Business Development of the Covestro Group

Key Data Covestro Group

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4th quarter 20181

 

4th quarter 2019

 

Change

 

20181

 

2019

 

Change

 

 

€ million

 

€ million

 

%

 

€ million

 

€ million

 

%

1

Reference information was not restated, see note 2.1 “Financial reporting standards applied for the first time in the reporting period.”

2

Reference values calculated on the basis of the definition of the core business effective March 31, 2019.

3

As of December 31, 2019, compared with December 31, 2018

Core volume growth2

 

+1.7%

 

+3.8%

 

 

 

+1.5%

 

+2.0%

 

 

Sales

 

3,272

 

2,864

 

–12.5

 

14,616

 

12,412

 

–15.1

Change in sales

 

 

 

 

 

 

 

 

 

 

 

 

Volume

 

+2.9%

 

–0.7%

 

 

 

+2.3%

 

+0.8%

 

 

Price

 

–9.3%

 

–13.3%

 

 

 

+4.5%

 

–17.3%

 

 

Currency

 

+0.3%

 

+1.5%

 

 

 

–3.0%

 

+1.9%

 

 

Portfolio

 

–1.0%

 

0.0%

 

 

 

–0.4%

 

–0.5%

 

 

EBITDA

 

293

 

278

 

–5.1

 

3,200

 

1,604

 

–49.9

Depreciation and amortization

 

153

 

185

 

+20.9

 

620

 

752

 

+21.3

EBIT

 

140

 

93

 

–33.6

 

2,580

 

852

 

–67.0

Financial result

 

(24)

 

(26)

 

+8.3

 

(104)

 

(91)

 

–12.5

Net income

 

79

 

37

 

–53.2

 

1,823

 

552

 

–69.7

Operating cash flows

 

641

 

637

 

–0.6

 

2,376

 

1,383

 

–41.8

Cash outflows for additions to property, plant, equipment and intangible assets

 

278

 

307

 

+10.4

 

707

 

910

 

+28.7

Free operating cash flow

 

363

 

330

 

–9.1

 

1,669

 

473

 

–71.7

Net financial debt3

 

 

 

 

 

 

 

348

 

989

 

>100

ROCE

 

 

 

 

 

 

 

+29.5%

 

+8.4%

 

 

The Group’s core volumes in 2019 as a whole rose by 2.0% over the prior-year period. The Polycarbonates and Polyurethanes segments reported growth rates of 2.7% and 2.3%, respectively. In the Coatings, Adhesives, Specialties segment, core volumes declined by 1.0% over the prior-year period.

In fiscal 2019, Group sales were down by 15.1% year over year to €12,412 million (previous year: €14,616 million). This is largely due to lower selling prices, which reduced sales by 17.3%. The main driver here is greater competitive pressure in all segments. The increase in total volumes sold gave sales a 0.8% boost and the effects of exchange rate developments also had a positive impact on sales of 1.9%. In contrast, changes in the portfolio had an overall negative effect on sales of 0.5%. The sale of the U.S. polycarbonate sheets business in the third quarter of 2018 and of the European polyurethane systems house business in the fourth quarter of 2019 had a negative effect. In contrast, the step acquisition of shares of Japan-based DIC Covestro Polymer Ltd. and its subsequent full inclusion in the Group’s consolidated financial statements in the second quarter of 2019 had a positive effect on sales.

The Polyurethanes and Polycarbonates segments’ sales were down in fiscal 2019. Sales in the Polyurethanes segment declined by 21.5% to €5,779 million (previous year: €7,362 million), and in the Polycarbonates segment sales decreased by 14.3% to €3,473 million (previous year: €4,051 million). At €2,369 million, sales in the Coatings, Adhesives, Specialties segment remained at the previous year’s level (€2,361 million).

Covestro Group quarterly sales

€ million

Covestro Group Quarterly sales (bar chart)

Covestro Group quarterly EBITDA

€ million

Covestro Group Quarterly EBITDA (bar chart)

1 Reference information was not restated, see note 2.1 “Financial reporting standards applied for the first time in the reporting period.”

