Covestro AG (1COV) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. Welcome to the Covestro Earnings Call on the First Quarter and Full Year 2021 Results. The company is represented by Markus Steilemann, CEO; Thomas Toepfer, CFO; and Ronald Koehler, Investor Relations. [Operator Instructions] I would now like to turn the conference over to Ronald Koehler. Please go ahead, sir.

Yes. Good afternoon to all European participations and good morning to all Americans. I'm happy that you're joining our full year 2021 conference call. And I know it's a busy day, and it might be one of several conference calls you have. But therefore, I'm even more happy that you're here. We have posted the annual report and the earnings call presentation at our IR website, and if you haven't seen it, you can always download it. And there, you will also find our safe harbor statement, and I assume you have read it. And with that, I turn it over to Markus.

Thanks a lot, Ronald, and a very good afternoon and/or good morning to everybody on the call. In the full year 2021, our earnings performance was well above previous year levels as the 2020 results, as you're well aware, were heavily impacted by the coronavirus pandemic. The demand rebound resulted in a 10% core volume growth in last year and earnings remained on high levels throughout the entire year 2021. We delivered EUR 3.1 billion EBITDA and a free operating cash flow of EUR 1.4 billion, and I think that qualifies 2021 as a strong financial year for Covestro. We want our shareholders to participate in our financial success, and therefore, yesterday, we announced a new share buyback program of EUR 500 million over the next 2 years. We also continue our ambition to pay out an attractive dividend and propose a dividend of EUR 3.40 per share. How do our 2021 results compared to our past promises? Let's turn to the next page. We achieved all our financial targets set for the year 2021. As I said, core volume growth of 10% included the volumes from the acquired RFM business and came in at the lower end of the guided range. We also saw strong demand and also limited product availability accompanied us in our customers throughout -- and our customers throughout the year. Free operating cash flow of exactly EUR 1.429 billion came in at the lower end of the latest guided range, yet above the upper end of the initial range. While earnings and cash flow outlook improved during the course of the year, cash was increasingly absorbed by working capital, reflecting the outstanding price inflation, especially during the second half. We generated EUR 3.085 billion of EBITDA and a 19.5% return on capital employed, well above our initial guidance and close to the center of the latest guidance corridors. While delivering on target on the financial side, I'm excited to announce today new targets on the nonfinancial climate-related side. Covestro has a tradition and a track record of pioneering sustainability in the polymer industry. I'm convinced, shareholders of Covestro will also in future benefit from both leadership and sustainability and profitable growth. Let's take a look at our new targets in more detail. Covestro aims for climate neutrality, and has set for itself a bold and ambitious target, net zero for Scope 1 and Scope 2 greenhouse gas emissions by 2035. This target is another major milestone towards our corporate vision of becoming fully circular. As a key milestone, we plan to cut greenhouse gas emissions from our own production, referred to as Scope 1, and from external energy sources, referred to as Scope 2, by 60% by 2030. A key aspect for our 2035 reduction target is meeting the goal of the Paris Climate agreement, under which the world community aims to limit global warming to 1.5 degrees Celsius. Sustainability, and more specifically, climate-related targets are not new to Covestro. As a matter of fact, in 2021, we achieved our previous specific greenhouse gas emission reduction target for 2025 ahead of time. We more than halved specific emissions, again, Scope 1 and Scope 2, compared to the base year 2005, while production volume doubled. As a consequence, Covestro achieved climate neutral growth since 2005. Reducing our own