Earnings call transcript: Covestro Q3 2025 reports 12% sales decline

Covestro AG’s Q3 2025 earnings call revealed a 12% decline in sales to 3.2 billion euros, alongside a 15.7% drop in EBITDA to 242 million euros. Despite these challenges, the company maintained a positive free operating cash flow of 111 million euros. The stock remained relatively stable, reflecting a minor 0.17% increase, with its last close value at 60.4 euros.

Key Takeaways

• Sales fell by 12% due to negative pricing and foreign exchange impacts.
• EBITDA decreased 15.7%, influenced by operational disruptions.
• Covestro acquired new production facilities to enhance growth.
• The company narrowed its full-year EBITDA guidance to 700-800 million euros.
• The Dormagen incident had a significant financial impact, partially mitigated by insurance.

Company Performance

Covestro faced a challenging Q3 2025 with a 12% decline in sales, driven primarily by negative pricing impacts and foreign exchange headwinds. The EBITDA also saw a considerable drop of 15.7%, reflecting operational setbacks, including the Dormagen fire incident. Despite these setbacks, the company managed to maintain a positive free operating cash flow.

Financial Highlights

• Revenue: 3.2 billion euros, down 12% year-over-year
• EBITDA: 242 million euros, down 15.7% year-over-year
• Free operating cash flow: 111 million euros, positive
• Net debt to EBITDA ratio: 3.8x

Outlook & Guidance

Covestro has narrowed its full-year EBITDA guidance to a range of 700-800 million euros, acknowledging ongoing challenging market conditions. The company expects its free operating cash flow to range between -400 million and -200 million euros. Strategic initiatives, such as the acquisition of HDI derivative production facilities, are anticipated to contribute to future growth.

Executive Commentary

Christian Weyer, CFO, commented on the difficult market environment, stating, "Global market conditions remained challenging throughout Q3." An unnamed executive expressed optimism regarding insurance coverage for the Dormagen incident, saying, "We are very strongly expecting that the coverage is there above $100 million."

Risks and Challenges

• Operational disruptions: The Dormagen fire incident significantly impacted production, with financial repercussions expected to last into 2026.
• Market conditions: Global GDP forecasts have been reduced, potentially impacting demand across key sectors.
• Exchange rate volatility: Foreign exchange headwinds contributed to the decline in sales, posing an ongoing risk.
• Cost pressures: Restructuring costs and the need for cost-saving measures highlight financial pressures.

Covestro’s strategic focus on expanding its production capabilities and navigating operational challenges will be crucial as it seeks to stabilize its financial performance in the coming quarters.

Full transcript - Covestro AG (1COV) Q3 2025:

Ronald, Moderator/Host, Covestro: Welcome to the Covestro earnings call on the third quarter results. The company is represented by Christian Weyer, our 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 now like to turn the conference over to Christian.

Christian Weyer, CFO, Covestro: Thank you Ronald and good afternoon everybody. I would like to start my presentation with some insights into a recent acquisition. Following the successful completion of the purchase of Pontacol in Q3 2025, Covestro has signed another value accretive transaction which is expected to close in Q1 2026 depending on regulatory approvals. This deal will also benefit our Solutions and Specialty segment with the acquisition of two HDI derivative production facilities from Vencorex in Rayong, Thailand and Freeport, U.S. This strategic move enhances Covestro’s global aliphatics production footprint in attractive growth regions, particularly the U.S. and Asia Pacific. Aliphatic isocyanates are essential raw materials for light, stable coatings, paints, and adhesives, primarily used in the mobility sector but also in construction and furniture applications. The acquisition strengthens Covestro’s position in the coatings and adhesives market, expanding its capacity to meet customer demand across key regions.

The acquisition delivers financial value through a low double-digit million euro EBITDA addition and synergies of up to high double-digit euro million amounts within the next five years. These synergies stem from substantial utilization rate improvements across our asset base combined with the implementation of Covestro’s advanced Elephantics technology platform. This deal demonstrates our disciplined capital allocation approach, targeting high return opportunities that enhance our specialty chemicals portfolio and drive sustainable value creation. Let us now turn to the key financials of the last quarter, which are clearly impacted by the Dormagen fire incident and the ongoing challenging business environment. On the sales volume side, we declined by 1.5%, also leading to lower sales of €3.2 billion that are also due to negative pricing and FX effects.

