Welcome to the Covestro Earnings Call on the Second Quarter Results. The company is represented by Markus Steilemann, CEO, and Christian Baier, CFO. During the presentation, all participants will be in a listen-only mode. The presentation will be followed by a question-and-answer session. If you have a question, please use the raise-your-hand function or post your question into the Q&A tab. You will find the quarterly statement and earnings call presentation on our IR website. I assume you have read the safe-harbor statement. With that, I would like now to turn the conference over to Markus.
Thank you, Ronald, and good afternoon to everybody and a warm welcome to our second quarter call. With the end of today, Covestro's Chief Commercial Officer, Sucheta Govil, will go into her well-deserved retirement after two consecutive terms on the Board of Covestro. I would like to express my sincere gratitude to Sucheta for her exceptional contributions and her dedication to shaping our company. On behalf of the entire Board of Management, I now have the great pleasure to introduce the new Chief Commercial Officer of Covestro, Monique Buch, to the investor community. Monique is an esteemed top manager with an impressive track record and a long-standing experience in the materials business. In her last position, she served as Executive Vice President Nonwoven at Lenzing AG, Austria. This position had been preceded by various leading positions at Freudenberg and Dow Corning.
She obtained a Master in Industrial Engineering and Management from the University of Twente. The other members of the Board of Management of Covestro and I are delighted that Monique will take an active role in improving our business performance while transforming Covestro to the circular economy and execute our sustainable future strategy. Turning to the next page, positive news are coming from our M&A team. We always said that we are looking for bolt-on acquisitions for our solutions and specialty businesses. Now, with the acquisition of Pontacol, a Swiss manufacturer of multi-layer adhesive films, we have done another step in this direction. This move expands our specialty films product and technology portfolio, enhancing our European market presence. The acquisition offers attractive value creation through portfolio, organizational, and procurement synergies.
The addition of production sites in Switzerland and Germany strengthens our global manufacturing network and improves regional availability of adhesive films. This expansion enables us to deliver more powerful customer solutions, increase competitiveness, and grow sustainably. We expect sales growth in the low double-digit euro million range by accessing growing applications including security glazing, flexible printed electronics, and windblade leading-edge protection. The EBITDA contribution of these attractive applications is expected in the mid-single-digit euro million range. The closing is expected in the second half of this year. After these encouraging news, let us now turn to the key facts of the last quarter. Turning to the next page, the key facts of the second quarter were: sales volumes remained stable. We had lower sales of EUR 3.4 billion, and they were caused by lower prices and unfavorable currency.
We achieved an EBITDA of EUR 270 million, which is in the upper half of our guidance range. The free operating cash flow came in negative at EUR 228 million. Following our July 11th announcement, we adjusted our guidance for EBITDA, free operating cash flow, and return on capital employed above WACC. We were the first of several chemical companies that have since revised their guidance in response to adverse market conditions. Turning over to the next page. We are looking at the business and the volume development in the second quarter of 2025. Year -over -year, global sales volume remained flat, almost balancing negative developments in Europe, Latin America, and Asia-Pacific, with positive volume trends in North America. Across different industries, construction showed the highest growth, with a mid-single-digit % increase, mainly driven by regional supply and demand patterns without major import-export trade flows. All industries dependent on imports/exports declined.
Automotive saw a low single-digit decline. Furniture followed with a mid-single-digit decline, and electronics was most affected with a high single-digit decline. Regional performance varied significantly. Europe and Latin America presented a mixed picture. Furniture/wood showed a slight increase, automotive remained flat, while construction declined slightly and electronics dropped significantly. North America's sales volumes, especially in performance materials, increased significantly, driven by strong growth in construction due to gaining market share from competitors relying on imports. Furniture/wood increased slightly, electronics developed flattish, while automotive showed significant decline. Asia-Pacific maintained a slight sales volume increase due to significant growth in construction, automotive with slight growth, but strong negative trends persisted in electronics and furniture. With this summary of the demand development, I'm now handing over to Christian, who will guide you through the financials.
Thank you, Markus, and also a warm welcome from my side. We are on page six of the presentation and are coming to the year-over-year sales bridge. Sales for Q2 2025 declined by 8.4% to EUR 3.4 billion. This decrease was mainly caused by negative pricing and FX effects. Prices declined by 4.8%, affecting both segments, while the negative FX effect of -3.2% was primarily driven by the weaker U.S. dollar, Chinese RMB, and Mexican peso. As mentioned earlier, overall volumes remained nearly flat at -0.4%. However, there was a divergence between the two segments, with performance materials experiencing a slight decline while solutions and specialties achieving a slight volume growth. With that, let's turn to the next page, where we are showing the Q2 2025 EBITDA bridge.