emissions, however, will not be the end. We plan to further reduce indirect greenhouse gas emissions from upstream and downstream processes in the value chain, referred to as Scope 3. This part of the transformation will be largely linked to our transition to a circular economy. More importantly, we strongly believe that transition opportunities will outweigh transition costs. We aim to shift all our production processes and products completely to circular principles in the long term, and we intend to support meeting our and customers' climate objectives at the same time. Covestro is continuously expanding its portfolio of climate neutral products as customers already today demand sustainable products, and we believe, are also willing to pay for the added value. This is vital to align our transition to net zero emissions with profitable growth prospects. To achieve net zero emissions, Covestro anticipates dedicated investments of accumulated EUR 250 million to EUR 600 million by 2030. These investments will tackle our direct greenhouse gas emissions, but also increase our overall energy efficiency. This is expected to result in lower operating expenses of between EUR 50 million and EUR 100 million annually during the same time. We currently also expect an increase in operating expenses in the magnitude of a low 3-digit million euro amount annually. These cost assumptions based on the historic circumstance that prices for fossil-derived energies are lower than prices for renewable energies. The upside here is that this historic price order is being turned around as it can be observed in many places today. If we now turn to the next page, we have identified three main levers that make a vital contribution to achieving our climate targets: more sustainable manufacturing; renewable electricity; and renewables steam. The waterfall graph on the chart shows our detailed path and expected contribution of each of the measures to reach our interim target of 60%, emission reductions in 2030 and 100% reduction in 2035. It is needless to say that business growth without any climate-related measures lead to higher emissions, in our case, plus 1 million metric tons until 2030. Thereafter, we expect no negative impact on emissions from business growth as future growth investments are required to support climate neutral growth from 2030 onwards. Also, there are external factors that influence our Scope 1 and Scope 2 emissions. These factors comprise the energy mix of public grids, for example, the announced nuclear accident in Germany and Belgium as well as public energy allocation schemes, for example, determined by the German Renewable Energies law, short EEG. The net effect of all changes as known today amounts to minus 0.7 million metric tons. To look at the identified lighthouse projects from the area of manufacturing excellence and renewable energy, let's turn to the next Page #7. We have identified numerous measures to effectively reduce our greenhouse gas emissions. In the area of more sustainable manufacturing, production processes will be further improved and energy efficiency enhanced One focus is to reduce nitrous oxide emissions by installing highly efficient catalyst. Secondly, in the area of renewable electricity, our production sites worldwide will be gradually converted from fossil-based to renewable electricity. We have already entered a number of Power Purchase Agreements for renewable energy and further agreements are being planned. Thirdly, steam. This is an important energy source for chemical production processes. Converting steam generation from fossil to renewable energy sources is a challenge that Covestro intends to solve by various routes. Those routes are ranging from electrifying steam generation based on renewable energies to using biogas or green hydrogen as an energy source for steam generation. In a nutshell, we are very excited to have set ourselves this bold emission target and have worked relentlessly out our roadmap towards climate neutrality. Covestro continues as a pioneer towards a circular economy and to successfully deliver both leadership and sustainability and profitable growth. With this, I would like to hand over to Thomas for the financial review.

