we talked about. That contains a small positive relief from raw materials, roughly between 1000000 and 1000000 positive and a negative pure price effect, which then altogether brings it to the $600,000,000 to $700,000,000, which we gave you And that obviously then also flows into the free operating cash flow. Okay, understood. Second question is, on polycarbonate again. Then it's obviously quite a difficult question, but, it looked like it was a part of the sharp price tobacco, but polycarbonate, of course, was do you want to decide to do the capacity additions that are rather open to the destocking in the automotive industry? Do you have any kind of a deal where the inventory levels of your customers or of the very standard polycarbonate that are are already at at levels where the the customers can't see stock further, or is this the downside potential for destocking Marcus, this is Marcus speaking. It is very difficult to judge for the time being in very much detail. And I'm, however, less concerned about the inventory levels on polycarbonates for the automotive industry. Why is that? Most of the grades we are selling to the automotive industry are great that we would consider to be more on the specialty side for polycarbonate. So it's not the mass market that is normally served towards the automotive industry. So it's not the big commodity grades, but rather, specific rates, for example, for headlamps, even that, even though it is a clear polycarbonate grade, that is something that is considered to be a specialty. And then if you go into the interior applications, most the applications are considered to be specialties. What does that mean? They are particularly ordered to produce a very specific model And, they are normally ordered when the demand is really there and not put on stock that much. That means currently what assume that the stock level at the automotive industry is rather on a low level as there anyhow in many, many at any time, the automotive industry is managing these type of stocks rather well and they just order what they really need for production. What concerns me more though is how does do the stock levels for the automotive industry look like in terms of finished cars? And that is something which we consider also in our forecast and which we also consider into our outlook how we expect the automotive industry developing in 2020 because once consumers are back and, willing to buy new cars, from my perspective, there's still a lot of inventory sitting there in finished cars, which still needs to be sold. That means whenever consumers start buying again, There is definitely a time lag, before all those cars have been sold off and that, therefore, might arise later up the value chain in terms of them creating demand on our side. We are well prepared. So whenever the chain is starting again, we are very well prepared to immediately react However, it might take some time. And then we might see a very interesting thing, which is we see a very quick ramp up in demand, which is then peak before it slows down again and then starting to normalize because we have seen that at numerous times, in the past as well. Yeah. Yeah. Okay. Thank you. Then my last question would be basically again in CapEx, particularly on 2021 and beyond. You have delayed this large project. And of the cap of your CapEx plan for 2021, how many of the project basically already fully locked in and can't be changed. Can you quantify these medium percentage terms? I mean, it's difficult to give an exact guidance, but, I think we could always take out a couple of 100,000,000 if we took a decision today. I think directionally, this would be be the number that you should have in mind. Thank you. The next question comes from Mr. Charlie Webb who's calling from Morgan Stanley. Please go ahead with your question. Thank you very much and afternoon, gentlemen. Just a couple. First off, just can you help us given all the moving parts and where we ended up at the end of FY 2019, can you give us your kind of view on what you see as mid cycle well as what you see as kind of trough EBITDA for Covestro today. I mean, you alluded to the fact that the spreads across many of your commodity verticals are close to trough levels. So perhaps can you just help us, is 1,000,000,000 the right kind of trough EBITDA number? Or do you see a number that's a little bit lower than that excluding kind of the one off effects like coronavirus, etcetera? And then the kind of second and then also mid cycle as well relating to that. And then secondly, just in terms of demand, in terms of what we've seen so far this year outside of China, clearly trying to the focus? And again, thank you for sharing what you think that looks like for February March. But how have you seen demand evolving in Europe and in the U. S? Kind of through the end of the year and in the early part of this year, that would also be very helpful. If I can maybe, this is Thomas speaking. Let me start with the first question. I think what I can tell you is for all of our feedback products namely MDI TDI and PCS commodity grades. We are currently at or close to historical trough margins. So, take this as an indication that the company as a whole, I would I would also assume we're at or at least very close to historical trucks. Now you can always, of course, construct a scenario and you name Corona, etcetera, which stands out of the, of of the normal development, but I think taking normal conditions, this is how we would see it. And then in terms of mid cycle, obviously, this is is somewhat, yeah, it's a little bit of a judgment call, but I think we have depicted on page 15 in the dotted line where we roughly