Year -over -year, EBITDA decreased by 15.6% to EUR 270 million, which falls in the upper half of our Q2 guidance range of EUR 200 million- EUR 300 million. The performance above midpoint and consensus was driven by the release of EUR 44 million short-term bonus provisions following the adjusted guidance for FY 2025. Selling prices once again declined more sharply than raw material costs due to the ongoing unfavorable industry supply-demand ratio. The price decline was most pronounced in APEC and EMLA after the tariff announcements of the U.S. government. As a consequence, EBITDA was impacted by -EUR 100 million from a negative pricing delta and additionally adverse FX effects. The small volume increase shows the ongoing shift to reduce low-margin business with strong market products. Other items were largely positive due to the aforementioned release of the bonus provision and included restructuring costs for strong of EUR 37 million.
On slide 8, we break down the details for the different segments, starting as usual with Solutions and Specialties. In S&S, the combination of 3.4% negative FX effects and the year-over-year price decline of 3% led to a sales decline of 5.4%, despite increasing volumes by 1%. Sequentially, sales declined globally, with growth recorded only in APEC, while EMLA and North America declined. The EBITDA in Q2 2025 remained stable year -over -year, as the negative pricing delta and FX effects were offset by positive volume development and others, mainly from bonus provision release and cost contingency. The quarter-over-quarter EBITDA decline was caused by a negative pricing delta, while volumes and others contributed positively. The EBITDA margin remained stable. In line with the adjustment of our FY guidance, we now expect S&S to contribute between EUR 650 million - EUR 850 million to our FY 2025 EBITDA.
After Solutions and Specialties, we now turn to the Performance Materials segment. Year-over-year sales declined by 11.8%, driven by negative contributions of -6.6% from pricing, -3.0% from FX, and -2.2% from volumes. Quarter-over-quarter, sales increased in APEC and North America, while EMLA declined. The Q2 2025 EBITDA of EUR 149 million is lower year -over -year, mainly due to a negative pricing delta while positive volume effects from reducing low-margin or loss-making business. Sequentially, the EBITDA in Q2 2025 rebounded after the Q1 impact from one-time costs related to the closure of our PO JV with Lyondell. It increased due to positive effects from others, mainly from bonus provision release and cost contingency, positive volumes, and pricing delta following the high energy costs during the winter period.
We are also reducing the EBITDA guidance from EUR 400 million -EUR 700 million and now expect PM to contribute between EUR 200 million- EUR 500 million. This adjustment is based on the low probability of a margin recovery for H2 2025. The next topic is the free operating cash flow development. As you can see from the graph, the free operating cash flow in H1 2025 was negative with EUR 481 million, with Q2 FOCF contributing -EUR 228 million. The free operating cash flow declined in H1 year on year, driven by lower EBITDA and higher CapEx. Changes in working capital of -EUR 314 million in H1 2025 were mainly due to the seasonal build-up of inventories, however less pronounced than in 2024. H1 2025 CapEx of EUR 365 million was higher year on year due to phasing. We reiterate our CapEx guidance of EUR 700 million-EUR 800 million.
Of EUR 85 million was similar to the previous year. The -EUR 127 million in other effects mainly comprises the bonus payout, which was slightly reduced compared to 2024. Overall, the Q2 2025 free operating cash flow is seasonally depressed. Our planning assumes an improved but still negative free operating cash flow in Q3, but a strongly positive free operating cash flow in Q4 2025. Let's now look at our balance sheet on page 11. Our total net debt increased by EUR 492 million compared to the end of 2024. The increase was caused by the seasonally negative free operating cash flow of -EUR 481 million, and the decrease in the net pension liability to EUR 215 million was driven by an increase in pension discount rates, mainly in Germany. This comprises pension provisions of EUR 285 million and a net defined benefit asset of EUR 70 million.