Yes. Thank you, Markus, and also a very warm welcome from my side to our call. So if you go to Page 8 of the presentation, you can see our core volume growth of 10% in the financial year 2021, and that reflects the volume rebound and the consolidation of RFM. Just to remind you, RFM contributed 6 percentage points, but I would also like to remind you that, at the same time, we were constrained by product availability. And you can see the volume development by our key industries in the box on the right-hand side in the order of kilo tons sold. So first of all, wood and furniture came in at minus 4%. We saw solid demand. However, we were constrained in terms of TDI and polyols availability. Construction, we -- came in at plus 1%. Again, solid demand, however, constrained and MDI and TDI polycarbonate availability; and number three, the auto and transportation industry, plus 10%, so very strong year-on-year growth globally. And I would like to remind you that the global auto industry grew by only 2% year-on-year. So we outgrew the industry by 8 percentage points. And that for me is another indication that we are delivering in the high-growth part of that industry, specifically electric vehicles. Last but not least, electro came in at plus 9% with growth in all regions. And I would like to remind you that all industries are excluding RFM, and the RFM business is fully consolidated in [indiscernible]. And this is why you find the plus 33% in the box on the right-hand side of the page. So with that, let's turn to Page 9 of the presentation, where you have the sales bridge. You can see full year sales increased by 48.5%, pushed by 35% higher prices. That is the EUR 3.7 billion that you see in the bridge, and it's just another proof of point that Covestro successfully passed through the unprecedented inflation of raw material prices to our customers. The net volume effect in sales, and that excludes RFM, was 6.5% year-on-year, mainly driven by Solutions & Specialties as this segment compares itself to a relatively weak prior year. And the volume growth, especially in Performance Materials, was limited by constrained product availability, as I mentioned earlier. FX is only a small negative number with minus 0.8%, mainly driven by the weak U.S. dollar. And I would like to draw your attention to the portfolio bucket, which is the EUR 863 million. That is essentially the entire sales of RFM, which has been consolidated as of April 1, and has an 8.1% effect for the full year, if you put it to the Covestro numbers. So with that, let us turn to the EBITDA bridge on Page 10. You can see that the full year EBITDA doubled compared to prior year, driven by the highly positive pricing delta, and that is the EUR 1.866 million -- EUR 1.866 billion, excuse me, and the vast majority of that was contributed by all key product groups within Performance Materials. However, also the volume effect in EBITDA contributed positively with an attractive volume leverage of 49%, and FX was virtually neutral on a year-on-year basis. So I would just like to comment on the other items bucket, which includes essentially three main effects. First of all, there is a negative EUR 443 million in there, and that is the impact from the higher bonus provisions for variable compensations. Secondly, there's a negative EUR 60 million onetime effect, which is related to the acquired RFM business, and that compares to a negative EUR 33 million in 2020. And number three, there is a negative EUR 39 million onetime effect included in that bucket, which is related to the LEAP transformation program, and we had no such effect in 2020. So with that, let us go to Page 11, which shows the free operating cash flow. And as Markus said earlier, we generated a free operating cash flow of EUR 1.4 billion, which is a strong number, well above previous year, and we achieved this despite the significant higher working capital. You can see in the bullet on the right-hand side that in Q4, the free operating cash flow was somewhat below previous year as the positive contributions from working capital and the higher earnings were eaten up by significantly higher income taxes paid and also higher CapEx. And talking about working capital, that ratio, in terms of working capital to sales ratio, stood at 18.6%. So it's just slightly above the 18.2%, which we had a year earlier. And again, that reflects higher feedstock and also product prices, which push up the euro values, especially of our inventories. You can also see in the table below the graph that we spent EUR 764 million on CapEx, so slightly below the budget number of EUR 800 million. That is due to two effects. One is, some projects were shifted into 2022, but also some projects came in at a lower spend than we had expected. So that is a positive news in terms of CapEx. And you can also see that year-on-year, we spent a much higher number on income tax paid, but that reflects our cash tax rate of 25%, absolutely within the guidance range, and also below the P&L tax rate of 25.9%. My last comment is the last item in the little table, the other effect. That, of course, reflects the higher provisions for variable compensation because the cash out for the bonus will only occur in the second quarter of 2022. So with that, let us turn to the balance sheet on Page 12. I can truly make a statement that our balance sheet remains strong. Our pension provisions decreased by EUR 924 million. That is due partly to the higher discount rate, specifically in Germany, but the other reason is that we transferred EUR 500 million of funds in one of our pension trusts, and the effect, you can see it essentially shown twice in the bridge, one time in the -- on the financial debt side and the other time on the pension provision reduction side. In terms of the balance sheet ratios, you can see that ratios are strong. So the ratio of total net debt-to-EBITDA stands at 0.8x at the year-end of 2021 versus 1.7x the year before. And essentially, you can also see that after EUR 1.5 billion cash outflow for RFM and the EUR 0.5 billion euro bonds repayment and also the EUR 0.5 billion fund transfer, we still have EUR 1.1 billion available in cash, cash equivalents and also current financial assets. So with that, I would like to hand it back to Markus for the segment review.