We achieved an EBITDA of €242 million, which is towards the upper end of our guidance range and mainly due to successfully delivering on cost ambitions. The free operating cash flow came in at a positive €111 million as usual, and with just two months to go we are narrowing our FY guidance. On page number four, we are looking at the business and the volume development in the third quarter of 2025. Year over year, global sales volumes slightly declined, primarily driven by the external fire incident in Dormagen and partly continued macroeconomic headwinds. Volume growth in APEC and North America provided for a partial offset but could not fully compensate for the European decline. Without the Dormagen incident, the European sales volume decline would be limited to -2% and global sales volume would have turned positive.

Looking across the different industries, only auto showed a low single digit increase mainly due to the year over year low baseline. After a strong decline in Q3 2024, construction, electro and furniture wood all showed a low single digit to low teens % negative development, reflecting persistent economic weakness across key markets. Regional dynamics varied significantly. In EMLA, the performance remained challenging with automotive volumes flat and significant decline in electronic construction and furniture wood. This reflects both the operational impact from the Dormagen incident and broader regional economic softness. In North America we’ve achieved slight volume growth supported by strong furniture wood demand. Electronics and automotive remained flat while construction declined significantly due to elevated interest rates and inflationary pressures and also trade policy uncertainty. In APEC, we have delivered slight volume increases driven by robust construction and automotive demand.

However, export oriented electronics and furniture wood segments contracted significantly, reflecting the impact of U.S. Tariff measures on trade flows. We are now on page five of the presentation and are coming to the year over year sales bridge. Sales for Q3 2025 declined by 12% to €3.2 billion. While all contributing factors were negative, the decrease was mainly caused by negative pricing and adverse FX impacts. Pricing pressure contributed 7% to the sales decline, reflecting continued market softness and competitive dynamics across our portfolio. Foreign exchange headwinds accounted for 3.5% of the decline, predominantly due to weakness in the U.S. Dollar, Chinese renminbi and Indian Rupee against the euro. As mentioned earlier, lower volumes contributed -1.5% to the sales decline. With that, let’s turn to the next page where we are showing the Q3 2025 EBITDA bridge. Year over year, EBITDA decreased by 15.7% to €242 million.

The performance towards the upper end of our guidance range of €150 million to €215 million was driven by delivering on our self help measures in the form of short term contingency savings as well as long term structural savings. The persistent unfavorable industry supply demand balance continued to pressure margins, with selling prices declining more rapidly than raw material costs. This negative pricing delta impacted EBITDA by €102 million. In addition, lower volumes and adverse foreign exchange rates added to the headwinds. Other items provided for a significant positive contribution, primarily due to the mentioned cost savings. Restructuring costs related to strong burdened EBITDA with €26 million in Q3 2025 and €170 million during the first nine months of 2025. On slide 7, we break down the details for the different segments, starting with Solutions and Specialties in SNS.

The combination of the year over year price decline and negative FX effects led to a sales decline of 7.7%. Volumes remained flat quarter over quarter. Sales declined globally, and volume growth was only recorded in APEC, while EMLA and North America declined. Prices were stable in North America and APEC, while a decline was observed in EMLA. The EBITDA in Q3 2025 declined slightly year over year, as the negative pricing delta and FX effects could not be fully offset by positive volume development and others. The quarter over quarter EBITDA increase was caused by positive pricing delta and cost savings, while volumes and FX diluted the increase. The EBITDA margin increased to 12%. After Solutions and Specialties, we now turn to the Performance Materials segment. Sales declined 16.2% year over year, driven by negative contributions of 9.8% from pricing, 3.3% from FX, and 3.1% from volumes.