see it and I think this would be a number which is around 2,000,000,000 EBITDA for the company. Charlie, on your second part on demand, how we look at it. I think we had a good start into January globally. Without giving you too much detailed flavors on individual industries. In February, we have seen a slowdown in China that went beyond the normal seasonality that you see, with regard to Chinese New Year, exactly because of the reasons that have now been widely discussed. So China is weak in that sense, the rest, United States and also Europe is okay. I would even say a little, a little bit more than okay, because we see that global supply chain seem to continue to adjust to what some people would call the new normal. We have to trade tariffs, as you know, that have already led to some shifts in the global supply chains. And on top of that, I would say, that now the coronavirus also has led to some additional shift and rearrangements of global supply chains. It is not a large extent, but I would guess that some of the development, in Europe as well in North America also are the result of people trying to desperately shift supply chains So that might lead to a little bit of a compensation of the slowdown in China by Europe and the United States. How material it is difficult to say? That's very helpful. Thank you very much. Thank you. The next question comes from jaatin who's calling from Millennium. Please go ahead. Thank you. If you don't mind, I have three questions. Firstly, on polycarbonate, Can you just tell us with regards to B phenyl A, if ban of this material, if there is going to be a ban in Europe in going to have an impact on you guys? And the second question I have on polycarbonate is basically if I look through 2014 to 2019, This business, you know, back in the day in crops used to make sort of 4%, 5% EBITDA. Now I know that you had a CD business back then. There's a lot of capacity still being added recently a very big oil company has announced a big project. So you're making about 11% margin. How do we think that this is trough, if there's still new capital coming into this product? And then just the final question really on leverage is, I take your point on stable dividend, but at what point in terms of leverage are you comfortable when you define that you want to be investment grade rating? Thank you. Yes, Jadeep, thanks for the question and for giving us a different spin. The Bistenola atopic in Europe, for me, is a topic that is very well managed by the entire industry. Bifinal A is a very widely used chemical substance, maybe one of the best research substances that we have in the entire chemical industry research going back more than 50 years, and also, studies that actually cover entire lives of people in this context. So from that regard, I think, and that has also been confirmed by many institutions, for example, the, EPA, but also the FD and the United States, bifinal a is absolutely safe for all its intended usage. And the few restrictions that we have seen, for example, on, thermal paper, printing devices do not have any major impact on the sales of the respective industry. So from my perspective, For me, I have a very hard time to imagine why there would be a potential ban on this funeral aid that would have a major impact on our business to be very clear. To add on that, some of the applications have already been deselected, that were of some concerns from consumer perspective, for example, baby bottles many, many years ago. So there's not one single kilogram of sales going into the application from our perspective anymore. And also from that perspective, I think, I would not see any impact from today's perspective. You asked on, polycarbonates, and let's say, in draft times, 4 to 5% EBITDA margins, if I understood you correctly. I think, we need to rethink how we look at polycarbonates a Covestro perspective and how much impact we really have from additional capacity additions? Why is that? Looking back 2005, where 30% of the global demand was just optical data storage. And when a majority of capacity was just selling primary products into the market, the Covestro portfolio has over the last 15 years significantly moved on and moved forward, into more specialized products that as of today, our portfolio consists to the majority of those specialized products, which gives us support on less volatile margin business on the one hand. Secondly, we have developed over the years leading cost position, and managing more efficiently and effectively a much larger business than at that time. So that means, in terms of overhead compared to what are we actually setting in terms of absolute volume. So from that perspective, the threat of additional capacity additions by high cost producers into the low margin area has, over time, become lower and lower for the Covestro portfolio because we are moving, at, let's say, disproportionate speed, away from those commodity grades more into higher specialty grades. At the same time, we are significantly increasing our leading cost position. One last example is here, this mother of all polycarbonates plant, which currently sits in China, with a very large capacity of 400,000 tons being now expand to 500,000 tons and with the optionality to expand it 600,000 tons. And that also gives an entirely different position than we have seen it, from a historical perspective. Just to ask you differently, you know, shelves move into this industry or into this product with 250 kd capacity announcement. With the so called different technology and inverted commerce doesn't concern you. That's what I was trying to ask you. We're looking at the competitive at our customer side and