Yes. Thanks a lot, Thomas. And please allow me to begin with the full year review of our Performance Materials segment. The segment delivered a highly positive pricing delta in 2021. We were able to pass through increasingly higher feedstock as well as energy prices, and on top, expanded our margin. First and foremost, this performance was based on solid underlying demand. However, simultaneously, our growth potential was limited by a continued constrained product availability. Looking forward into full year 2022, we expect our sales volumes to grow strongly based on improving product availability. At the same time, we expect the segment EBITDA to significantly decrease year-on-year due to intensified competition mainly in polycarbonates, and I will talk a bit more about polycarbonates in a short moment. Positively, we anticipate that the supply-demand balance for our product groups MDI and TDI will further improve as announced supply additions are below expected demand growth. Let's turn to the next page. So turning to Solutions & Specialties. We defended absolute EBITDA and managed earnings to remain virtually unchanged year-on-year despite unprecedented inflation. Positively, the segment recorded strong sales volume growth of 12% year-on-year, reflecting a rebound in demand from a pandemic impacted prior year. The acquired RFM business consolidated since April 2021 also contributed positively. EBITDA margin, however, was down year-on-year by nearly 5 percentage points. This is due to mainly three reasons: significantly higher price-driven sales comparing to unchanged absolute EBITDA, resulting in a mathematically lower margin; earnings significantly burdened by higher feedstock prices; and longer-term sales contracts yet presented to fully pass-through prices, reflecting the typical nature of a specialty business. Looking forward into 2022, we expect sales volumes to continue strong growth versus '21 and we also expect segment EBITDA to significantly increase year-on-year. How we anticipate to reach our segment margin target of 17% is what I will present to you on the next page. I just presented the unsatisfactory 2021 margin of 9.9% as a reference point to target a segment EBITDA margin of 17% in 2024. In order to reach 17%, our EBITDA margin will be driven by the four key elements that are shown in light orange on the chart. Firstly, continued execution of our lead transformation and cost containment program as well as continued strong growth are expected to further dilute fixed costs. Secondly, we are going to further progress with the RFM integration and realize the anticipated synergies. Thirdly, we will focus on value-based pricing, especially for newly launched innovative products. Lastly, the margin target is based on mid-cycle intersegment charges by Performance Materials, therefore, are anticipated to be lower than in 2021. In 2022, as already mentioned, we expect a significant increase in EBITDA. On the following two charts, I'm going to share some further details on our targeted path of margin improvement, beginning with RFM. So let's turn to the next page. Regarding the integration of the acquired RFM business is all planned synergies are fully confirmed and realization is ahead of plan. As a recap, at the time of acquisition, we identified a total EBITDA contribution from synergies of EUR 120 million or about 12% of RFM's full year sales, thereof, EUR 80 million synergies from lower cost and EUR 40 million from additional revenues. We could pull forward the realization of synergies and deliver EUR 26 million in 2021 compared to originally expected EUR 10 million in the same year. We achieve this above plan realization at EUR 6 million lower costs compared to earlier planning, and we now expect total implementation cost of EUR 115 million, EUR 40 million less than we originally expected. The main reason is lower-than-expected severance needs. In a nutshell, the integration of the acquired RFM business about 1.5 years after the announcement is a success, and we are satisfied with the delivered results. Let's now turn pages to polycarbonate. As a second deep dive, let me elaborate a little bit more on our polycarbonate strategy. Overall, we continue the strategic portfolio shift from standard polycarbonate to different polycarbonates. I, myself, accelerated this shift from 2013 onwards when I headed the former business unit, polycarbonate. The graph on the left side shows the development of the volume split. While the gray bars continuously shrink, depicting the standard polycarbonates business within our Performance Materials segment, the light pink bars continuously rise depicting a differentiated polycarbonate business. Refining standard polycarbonate resins produced at our fully-integrated large-scale [indiscernible] driven plants within Performance Materials into differentiated rates, that is the job of the business entity engineering plastics within the Solutions & Specialties segment. In order to allow this shift, we are continuously investing in downstream capacity, we refer to as polycarbonate compounding, between 2020 and 2025. We will add 230,000 tons of additional compounding capacity. Importantly to note is this addition is neutral to the overall industry supply/demand balance, yet it exclusively allows Covestro to cater even more for the attractive differentiated customer segments of this industry. This portfolio shift is supported by the expected 7% industry demand CAGR for engineering plastics across several customer industries. A detailed list of growth drivers is shown on the right side of this chart. With that, allow me to turn to the next page. Looking ahead into 2022, we expect solid demand recovery to continue globally. This applies to the products we just talked about in more detail, but also to our entire product portfolio. The figures on this chart show full year demand estimates for our key industries and respective important sub industries. The expected 2022 demand growth in global automotive and global construction shows growth estimates above the full year 2021 values. The recovery in those industries is expected to continue after the strong demand hit by the coronavirus pandemic in 2020. The expected 2022 demand growth in global furniture and global electro, in contrast, show values below full year 2021, but on continued attractive levels. Key reason is the strong demand recoveries seen in these industries already in last year. Now I would like to hand over to Thomas.