The Group’s in 2019 as a whole decreased 49.9% over the prior-year period to €1,604 million (previous year: €3,200 million).

In the Polyurethanes segment, EBITDA slid by 63.2% to €648 million (previous year: €1,763 million). The Polycarbonates segment’s EBITDA fell by 48.3% to €536 million (previous year: €1,036 million). At €469 million, EBITDA in the Coatings, Adhesives, Specialties segment was up by 1.1% on the prior-year figure (previous year: €464 million).

In 2019 as a whole, depreciation, amortization and impairment losses rose by 21.3% to €752 million (previous year: €620 million). This development was mainly due to the application of the  16 standard, which resulted in an effect totaling €124 million. Depreciation, amortization and impairment losses amounted to €732 million (previous year: €599 million) in depreciation of property, plant and equipment and €20 million (previous year: €21 million) in amortization of intangible assets. This included €28 million (previous year: €7 million) in impairment losses and €1 million (previous year: €0 million) in reversals of impairment losses.

In the 2019 fiscal year, the Covestro Group’s dropped by 67.0% to €852 million (previous year: €2,580 million).

Operating cash flows sank by 41.8% to €1,383 million in fiscal 2019 (previous year: €2,376 million). EBITDA declined, while income tax payments decreased and freed-up working capital increased.

In the reporting period, was down by 71.7% to €473 million (previous year: €1,669 million) due to a decrease in operating cash flows and increase in cash outflows for additions to property, plant, equipment and intangible assets. These outflows totaled €910 million in 2019 (previous year: €707 million).

Calculation of the return on capital employed

measures profitability and is calculated as the ratio of EBIT after imputed income taxes ( = net operating profit after taxes) to the average . Imputed taxes are determined by multiplying the effective tax rate by EBIT. If ROCE exceeds the (WACC), the company is earning a premium on its cost of capital.

The is the difference between NOPAT and the cost of capital. The latter is calculated by multiplying the average capital employed by WACC. A positive value contribution means that value has been generated.

In fiscal 2019, ROCE was 8.4% (previous year: 29.5%), exceeding WACC of 6.8% (previous year: 6.7%), which meant Covestro earned a premium over capital costs. This resulted in a positive value contribution of €120 million, which was, however, well below the prior-year figure of €1,474 million.

Covestro value management indicators at a glance

 

 

 

 

 

 

 

2018

 

2019

 

 

€ million

 

€ million

NOPAT

 

1,907

 

624

Average capital employed

 

6,468

 

7,406

WACC

 

+6.7%

 

+6.8%

ROCE

 

+29.5%

 

+8.4%

Value contribution

 

1,474

 

120

Material transactions

The increasing competitive pressure that had already become apparent in the fourth quarter of 2018 led to a sharp decrease in margins again in fiscal 2019. A drop in selling prices led mainly to being reduced nearly by half compared with the previous year.

Effective April 1, 2019, Covestro increased its interest in DIC Covestro Polymer Ltd. (DCP), Tokyo (Japan), by another 30% to 80% as part of a step acquisition of shares. The shares previously recognized using the equity method of accounting were remeasured at their fair value. This resulted in a gain of €19 million, which was recognized in other operating income. DCP has been fully consolidated since April 1, 2019.

In the second quarter of 2019, Covestro’s Polyurethanes segment signed an agreement to divest the European systems house business. This transaction was completed in the fourth quarter of 2019. The gain on the disposal of this business totaling €34 million was recognized in other operating income.

In the third quarter of 2019, Covestro’s Polycarbonates segment signed an agreement to divest the European polycarbonate sheets business. Writedowns of assets totaling €26 million in connection with the disposal negatively affected EBIT. Of this amount, €21 million related to impairment losses on noncurrent assets.