not just that one single plant of one new entry into the market. And, from that perspective, I would not say that one single client really worries me. Thank you. The next question comes from Jean Baptiste Roland, who's calling from Bank of America. Please go ahead. Good afternoon gentlemen. Thank you for taking my questions. I just wanted to get, some clarity on the phasing of the CHF 200,000,000 cost savings, that you have planned for this year. And also if you have, any expectations in terms of the phasing as from the raw materials, relief. Well, I mean, on the phasing of the billion cost savings, I think you can assume for your models an equal distribution across the quarters, give or take. So there will be no major ramp up, for that to be needed. And the raw material, again, I would rather think in terms of pricing delta, which is the EUR 600,000,000 to EUR 700,000,000, and in that sense, it's also evenly distributed. The next question comes from Geoff Haire Please calling from UBS. Please go ahead with your question. Oh, hello. And thank you for the opportunity to ask some questions. I just have one left, from my point of view. Just wondered if you could help us with your thoughts around capital allocation. You've clearly said that you can't borrow to pay the dividend indefinitely. But CapEx obviously remains high relative to maintenance CapEx in a low point in the cycle. How do you think about is is investing in new capacity more important than the dividend, or how would you think about that? Josh, thank you for the question. Unfortunately, those things are difficult to reduce to single statement, yes? So obviously, we're trying to manage the magic triangle here. The CapEx is a we have a 7 year CapEx horizon. So we cannot cut CapEx short term, but we're absolutely convinced as you correct as that investing into our capacities and maintaining the 4% long term growth rate is value creating to our shareholders. We're obviously making short term adjustments in the CapEx as as much as is this is sensible, but we have to also manage the fiction costs that an up and down CapEx spending would would introduce. At the same time, as I said, we are committed to a solid investment grade rating, which we think is important for the company. And we think we will be able to pay a stable, ideally rising dividend, and we would be prepared to finance this out of the balance sheet in the short term. So quite frankly, I I I cannot give you, a exact priority. We're managing all three priorities, and we think in the middle of the cycle where the company is earning the 2,000,000,000 of EBITDA, we can fulfill all targets that we're managing. But if it took us, let's say, 4 or 5 years to get to a mid cycle of 2,000,000,000 we could be 2, 3 years of having to borrow. And what you're saying is you're happy to do that to pay the dividend? No, I would say what I said is we can bridge the dividend in the short term. Short term is definitely not 4 years. Short term is maybe 1 to 2 years. The next question for today comes from chetan Udeshi who's calling from JP Morgan. Please go ahead with your question. Yes, hi. Just to firstly, on $200,000,000 of additional savings, Can you help us understand how certainly 200,000,000 have come through? I mean, it seems a big number as such even if it's a given that it's just short term savings. And can you clarify whether $200,000,000 is just net or a gross number? In other words, should we be adding $200,000,000 total to our bridge. That's number one question. Number 2, your free operating cash flow definition which you probably are using to juxtapose your dividend payment besides it, but I don't know whether that free operating cash flow definition is necessarily the right free cash flow definition given that you have some of the lease liabilities or lease payments of $130,000,000 have been moved from operating cash flow to financing cash funds. You still have some interest charges. So you know, is fee operating cash flow the right definition to use, or you think maybe one should be adjusting it for for the below the 9 payments. And last question, sorry, is having volume growth as a key KPI, Maybe just help us understand why not the absolute earnings rather than just volume growth? Because clearly, you know, one of the key moving parts for cardiovascular earnings is pricing. So to some extent, how best can you optimize the absolute earnings is probably more important than just volume growth. So just some thoughts on that. Thank you. Okay. Let me take the first question and then come to the more fundamental ones that you raised. So on the million savings. I mean, I have a long list in front of me, and, I think it would probably be too much for this call to read them all out. What I can give you in terms of rough cut is that we're looking at 3 buckets of, one third each. The first one is cost savings, simply because we have, cut our CapEx program and less CapEx also means savings on the OpEx side. So this, roughly is 1 third of those savings. Secondly, the the next third is various cost saving items. So those are the usual suspects and smaller things like consulting costs, consultancy costs travel training, catering, etcetera, etcetera, and marketing where you can always take a break. And then the 3rd bucket, which again take us for a third of it, is that simply we have reduced our budgets for some of the growth initiatives where we wanted to spend more money. This is, in part digitalization, this is in part IT, where we think we can, for a year, also live with less growth in our costs. So those are the 3 buckets. If you, if you ask, what of that is cost avoidance versus wheel cuts versus 2019, it's a fifty-fifty