Summarizing our net debt situation, the total net debt to EBITDA ratio is at 3.8 times based on a four-quarter rolling EBITDA of EUR 0.9 billion. Without the significant strong expenses of around EUR 140 million in H1 2025, the increase would have been limited to a ratio of 3.3 times, which would have been an increase year on year of only 0.1 times. Covestro remains committed to a solid investment-grade rating, which was just confirmed in April by Moody’s, including a stable outlook. That concludes the overview of the Q2 financials, and I'm handing it back over to Markus.
Thanks a lot, Christian. We are continuing with the outlook for Covestro's core industries on page 12 of the presentation. Global GDP forecast has decreased to 2.5% from February's 2.8% outlook. This reduced global outlook also affects most of Covestro's core industries. Automotive growth forecast decreased to 0.6% from 2.7%, primarily due to U.S. tariff policies disrupting global supply chains and demand weakness in Europe and North America. EV and battery electric vehicles outlook remains strong at 24% growth. Construction industry growth forecast increased to 0.6%, partly due to stabilization in the Chinese housing market, though ongoing conflicts and political uncertainty limit further growth. Furniture industry growth forecast decreased to 0.5%, which is one percentage point below earlier forecast, mainly due to weaker production in APEC and North America regions. Electronics industry growth forecast is now at 3.7%, with persistent uncertainty regarding U.S. trade policy and potential tariffs affecting investments.
Household appliances show slightly higher expected growth at 2.4%. Let's turn to the next page. As already mentioned, we have adjusted our guidance as published on July 11 due to downgraded industry growth expectations following U.S. tariff announcements and the lack of substantial margin recovery prospects. The EBITDA guidance is now between EUR 700 million and EUR 1.1 billion, down from EUR 1.0 billion to EUR 1.4 billion after the first quarter. The free operating cash flow guidance has been adjusted in line with EBITDA and is now expected between -EUR 400 million and +EUR 100 million. Accordingly, return on capital employed over weighted average cost of capital is now projected at - 9 to - 5 percentage points instead of - 6 to - 3 percentage points. The current mark-to-market estimate is approximately at EUR 900 million based on July forecast assumptions flat forward, so on midpoint of our current guidance.
Greenhouse gas emissions forecast remains stable at 4.2 to 4.8 million tons. Unfortunately, a day after our ad hoc release, we were impacted by a fire in the transformer station in Dormagen, owned by the chemical site operator Currenta. The sudden lack of electricity led to a shutdown of our polyol plants but mainly damaged our chlorine production, which subsequently impacts our TDI as well as several solutions and specialty value chains. We are still uncertain about the full financial impact. However, first preliminary evaluations revealed a possible high double-digit to low triple-digit million euro EBITDA burden for the full year 2025. We are still trying to mitigate the effects of the incident as much as possible. Beyond that, additional financial expectations are. Covestro sales are estimated between EUR 13 billion and EUR 14 billion.
Our Q3 EBITDA is expected in a range between EUR 150 million and EUR 250 million, including our preliminary assessment of the Dormagen impact of a mid-double-digit million euro burden. The financial results range was adjusted to - EUR 140 million to -EUR 180 million. All other financial expectations remain unchanged. As the guidance adjustment has been significant, I would like to quickly hand over to Christian for a detailed view on the external market headwinds leading to the revision.
Thanks, Markus. Let me just provide transparency on the key factors that led to the adjustment of our EBITDA guidance. The midpoint of our initial February guidance was EUR 1.3 billion, which we now have revised to EUR 900 million. The primary driver is the absence of the margin recovery perspectives, which we anticipated for 2025, resulting in a negative pricing delta of approximately EUR 550 million. We also expect a low triple-digit million euro volume decline and unfavorable exchange rates for U.S. dollar and Chinese RMB, with a mid-double-digit euro million impact. Combined, these external market developments total around EUR 700 million in negative impact. To counter this, we have launched short-term cost contingency measures expected to deliver up to EUR 275 million in savings. Positive effects from our strong transformation program were already included in the initial guidance. Other savings of around EUR 100 million include reducing short-term bonus provisions for FY 2025.
Our internal measures can offset approximately EUR 300 million of the roughly EUR 700 million negative impact. Despite these comprehensive efforts, the remaining EUR 400 million difference explains the EBITDA guidance adjustments announced between February and July. We remain committed to driving our transformation and will continue to pursue every opportunity to improve our performance throughout the remainder of 2025. Back over to you, Markus.