Yes. Thank you. I'm on Page 19 of the presentation where we talk about our fixed cost development. So remember, last year, we committed to keep our fixed costs unchanged until 2023 relative to the 2020 levels. And it's fair to say that we qualified this target as being challenging from the beginning. Now if you look at the chart, you can see that in financial year 2021, the cost development was in line with the expectation in our guidance, so we saw a rebound from the 2020, which at the time was marked by the lockdown and short-term cost savings. And the rebound was absolutely in line with our guidance and expectations, as I said. So also in 2022 and 2023, we do continue to execute cost reductions of between EUR 50 million and EUR 100 million per year through the LEAP program, and I can tell you that all the costs that we can control are on track. However, what we also see now, of course, is that there are counter effects resulting from high inflation, for example, logistics and labor costs and also the potential projects that we will decide like the MDI project and, last but not least, also the new climate-related investments that are necessary in order to reduce our greenhouse gas emissions, as Markus just elaborated on. So as the graph indicates, with that, we will have to face some counter effects in the years 2022 and 2023, but we remain fully committed to tightly manage our fixed costs. And just one example of that counter effects you find on Page 20 because this, I think, just shows you this unprecedented challenge with the global energy costs more than doubling within 2 years. So as you can see, the global energy costs are significantly increasing in 2021, mainly driven by the European energy prices. And you can see this in the blue columns in the upper-part of the chart. So global energy costs for Covestro in 2021 were EUR 1 billion, and thereof, EUR 0.6 billion were driven by electricity and EUR 0.4 billion were driven by natural gas. And if you break that down on a region-by-region basis, I can tell you that 70% of that is in the EU, 20% is in Asia and 10% is in the United States. So the lower-part of the chart depicts by some key countries with specific price development for electricity and natural gas. And you can see, first of all, the significant increases, but also the regional differences. So that, based on our actual breakdown, our global energy bill in 2022 is expected to be at EUR 1.5 billion. And again, you see this in the light blue bar on the upper-half of the chart. So if we put it all together and you go to Page 21, we are expecting an EBITDA in 2022, again, above the mid-cycle earnings level. The mark-to-market estimate stands at about EUR 3.3 billion based on the January data, and that is above the upper-end of our EBITDA guidance corridor. And that EBITDA guidance is EUR 2.5 billion to EUR 3 billion, reflecting expectations of an increase in competitive pressure during the course of 2022. I would also like to say that the mid-cycle EBITDA level, we now see it at EUR 2.5 billion after a step-up compared to 2021, which is attributable to the RFM acquisition, and the mid-cycle EBITDA should increase to EUR 2.8 billion until 2024, driven by the business growth and, of course, also the realization of the RFM synergies. So what I would also say is that based on the industry supply and demand forecast that we see for the next years, the EBITDA is expected to remain above the mid-cycle levels for the next years. And with that, I would like to come to the concrete outlook for 2022 on Page 22. And as you can see, it contains two new KPIs. So first of all, EBITDA is replacing core volume growth, and that reflects our ongoing efforts away from volume growth towards value-driven growth. And secondly, there is an ESG KPI measuring the greenhouse gas emission measured in metric million tons for absolute CO2 equivalents in Scope 1 and 2. The free operating cash flow outlook is in line with our EBITDA outlook, as I explained a minute ago, and the number stands at EUR 1 billion to EUR 1.5 billion. And in terms of ROCE above WACC, the outlook is between -- the outlook is that we have a WACC of 7 percentage points in 2022 after 6.6% in 2021, and we expect an overachievement for ROCE over WACC between 5 and 9 percentage points. Greenhouse gas emissions, we expect between 5.6 million and 6.1 million metric tons as the increase is mainly attributable: firstly, to the composition of the externally procured power, which is less favorable for us; and secondly, to the growth of the business. And last but not least, I would like to mention our guidance for the EBITDA in Q1. So we're expecting between EUR 750 million and EUR 850 million. And even with the lower end of this guidance range, we would be above the previous year level of EUR 743 million. So let's turn to the next page, which shows our CapEx development, so unchanged and with the highest priority is the investment into profitable organic growth because we do think that we are delivering attractive returns based on our industry and cost leadership. So for 2022, we have an expected total planned CapEx of EUR 1 billion, and that includes EUR 0.6 billion expansion CapEx and EUR 400 million of maintenance CapEx. And this planned year-on-year step-up, especially in expansion CapEx, includes our single largest CapEx project, which is currently our aniline expansion in Antwerp in Belgium. And of course, we will continue to maintain an adequate level of maintenance CapEx to secure safe and reliable and efficient operations. So with that, let me come to the topic of the dividend on Page 24. We're proposing EUR 3.40 per share. That is the highest dividend in the Covestro history. We had communicated our new payout corridor between 35% and 55%. And we said that in strong years, we will probably be in the lower-half of the corridor, and in weaker years, in the upper-half of the corridor. And as we consider 2021 to be a strong but not a peak year, the payout ratio of 41% is pretty much in the middle of the lower-half, so that explains the context. And of course, the upcoming AGM on April 21 should then verify the proposal that we're making. So on the next page, you can see the details on the share buyback program, which we announced yesterday. We announced to buy back shares of EUR 500 million over the next 2 years, and we do see a share buyback as an additional option to create value for our shareholders because it optimizes the capital structure for the group, and of course, it increases the earnings and the dividend per share. And with this decision, I would like to reiterate and explain also, and you can see this on the right-hand side in the box, our priorities in terms of capital allocation. So what is unchanged, our #1 priority is profitable growth capital expenditures, and I was talking about the CapEx spending for next year on one of the previous pages. Secondly, we do want to maintain an attractive dividend payout, and I think the proposal that we're making for 2021 is underlying that. However, what we currently see is that large acquisitions currently for us have a lower priority. This is also driven by the fact that we see that the multiples that are currently paid in the market make it very difficult for us to find value-creating M&A activities for us, at least on a larger scale, and you know that we are very much value-driven and selective here. And therefore, as I said, the priority for large acquisitions currently is lower. And that then leads me to a share buyback because we do think that currently, the investment into our own shares is a very attractive investment opportunity that we have. And just to conclude it, of course, we do remain committed to a solid investment-grade rating. And with that, I would like to hand it back to Markus.