split. So 50% is cost avoidance versus a higher budget and 50% is real cost reduction relative to 2019. And then I think on your other questions, I mean, mean, I think we've been very, I mean, it's, geez, this is something we can obviously debate, but I think we've been very, open about what is the effect of IFRS 16. And I think we're obviously very mindful that below fee operating cash flow, there's still a dividend to be paid and interest to be paid and that includes the interest for the leases. So I think something that we will take into consideration. And on the volume growth side, I mean, I can assure you that we are not pursuing volume growth per se as a KPI, but we think that out of our value, a value focused strategy to invest into, new capacities that have a return above our weighted cost of cap capital that that should lead into growth for the company. And, since we're in an industry where we have cost inflation every year. Growth is a necessary condition so that we can cover those cost inflation. So it's for us not, I would say a a a single mind that, road where we say we have to achieve growth at all costs, but it's a balanced approach between growth to profitability and the efficiency, which is reflected our routing number. And we think, in that sense, to have it as one KPI, which is equally weighted with the others. It is a sensible way to look at our business. Understood. Thank you. Thank you. The next question comes from Georgina Iwamoto. Please go ahead. Thank you. Hi, Marcus. Hi, Thomas. I'm sorry for keeping you on the line for the long this evening. I've got two questions left. So the first, is to Thomas on the dividend. I just wanted to understand the rationale for not rebasing the dividend in the current environment. Does it signal that you think earnings are going to rebound next year? You've been very clear to Thomas about not funding the dividend from debt in the medium term. What do you need to see to have confidence? The medium term looks good. And then also kind of on that topic, can you maybe elaborate on your preference for a high dividend over a share buyback, which potentially offers more flexibility and could arguably be seen as attractive, if you think that FY 'twenty is the trough? And then one question for Marcus. Aside from M and A, are there any in house technologies that you think you can develop or grow organically to diversify your product or end market exposure? I appreciate the color that you gave us on, projects in Circularity and recycling, but do you think that product or end market diversification is also possible? Yes. Georgina, let me start with the dividend question, and I hope that I can, cover cover the the scope that you alluded to. So, first of all, I mean, our rationale is if you look at this company, in in the midpoint of the cycle. And, I mean, you can obviously pay what is exactly the EPPA number that that is midpoint, but just rough and take just give and take, if it was a 2,000,000,000 EBITDA, then we just think the dividend payment, of 2.40 that we currently have is at least in line with a cycle point, in order to, have our channels participate in this success of the company. And we only paid EUR 2.20 when the, when the earnings were much higher. And we think now that we are approaching trough level we should maintain the dividend payment. Therefore, it is somewhat geared to a reasonable payment given the midpoint of the cycle that we assume for this company. And yes, you said it. I think we can, we can find it out of the balance sheet in the short term. Short term being 1 or 2 years, but not in the medium to long term, but medium to long term, we have to take the right efficiency measures. I can tell you we're laser focused on implementing exactly those savings that we try to describe in this call. On the rationale, of of a share buyback, I think the feedback that we've gotten so far is that a a a a reasonable dividend payment is the preference of new shareholders, but, I think shown some flexibility in the past where we embarked on HCR buyback, and we've also received the authorization to embark on another one. If we should be in a position where our balance sheet is becoming, inefficient, I think currently, this is nothing that is, immediately in the cards, but we've shown our commitment to return excess cash to our shareholders in the past, and we will stick to that commitment should the situation arise again. Yes. Georgina, this is Marcus speaking, and I see you again. Yeah. It's it's a quite challenging question in terms of innovation. I have to say, simply because of the fact that our development cycles also in which regard to new technologies of new products, take a while, I would say. And in particular, in our end markets, when we only talk about chemical products, there's smaller contributions because at least at least as of today, the so called blockbuster you see in other industries, are difficult to to find here. However, if you would like to add some flavor on what we do in the Circular Economy, One thing is, where we believe a big opportunity also to, increase competitiveness in the market. If you provide solutions that help to, for example, recycle some of the products that we bring into the market. And here we're talking about opportunities in terms of chemical recycling. We talk about technologies that are not necessarily commonly product related, but then are related to what online process optimization with our customers. So we'll be telling our customers online how they could optimize the mixtures that they're using to produce, for example, less scrap when they are, going for, rigid foam manufacturers and and things like that. There's