Yeah, thanks, Christian. Before summarizing the second quarter, I would like to give you an update on the XRG transaction. Regarding the European Foreign Subsidy Regulation, we have been informed about the conclusion of the phase one review and our entry into a phase two investigation. This phase two referral was expected given the size of the deal and its significance, as it is the first FSR review involving a national oil company, as well as the first complete takeover of a German blue chip company by a Middle Eastern company. This in-depth phase two investigation can last up to 90 working days. On merger control approvals, we have now advanced to a 90% approval rate, with only Vietnam remaining prior to closing. We reiterate our confidence to close within the second half of 2025, most likely in Q4, with the subsequent payout of EUR 62 per share to Covestro's shareholders.
Let's turn to the next page and allow me to quickly summarize. We have seen in the second quarter flat volume development that was burdened by economic and geopolitical uncertainties. Sales came in lower at EUR 3.4 billion, mainly caused by lower prices and unfavorable currency effects. The EBITDA for the second quarter of 2025 of EUR 270 million was above the midpoint of the guidance range and was helped by internal measures. The full year guidance for the year 2025 has been adjusted with an expected EBITDA now of between EUR 700 million and EUR 1.1 billion. The XRG transaction is on track with expected closing in the second half of 2025. Christian and myself are happy to answer any questions that remain open. With that, I hand it over to Carsten, who will guide us through the Q&A session.
Thank you, Markus. Ladies and gentlemen, we will now begin the question-and-answer session. If you have a question, please use the raise-your-hand function on your telephone. This is star five, or post your question into the Q&A tab. If you wish to cancel your request, please use the raise-your-hand function again. When speaking, please ensure that you are unmuted. The first question comes from Christian Faitz from Kepler Chevreux. Christian, please unmute your microphone.
Right, good. Sorry, it was unmuted for me, and I tried to unmute it again, so I muted. Hope you can hear me.
Very well. Good afternoon, good morning. Markus, Christian, and Ronald and team, two questions, please. First of all, at the lower end of your EBITDA guidance for the material segment, you're not expecting much of a positive contribution in H2, so just about EUR 40 million at best, I guess, kind of an H2 2022 situation. What are the assumptions for this lower end? I take it this includes the force majeure effects, correct? The second question would be, are there any signs of a demand revival into Q3 from any key customer industries, furniture, electro-electronics, automotive?
Yeah, thanks, Christian. This is Markus speaking for your questions. Let me start with the second part or second question, the revival signs of any industries going into the third quarter. I hope we could provide you with an overview about where the different industries in terms of overall industry outlook look like. I'm here specifically referring to one of the slides that we have in our presentation that supports the respective call. There you see that many of the industries that we are serving, mainly take automotive, construction, furniture, electrical, electronics. There is a positive growth outlook for the full year 2025. However, in general terms, we have to say that this industry growth outlook has been revised downwards for some major industries. That downwards revision, having now Q1 and Q2 behind us, for sure would impact the second half of this year stronger.
If you do the math, you would figure out that currently , there is limited to no signs of a significant uplift. That might be regionally slightly different here and there. In general terms, we have to say that the world is still challenged. One of the major reasons is the ongoing uncertainty due to ongoing negotiations of U.S. tariffs. That is the underlying thing. That all comes on top of the uncertainties that we have seen so far and the prolonged crisis. I don't want to reiterate it since when we already have consecutive crises going on, 2021 with Corona, energy peak, and so on and so forth. Long story short, the market currently is in a very challenged overall situation. That means for the second half, I personally would not see a significant broad-based across-the-board uplift in demand.
Once again, there might be here and there some regional differences by industry or in general, but I do not think that this is sufficient to provide a broad positive overall uplift of the markets for our industries and for our main customers. Yeah, so it's a very broad answer, but before we now go into details and then it's maybe seen as, oh, there's a positive sign here, positive sign there, broad basis from today's perspective, the markets will remain very challenging. Yeah, so.
To summarize it, front-end loaded here with the front-end being behind us.
Let's not forget, Covestro is doing a lot on self-help. We have just, and as has been mentioned, today's this program strong. We also have made it very clear where we stand in terms of the rest of the year outlook with our updated guidance. Now coming back, let's say, to your first question. The costs that we had to digest this year, for example, restructuring costs for PU-11, are non-recurring then, let's say, for the next year, most likely. The Dormagen case that I just mentioned has not been included in the midpoint, but should be covered at the low point. There will be ongoing margin pressure also for materials like polycarbonate and polyols. It will remain a challenging year.