The volume reduction was primarily attributable to production disruptions in TDI and Basic Chemicals stemming from the Dormagen incident. Quarter over quarter, sales declined in EMLA and North America, while APEC was flat. The Q3 2025 EBITDA of €174 million is higher year over year mainly due to an insurance reimbursement and cost savings, while pricing delta, volume, and FX all contributed negatively. Please note that the segment Performance Materials benefited from a €75 million payment from Covestro International Re, a licensed reinsurance company to self insure property damage and business interruption risks. Therefore, there is an equal negative amount booked in the other reconciliation segment in Q3. We assume that Covestro had a mid double-digit euro million negative operational impact from the incident. We do not expect another insurance booking in Q4.

Therefore, we assume that the operational loss of another mid double-digit euro million amount will burden the EBITDA in the last quarter. The next topic is the free operating cash flow development. As you can see from the graph, the free operating cash flow in 9M 2025 improved to -€370 million, with Q3 free operating cash flow contributing positive €111 million. The free operating cash flow declined after nine months year on year, driven by lower EBITDA and higher CapEx. The usual build-up of working capital during the year was less pronounced compared to last year due to reduced inventories. CapEx after 9M of €556 million was higher year on year due to higher expenditures in our performance materials segment. We maintain our full-year CapEx guidance of €700-800 million for 2025. Income tax payments of €145 million remained consistent with the previous year.

The -€152 million in other effects mainly comprises the bonus payout in Q2. Let’s now look at our balance sheet on page 10. Our total net debt increased by €292 million compared to the end of 2024. The increase was caused by a negative free operating cash flow of -€370 million. The decrease in the net pension liability of €240 million was driven by an increase in pension discount rates, mainly in Germany. This comprises pension provisions of €285 million and a net defined benefit asset of €70 million. Summarizing our net debt situation, the total.

Unnamed Executive, Senior Executive, Covestro: Net debt to EBITDA ratio is at.

Christian Weyer, CFO, Covestro: 3.8x based on our four-quarter rolling EBITDA of €0.8 billion. Covestro remains committed to a solid investment-grade rating, which was confirmed in April by Moody’s, including a stable outlook. That concludes the overview of the Q3 financials, and we are now moving to the forward-looking part. We are continuing with the outlook for Covestro’s core industries on page 11 of the presentation. The global GDP forecast has decreased to 2.5% from February’s 2.8% outlook. This reduced global outlook also affects most of Covestro’s key industries. Growth projections for the automotive industry have been reduced to 1.9% from 2.7%, primarily driven by U.S. tariff policy impacts and weakening demand in Europe and North America. However, the electric vehicle segment continues to demonstrate robust momentum with 25.7% growth expectations.

The growth forecast of the construction industry increased to 0.6%, partly due to stabilization in the Chinese housing market, though ongoing conflicts and macroeconomic uncertainty limit further growth. Residential construction is seeing a further decline to -1.8%. The growth forecast for the furniture industry decreased to 0.2%, which is more than 1 percentage point below earlier expectations. Primarily, this is due to weakened production activity in the APEC and EMLA regions. The growth forecast for the electronics industry is now at 2.9%, down from 5.2%, with persistent uncertainty regarding U.S. trade policy and potential tariffs affecting investments. Household appliances show an improved growth expectation at 3.1%. In line with our usual practice, we are now narrowing our guidance corridor for our KPIs in Q4.

We narrow the EBITDA guidance to now in between €700 million and €800 million, and I will explain on the next page the relevant drivers for that. The free operating cash flow guidance has been adjusted in line with EBITDA and is now expected in between -€400 million and -€200 million. Accordingly, ROCE above WECC is now projected at -9 to -8 percentage points. The greenhouse gas emissions forecast was also narrowed, mainly due to lower volumes after the Dormagen incident, and are now expected between 4.2 to 4.4 million tons. Beyond that, most other financial expectations remain unchanged. Only Covestro sales are now estimated to come out at around €13.0 billion as referenced in our Q2 reporting. This waterfall chart illustrates the sequential factors driving our EBITDA guidance revision from the initial February outlook. Our February guidance established a midpoint of €1.3 billion.