other opportunities that we have, to provide products to our customers that are more environmentally friendly. And one of the fastest growing segments, for example, in the coatings adhesive specialties area is all our waterborne for the European dispersion systems, which still are very much like our customers and show several other benefits, not only benefits in terms of a greenification of the production and so on and so forth. So the entire topic of Circular Economy goes across the board from recycling technologies through, solvent free systems, through non fossil based raw materials, and they go even beyond just to give you another example, if you think about products that have been produced, with green energy, that means the higher your usage of green electricity is, I think the better your position with some of the customer segments that we have are So only looking at the product view, only looking at, the chemicals that you sell to customers may fall for short a little bit you have to look at this from an overall life cycle assessment perspective. And I think that is exactly the journey that Covestro currently is embarking into and that provides technologies that provides better footprint in terms of CO2 emissions, but it also provides better solutions, in terms of applied technology and methodologies of recycling just to give you some flavor. Thank you. And the last question for today comes from Isha Sharma, who's calling from MainFirst. Hi, thanks for taking my questions. First one would be, what is the magnitude of price increases from the current levels that you would need to achieve the mid point of your guidance? And then related to that, how likely is it that high cost producers who burn cash in this situation and are to a shutdowns because of which the price should improve, would start producing again once the prices are in a are, again, at an attractive level. This would be the first one. And the second one would be if we assume that there's a little bit of recovery in prices during the year and a pickup in business activity, would you still prioritize the short term savings of EUR 200,000,000? Thanks. This is Markus speaking. We're just debating here, in the background. A little bit, to be a little bit more transparent about what we are doing while being so quiet here on the other end of the line. Because, I think we have been quite clear about how we see the current mark to market situation. And, Thomas, alluded on that quite nicely. That he said, this is about SEK 1,100,000,000. And, if you would translate that now in terms of sales, and would say that everything comes through, which we sell more in terms of pricing and about 1% to 2% of additional sales would maybe lead to about $120,000,000 additional EBITDA. And you can now choose to what extent you would like to distribute that to which product portfolio because I think we automate it very clear, that in the polycarbonates, as well as CDI business, we would not see a quick recovery in prices. So the only remaining larger commodity segment would be MDI, And then you would need to just make your own math about how much additional price increase you would need on MDI, let's say, in terms of generating additional 120,000,000 EBITDA, if you would increase, our sales by 1 to 2% just to keep in mind, and the I, is 20% of our portfolio. It will mainly lead to a 10% price increase, on a year on year basis. I mean, full year on year basis, that gives you some indication, so where, you would, where you would need to end up. If this unusual, Have we seen that historically? Yes. We have. So it is not unusual. Would we see it for the full year? Would we see it from which point in time? Very difficult to say. Frankly speaking. So, that also leads me to the second part of the question where you said, well, when will those type cost producers enter? We have to take into consideration that some of the high cost producers have small plants. And it is very difficult to say when they will restart and what will be the effect. Just, to keep in mind, there is significant capacity currently not producing That also means that, if, the market prices would recover, there will definitely be be a few producers lining up to immediately start and resume production again. And that would also subdue price movement in TDI, but also polycarbonate only on the commodity segment for polycarbonate, for quite some time. And, that's why it's very difficult to say where exactly would be the price, from which, low sorry, high cost producers will immediately enter. PDI, if you just take the cash cost curve, it is very steep. So a low cost producer to high cost producer, 50% difference on MDI, we assume it's 30% difference. And, so I would assume whenever whenever, let's say, when the when whenever, let's say the pricing will increase by 1, 2%. That would be the first one in line who would immediately produce, but then it would be the second approach, and it's very difficult to judge, frankly speaking. Okay. Thanks. Good afternoon. Mr. Kyla Thera, any further questions at this time? Maybe we forgot one question to be answered. Would we still give, priority to short term savings? Sorry for that. In case of a peak of profitability, I think that the answer is yes. For sure. Perfect. Thank you so much. Good. And thank you all for participating and for your questions. If you have additional questions, don't hesitate and just call the IR department and we will try to help you. We will be obviously having some conferences and roadshow after the quarter. So happy see you then on the street as well. Thank you. Bye. Ladies and gentlemen, this concludes the investor conference call of Covestro. Thank you.