At the same time, we have to also make clear that we do everything that is in our own power to make sure that we deal with the current situation. The underlying is relatively stable, yet at, for us, also low levels. Therefore, we would expect that Q3 is therefore similar to the second quarter, but excluding the Dormagen incident. I hope that gives you somewhat a picture and a flavor.
Yes, thanks very much, Markus.
The next question comes from Geoff Haire from UBS. Geoff, please unmute your microphone.
Yeah, good afternoon. I was wondering if I could ask Markus if he had any comments on this policy in China, this anti-involution policy, and what impact and the timing of it might have on the chemical industry as a whole. I'm aware of obviously your other hat that you wear with the VCI, but also what you make of the action plan from the EU that has been announced.
Okay, sorry, Geoff, I have to repeat it because I forgot now to unmute myself. After 40 quarters of reporting here, finally that also happens to me. Wonderful. The anti-involution policy, we currently do not see any direct effects on our businesses for the time being, to be very clear. With regard to the current conversations on European level, is it on countermeasure or is it more the general, let's say, because you talked about VCI? I'm not sure, Geoff, can you just clarify because I understood you that you say, how do you look at the energy out on the European, let's say, overall policies, but not as potential countermeasure, is it?
No, I was just wondering, obviously the action plan that the EU have announced, and all I meant was I was aware that you obviously have other responsibilities, but I was wondering what impact you think that could have on the chemical industry in Europe. Also, do you think that the anti-involution policy may result in old capacity being taken out? I'm aware not for Covestro, but for the industry more as a whole.
Yeah, as I said, with regard to involution policy, let's see. Once again, we currently do not see any impacts, at least not short term. I also have not seen any announcement that would support that thesis that old capacity would be taken out. On Europe, the European Chemical Action Plan. First and foremost, what I am positive about also in my role as a VCI President is that finally that new economic reality has obviously arrived in the Brussels offices and therefore also has now led to action that seems to me a more balanced approach towards economy and the ecology. Whereas climate was on top of the list, and maybe only on top of the list for the last administration, I now see that it's a more balanced approach being taken. That in itself, I see as a very positive sign.
Yet the effects, whether it has really positive effects, whether it makes the EU and its industries more competitive, that remains to be seen. Therefore, more actions and more swift actions have to be taken. Without repeating myself, that is lowering bureaucracy, doing something on tax, tackling the high energy prices in Europe, and so on and so forth. A good start, but way too little to really turn now the tides.
Thank you.
The next question comes from Chris Counihan from Jefferies. Chris, please unmute your microphone.
Yeah, thanks so much. Good to hear you, Markus. I just wanted to ask about Dormagen and specifically how long you expect the plant to be out for, firstly. Obviously, you've given a financial impact, but I wasn't sure if I heard how long you expect it to be on force majeure for as at today. Secondly, that's about a third of your TDI capacity. If I look at my supply demand, is there the potential for the other two-thirds to benefit from the market being a bit tighter?
Yeah, Chris, thanks for your question. Very roughly speaking, we expect Dormagen to be out for several months. Now comes the big but. What is mainly affected for these several months is the chlorine supply. The chlorine supply is absolutely essential to run the TDI plant. However, there are other chlorine customers internally as well as externally. That's why we also issued that force majeure, because there is an opportunity to gradually at least bring back some of the other internal value chains, for example, in the solution and specialty area. That will also be a matter of weeks, not days, but really weeks. Gradually, we expect that more and more plants will come up on stream, but the big volume and also margin contributor TDI, that is definitely out from today's perspective for several months.
With regard to your second part, we have just observed that Asia prices have rebounded based on the prices that were quoted by traders. First, we have to take a look at it, is it sustainable? In the U.S., we have, let's say, in the entire industry, not so fast moving prices due to contractual basis. I'm talking more about what I perceive as a general industry pattern rather than our own situation. Therefore, we have not seen any reaction so far. Also, please bear with me if we're not going into any further details because the TDI market is a very, let's say, narrow market. Therefore, anything I say could be one word too much around this. From that perspective, please allow me that I leave it with that.
Of course, thanks so much.
Geoff, there seems to be a follow-up question. No. Okay, there are no further questions at this time. Handing back to Ronald.
Okay, thanks for your question. I know it's a busy day for you today with a lot of reportings. If you have any follow-up questions, don't hesitate to contact the IR department. With that, I would thank you for your interest and see you next time. Bye-bye.