Market headwinds of about €700 million, countered by €300 million in proactive short term cost contingencies to mitigate these pressures, resulted in our July guidance midpoint of €900 million. Global market conditions remained challenging throughout Q3 and I expect it to persist in Q4, characterized by sustained margin pressure and significant oversupply across our core product portfolio. While our transformation program, strong and short term cost contingencies provide partial mitigation, we are accelerating both initiatives to capture earlier benefits. This may require pulling forward restructuring costs of low to mid double digit millions from 2026 into 2025. The effect of the Dormagen incident, which has occurred one day after our revised FY25 outlook, has been part of our Q3 guidance but had not been incorporated in our FY25 outlook.

We are today in a much better position to evaluate the full impact of the outage for FY2025 and estimate a burden of up to €150 million. Meanwhile, we resumed partial production of TDI and expect to continue running at a low operational load during 2026. Production will be gradually increased to full capacity depending on improving chlorine availability. The lacking TDI and basic chemical volumes in combination with the ongoing challenging economic situation leads to the new EBITDA guidance midpoint of €750 million. Before summarizing Q3, I would like to give you an update on the XRG transaction. We have successfully completed all pre-closing merger control approvals following Vietnam’s recent authorization and Indonesia will be addressed post-closing in accordance with local regulatory requirements. Two key approvals remain: the German Foreign Direct Investment Clearance and the European Foreign Subsidies Regulation approval.

Regarding the European FSR, we entered Phase two proceedings in late July and have since maintained constructive dialogue with the EU Commission. We achieved a significant milestone by submitting commitments which have also undergone market testing, a standard procedural step in the FSR process. For German FDI approval, we are in final stages of the clearance process. Both regulatory authorities are fully aware of our December 2 long stop date and remain confident to achieve the closing of the transaction before this deadline. Let me quickly summarize the highlights and the key points for Q3. 2025. We have seen a negative volume development as we were burdened by the Dormagen incident and ongoing challenging economic conditions. We have also seen sales lower at €3.2 billion, mainly caused by lower prices and unfavorable FX.

An EBITDA of €242 million ended up towards the upper end of our guidance range, helped by delivering on our cost savings ambitions, and we have narrowed our FY2025 guidance with an expected EBITDA of €0.7 to €0.8 billion. On the XRG transaction, we are on track for closing before December 2, which is the long stop date. Ronald and myself are happy to answer any questions that remained open. With that, I hand it over to Carsten who will guide us through the Q and A session.

Carsten, Q&A Session Moderator, Covestro: Thank you, Christian. 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 5. You may also post your question into the Q and 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 Feitz from Kepler Chevreux.

Yes, thanks. Good afternoon. Hope you can hear me. Yeah, two questions please. First of all, thanks for the helpful comments on Dormagen and the ramp into 2026. Can you talk or elucidate a bit? How much of that $150 million impact you talk about is actually covered by insurance payments, for example, or will be covered eventually? Also, second question. Your presentation suggests that electric vehicle growth continues to have solid momentum, even more so in 2025 than in 2024. Can you remind us how much Covestro product in terms of value is in an average car with a combustion engine versus a battery electric vehicle? Thanks very much.

Christian Weyer, CFO, Covestro: Yeah, thank you Christian for your questions.

Unnamed Executive, Senior Executive, Covestro: Very happy to comment on both. With respect to Dormagen and the insurance perspective, we are on the one hand very early in that process, really focusing heavily on restoring operations where we are very confident to be able to ramp that up significantly over time. The insurance perspective that you have seen, first of all we have that internal insurance of $75 million and we have basically deductibles of $25 million. We are very strongly expecting that the coverage is there above $100 million effect that would be happening at that point of time. With respect to the EV view, we certainly have a very high ratio of.

Christian Weyer, CFO, Covestro: Products within the EVs.

Unnamed Executive, Senior Executive, Covestro: Especially when we talk the high end luxury EVs, we are talking about a very significant number, which is about two to up to five times higher than.

Christian Weyer, CFO, Covestro: In a normal combustion engine, carbon.

Unnamed Executive, Senior Executive, Covestro: EV is definitely an important market for us and it continues to be still. We see obviously in different regions various strengths and also weaknesses overall. Given that we are very much penetrated also with well performing Chinese players, we see also a good perspective down the road in that market. While auto at the moment certainly is somewhat challenging.

Okay, thanks very much, Christian.