Yes. Thanks a lot, Thomas. And before we now enter them into the Q&A session, please allow me to quickly summarize. Our EBITDA increase in full year 2021 was driven by positive pricing delta, and we were able of passing through the unprecedented raw material inflation. Secondly, we plan to -- we suggest to the Annual General Meeting a record dividend of EUR 3.40 per share for full year 2021, with a dividend yield of 6.3% based on year-end share price. Thomas just alluded to a share buyback program of EUR 0.5 billion that has been launched using the opportunity to create value for our shareholders. The full year 2022 earnings outlook is, again, above e mid-cycle levels based on solid sales growth and a strong start into the first quarter of 2022. And we also announced our climate neutrality in 2035 ambitions after, as an important intermediate milestone, a 60% reduction of greenhouse gas emissions referring to Scope 1 and Scope 2 in 2030. So all-in, looking ahead means expecting profitable growth into a climate neutral future. Thanks a lot. And now we are looking very much forward to your questions. And I'm handing back to the operator. Thanks a lot.

[Operator Instructions] Okay. And the first question for today comes from Mr. Christian Faitz, who's calling from Kepler Cheuvreux.

Two questions, if I may. First one, I know your sales exposure into Russia and the Ukraine is rather limited. Yet, looking at some of your major customer sales exposures in these regions, I am thinking of IKEA and [indiscernible] or Henkel and Adhesives. Would you see those sales into these major customers being impacted? And can you give us an idea of how impacted those would be? And then second question, your -- is it still your plan to come to a decision where to build the new MDI plant by the middle of this year? .

Yes. Chris, great to hear from you. And let me answer the following way. For sure, we're looking into individual customers that have exposure to Russia. And for sure, we're also looking, let's say, into specific industries that have exposure into Russia. But currently, it is way too early to really speculate or start speculating about how that, from a macro perspective and also from an overall industry perspective, would impact our own sales because there are so many influencing factors that is really currently difficult to predict. One thing that I would like to make sure is that we understand, we have numerous assumptions, from a macro perspective, but also numerous assumptions from individual industry perspectives. And so, if some of those aspects are maybe not exactly in the order of magnitude as we currently expect it today, we do see very limited to maybe even no impact on our, for example, current guidance for the year. For sure, if there would be massive influence, for example, global GDP would go massively down, maybe even half or even go below, that would have an impact, but it is way too early to say that. And that's why we're also factoring in what we currently can see, and that is also what you see reflected in the current guidance. So I hope that answers the first part of your questions. And in that context, you also have to see that Russia is only representing 2% of global GDP. Therefore, a spillover, let's say, effect should be at least, from today's perspective, limited. I know that there's different scenarios out there, but we're closely monitoring the situation. And -- but today, honestly speaking, this is the position we have, and this is also what we today can say to this. On MDI, we have always been clear that we will come to a decision end of third quarter, beginning of fourth quarter. So that means after the summer holiday, you will hear more about that.

The next question comes from Mubasher Chaudhry, who is calling from Citi.

First on the guidance. Can you please talk about some of the moving parts, which came from the bottom end of the guidance of EUR 2.5 billion to EUR 3 billion range? Just some thoughts around there? And then second one on industry utilizations. Can you provide some thoughts on the MDI and TDI utilizations in 2021 and where you see them going towards 2022, please?

This is Thomas. The sound quality was a little bit poor, so I'm trying to answer the first question. If it's not spot on, please let me know, and then I will try to repeat it. So what I understood your question, what is the -- what would bring to the bottom end and the top end of the guidance? So I think there's two major factors. One is you should, of course, know that we are assuming a growth factor for 2022. So a mid- to high single-digit number growth. That is factoring in the assumption that we will have lower unplanned shutdowns than we had in 2021, and that we will simply have a higher uptime for our own plans. And secondly, on the negative side, it is assuming essentially a negative pricing delta of EUR 1 billion because we do see that there is, especially in Asia, a new capacity for polycarbonates coming to the market and we're already now seeing some pricing pressure on for polycarbonates in that region. So now how exactly that will play out is, of course, the big question. But therefore, the lower end of the guidance simply assumes that we will again have some unplanned shutdowns and therefore, not deliver the full growth potential, so rather in the mid-single-digit range. And the other factor -- and every percentage point of growth is some EUR 80 million of EBITDA, just to give you the order of magnitude. And the other, of course, is the pricing delta. We do think that EUR 1 billion is a reasonable number. You can see that the pricing -- the mark-to-market today stands at EUR 3.3 billion. So that also shows you the order of magnitude that we have factored in. But of course, things can move quickly. However, I would also like to be a little bit more [indiscernible]. We currently do see that Q1 is on a very good track. And the fact that we're guiding between a EUR 750 million to EUR 850 million, so above previous year, is maybe a proof point to that. So I think those are the factors, the swing factors between the lower and the upper end of the guidance for EBITDA.