Carsten, Q&A Session Moderator, Covestro: The next question comes from Sebastian Brae from Berenberg. Sebastian, please unmute your microphone.

Hello everybody and thank you for taking my questions. I’d have two please. The first to come back on Dormagen. Is this done in January or 26th? The plant is fixed and everything goes back online or is it not done quite that simple. My second question was on the comments around September mark-to-market pricing for key products implying about €750 million of EBITDA for the year FY2025. I am looking at MDI, a little bit of polycarbonate and some other commodity prices. These all appear to have deteriorated significantly in excess of raw material prices through October. If you were to perform the same analysis again with mark-to-market October prices, is €700 million a more reasonable figure or does it not differ very much? Thank you.

Christian Weyer, CFO, Covestro: Yeah, thank you, Sebastian, for your questions. Happy to address those.

Unnamed Executive, Senior Executive, Covestro: I think with respect to Dormagen, it is basically a multifold analysis that is being done.

Christian Weyer, CFO, Covestro: We already have ramped up parts.

Unnamed Executive, Senior Executive, Covestro: Of the various production entities, I think the key one was to restore relevant parts of the power supply in order to also ramp up trains on various of these sub products. Just answering specifically your question, no, early or in January 26th, this is not all going to be fixed at that point of time. We will be ramping up throughout that year on the key products in order to then basically come back to full TDI availability at that point of time. We’re very confident, together with the external partners that are important here also on that external fire incident, to ramp up reasonably quickly at that point.

Christian Weyer, CFO, Covestro: Of time with respect to the September mark-to-market.

Unnamed Executive, Senior Executive, Covestro: Yes, certainly there is always some fluctuations between the various months, but we very much remain confident with the guidance range that we have narrowed today, this also being the relevant one to look at for the full year outlook, also on the back of current trends that we see in the last couple of weeks.

Could I just follow up on this? We’re comparing Q4 versus Q3. I appreciate there are various bits and pieces of noise around semiconductor supply to the automotive in Europe and so on, but it is notable how much some of these prices have declined. Let’s say October versus year average versus quarter average for Q3. Is this because Wanhua is ramping up further MDI supply? Is it entirely demand led? What is your own view on why prices are seemingly weak in October?

Christian Weyer, CFO, Covestro: As we are not commenting.

Unnamed Executive, Senior Executive, Covestro: On competition, what we basically see is some headwinds also certainly on the products that you quoted. It’s in the end a combination of various factors that we see there. There certainly is a demand development that also from a seasonal perspective is ramping in, providing some pressure. Given that we have seen some additional volumes in this year hitting that demand situation, supply and demand certainly is something to be improving over time, but at the moment that’s the balance that we see.

Christian Weyer, CFO, Covestro: See, and still it’s consistent with our expectations for the full year.

Thank you for taking my questions. If the deal closes, all the best for life under ADNOC.

Thank you very much, Sebastian.

Carsten, Q&A Session Moderator, Covestro: Unless no additional question still occurs, there are no further questions. We have an additional. There are no further questions at this time. Oh, one occurred by Tiffany Zafati. Tiffany, up to you. Tiffany, can you hear us? Tiffany, we can’t hear you yet.

Hi.

No, we can hear you. Hey.

Okay, perfect. Sorry. You said four weeks ago at a conference that you had an agreement with the German government on the edge FDI approval. My question is what are they waiting for?

Unnamed Executive, Senior Executive, Covestro: I think we basically are making good progress on the FDI side. We have never said we have an agreement on the FDI or the approval in Germany, but we continue to be very constructive in conversations there and are very confident by the longstop date, have clearance not only on FDI in.

Christian Weyer, CFO, Covestro: Germany, but also on European Foreign Subsidies Regulation in Europe.

Okay, thank you so much.

Thank you.

Carsten, Q&A Session Moderator, Covestro: There are no further questions. With that, handing back to Ronald.

Ronald, Moderator/Host, Covestro: Thank you all for listening in. I know it’s a busy day today with a lot of other companies reporting, so thanks for your questions. If you have any follow up questions, don’t hesitate to call the IR team. Thanks and goodbye.

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