Yes. And thanks, Thomas. Also here, if you would like to have a little more flavor, let's say, on the individual product groups, MDI, TDI polycarbonates as well as our standard polyols. Let's take a look at MDI first. So we actually assume that based on nameplate capacity last year, we had an industry utilization of around 90% for the full year. And we expect, given the continued demand but also the continued, let's say, supply additions that we see that we should move above 90% in full year 2022. The maybe well-known [indiscernible] ramp-up last year and early 2021 expansion should be more or less already been absorbed by the market. And at the same time, I believe that we are currently in a situation where things can turn north and south. That means, we're in a situation where we have a balanced MDI market. But I would lean currently more towards, let's say, a market that would change to be a little bit undersupplied if there is not, let's say, major disruptions happening in one or the other direction. On TDI margins, it's slightly a different story because nameplate capacity, we are operating at rates in full year 2021 at around 73%. That would indicate that there would have been little pricing power, but we have seen actually opposite in the overall market. And also given that the available capacity based on planned or unplanned shutdowns is actually much lower than the nameplate capacity, I also expect that overall, structurally, the situation improves, but we also may benefit a little bit, let's say, from this current, let's say, lack of availability of some TDI plants around the world. So long story short, if you look at the overall mid-term development, the announcement until 2026, the supply growth and on the other hand, demand growth in TDI, we expect that we will see a further improving industrialization rate. And especially in 2022 and 2023, the announced capacity additions would only sum up to 1% by the year -- each year. So that also gives you a flavor on TDI. Then the polyols and the really relevant markets for Covestro, which is Europe and North America, you could see that the, let's say, industry margin levels are assumed to be extraordinarily high. That means, more than twice as high as historic average. And the reason for that, let's say, margin peak was that we had several production limitations at the time of larger producers are not going down their entire list now. We're seeing a recovery of the supply in Europe and North America, and that would indicate further margin normalization during that year. That might be, on the other hand, potentially cushioned by planned turnarounds in the second quarter by, for example, Dow and Shell in Europe, but also Lyondell and Dow in North America. So overall, we have seen that in China, already declined -- some margin decline happened to normal levels and with the rest of Asia Pacific to follow. And it remains to be seen how that spillover effect will look like for Europe and the U.S. because currently, that is limited, particularly by the increased -- significantly increased supply chain costs that we talked already about in a different context and reliability of the assets. So last point, and Thomas has alluded to that already quite a bit on the polycarbonates. And here, I'm particularly referring to the commodity part in our Performance Materials segment. So the standard polycarbonate types, we assume that we will see a further decline of the nameplate capacity utilization from 69% last year to around 65% in the full year 2022. And we also see that there is additional capacity until 2026 coming in. So we have a supply growth of 5% to 6%, which is above average annual demand growth of 4%. That would also then indicate that it would lead to a further decline in industrialization rates. So long story short, supply addition is expected to peak this year and so on and so forth. Long-term supply growth is expected to further decline. Nonetheless, we are in a, let's say, rather challenging situation with regard to standard polycarbonates. However, and I think we have made that very clear, we are moving away from the commodity and standard polycarbonates for Covestro. The volume share of standard polycarbonates now in the segment Performance Materials versus the total polycarbonates declined from 65% in 2010 to only 32% in 2020. And we're expecting 27 -- sorry, we saw 27% in 2021. And we expect that share to further decline in 2025 to 20%. And that shows you very clearly that our exposure to that segment is decreasing by the day and our exposure to the high-value segment is, let's say, increasing by the day. And that should give you also some comfort about how we are cushioning this. Nonetheless, Thomas has alluded to that, what that overall could mean for all 4 product routes in terms of, let's say, our pricing effect in 2022. Was a long answer, however, I think it's important to get the full picture so that you have a better flavor how to look at our guidance and also the year ahead.

The next question comes from Geoff Haire, who's calling from UBS.

I have two related to energy. So if I look at Slide 20, if I'm reading it right, I think you're saying that the EUR 500 million increase in the energy bill in 2020. But if I look on a mark-to-market basis at the graphs information, we can see it would imply that this could be significantly higher than EUR 500 million. So is the offset with hedging or long-term energy pricing contracts that you have, I wonder if you could discuss that? And then also connected with this, do you expect energy costs to continue to be high relative to where we were last year in 2023 or do you assume some normalization?

Geoff, this is Thomas. Your last question certainly is the $100 million question. So let me start with the first one. Exactly, so the numbers in the light blue columns that you see is, yes, we had EUR 0.6 billion energy costs in 2020, EUR 1 billion last year. And we were expecting EUR 1.5 billion for 2022 in our plans. If you mark that to market with yesterday's levels, you're right, it will be slightly higher, roughly EUR 1.7 billion. But again, I would say, in the overall context, we have shown that we were able to pass through energy cost rises quite successfully in 2021. And therefore, this daily mark-to-market, which really has quite an amplitude over the last number of days, would not lead us to change our guidance. But you're right. The EUR 1.5 billion would be EUR 1.7 billion as of yesterday. What are we expecting for 2023? It's really more the volatility, which is a challenge and not the absolute level because you've seen this specifically in our Solutions & Specialties segment where we are somewhat slow to adjust contracts to price changes simply because they are longer running. However, if it is a longer plateau on a high level, our view is that also the Solutions & Specialties segment should be able to pass this on to the customers. And therefore, as I said, we're not so much concerned with the absolute level, but more with the volatility in the energy prices.

If I could just ask a quick follow-up? Within your sort of multiyear contracts that you have for MDI or polycarbonates, do you have energy pass-through clauses in those?

Essentially, we do not have longer-term contracts for MDI and TDI. So those are 1-month rolling contracts, if you like. I mean, there might be a frame contract with minimum and maximum quantities, but the prices are essentially adjusted on a monthly level. And therefore, there is no automatism. So there is not an automatic price adjustment across, but there is a monthly renegotiation of the prices which is the standard in the industry.

The next question comes from Thomas Swoboda, who's calling from Societe Generale.

I have two questions left, please. Firstly, on CapEx, can you give us a sneak preview on the next couple of years in the light of the investment in sustainability and the and the MDI plant wherever it will be built. So when do you see the peak? What is the peak CapEx roughly, whatever you can say. And the second question is on your emission targets, an important driver is the renewable energy. My question is, how much of this renewable energy you have in your planning, you are going to acquire yourself, meaning how much is under your control? And how much do you relay that basically the governments will provide enough green energy so you can reach your targets? .

This is Thomas. Let me take the first question on CapEx. And of course, I mean, the sneak preview is somewhat dependent on the decision that we take after the summer break, as Markus said. But let's assume just for a minute that we were to decide to build MDI irrespective of which region it is, then I think you should expect another step-up in 2023 of between EUR 100 million and EUR 200 million, and you should expect the peak to occur roughly in 2025, a with up to EUR 1.5 billion for [indiscernible]. You also put this in context with our investments for carbon neutrality. We said that we would spend EUR 1 billion over the next 10 years. I think that just shows you the absolute CapEx number that we need to achieve that target is not the big swing factor here, simply because we have not stranded assets. We can fully operate our assets as they are with drop-in solutions, so renewable input factors. We have to switch the energy to green energy supply. We have to switch them to green steam, but we don't have to invest big ticket items for completely new installations. Because as I said, the ones that we have to work with drop in solutions and are not stranded assets. And I think that just puts into context that the ticket for our carbon neutrality path is not the big swing factor in our CapEx planning.

Yes. And Thomas, if I may say so, this is Markus speaking. That plan has, as Thomas alluded, three big ticket items, not in terms of cost, but where we want to focus on in terms of levers, how to make our Scope 1 and Scope 2 emissions climate neutral by 2035. Part of it is for sure that we have expectations on how the overall electricity let's say, production will look like in a specific country. However, we're not entirely or even to a large extent, relying on that. And proof of that is, for example, how we have so far managed that. We actually closed a big deal at that time, the largest ever made, let's say, private deal between two companies on renewable energy with where we expect about 10% of the electric demand of our production facilities by 2025 being, let's say, supported by a wind farm of Ørsted in the North Sea. We have actually done a similar deal with the company, Engie, for our production plant in Antwerp covering already since last year, 1st of April, 45% of the electrical energy demand. And we have now actually sun-powered electricity that covers around 10% of the electrical demand of our aging size. So you see that regardless of what the state is doing and how the state grid energy mix looks like, we are also pursuing own options to buy our own electricity to make sure that we achieve that target. And we will, for sure, adopt this, depending on how, let's say, the overall development will look like. So that flexibility is built in. For sure, at one point in time, you have to jump and you have to make a decision. For example, the Ørsted contract was actually signed in 2019. It takes 6 years to build the wind park. And therefore, at one point in time, we have to say no matter what the state does, we secure our own energy. But on the other hand, that is not different from what we are currently doing, let's say, with fossil-based energy. Also here, we have own supply agreements with individual companies. And also here, we already had the chance to say how much green electricity we want to have and so on and so forth. So long story short, that is not carved in stone, and it is not relying, let's say, on individual governmental decisions but rather a flexible approach that we have within the 3 major levers that we have described in the presentation.

The next question comes from Matthew Yates, calling from Bank of America.