Overall assessment of target attainment and business performance

Target attainment

In the 2018 Annual Report, the Covestro Group published a forecast for key performance indicators in fiscal 2019. In view of the business performance of the first nine months of fiscal 2019, Covestro AG’s Board of Management elected to concretize the forecast for 2019 as a whole in the reporting for the period ended September 30, 2019. The earlier forecast of volume growth in the low-to-mid-single-digit percentage range was narrowed to the low-single-digit percentage range. Also concretized were the bandwidths for expected FOCF and ROCE performance. After initial projections of FOCF between €300 million and €700 million, this range was narrowed to between €300 million and €500 million in October 2019. The original ROCE forecast of 8% to 13% was narrowed to 8% to 10% in October 2019.

Target attainment 2019

 

 

 

 

 

 

 

 

 

 

 

2018

 

Forecast 20191

 

Narrowed forecast 20192

 

Target attainment 2019

1

Published on February 25, 2019 (Annual Report 2018)

2

Published on October 28, 2019 (Quarterly Statement as of September 30, 2019)

Core volume growth

 

+1.5%

 

Low- to mid-single-digit-percentage range increase

 

Low-single-digit-percentage range increase

 

+2.0%

of which Polyurethanes

 

+0.8%

 

Low- to mid-single-digit-percentage range increase

 

Low-single-digit-percentage range increase

 

+2.3%

of which Polycarbonates

 

+3.0%

 

Low- to mid-single-digit-percentage range increase

 

Low-single-digit-percentage range increase

 

+2.7%

of which Coatings, Adhesives, Specialties

 

+2.3%

 

Low- to mid-single-digit-percentage range increase

 

Low-single-digit-percentage range decrease

 

–1.0%

Free operating cash flow

 

€1,669 million

 

Between €300 million and €700 million

 

Between €300 million and €500 million

 

€473 million

of which Polyurethanes

 

€972 million

 

Increase in cash outflows for additions to property, plant, equipment and intangible assets, which will exceed the expected net cash provided by operating activities

 

Increase in cash outflows for additions to property, plant, equipment and intangible assets, which will exceed the expected net cash provided by operating activities

 

€32 million

of which Polycarbonates

 

€468 million

 

Decline in FOCF, although the trend here will likely be much more positive than for the Group as a whole

 

Decline in FOCF, although the trend here will likely be much more positive than for the Group as a whole

 

€404 million

of which Coatings, Adhesives, Specialties

 

€203 million

 

FOCF around the prior-year level

 

FOCF slightly below the
prior-year level

 

€191 million

ROCE

 

+29.5%

 

Between 8% and 13%

 

Between 8% and 10%

 

+8.4%

Covestro therefore met the projections for all key performance indicators for the Covestro Group in the forecast for fiscal 2019 originally issued and narrowed in October 2019. At 2.0%, our met our forecast target. At €473 million, free operating cash flow for fiscal 2019 was in the announced range, as well as at 8.4%.

Overall assessment of business performance

Fiscal 2019 was a challenging year for Covestro, with business down significantly from fiscal 2018. The trend apparent in the second half of 2018 continued in the year under review and is primarily the result of a decline in selling prices. These developments halved EBITDA compared with the previous year’s figure. Despite weaker demand from the automotive industry, core volumes expanded overall. Free operating cash flow also declined to €473 million (previous year: €1,669 million) on account of the lower EBITDA. In the interest of supporting our long-term growth and maintaining our facilities, we increased our cash outflows for additions to property, plant, equipment and intangible assets as planned to €910 million (previous year: €707 million).

EBITDA/earnings before interest, taxes, depreciation and amortization
EBIT plus depreciation and amortization of property, plant, equipment, and intangible assets
IFRSs/International Financial Reporting Standards
International accounting standards as endorsed by the European Union
EBIT/earnings before interest and taxes
Income after income taxes plus financial result and income tax expense
FOCF/free operating cash flow
Operating cash flows (pursuant to IAS 7) less cash outflows for additions to property, plant, equipment and intangible assets
ROCE/return on capital employed
Ratio of operating result after imputed income taxes to the capital employed
NOPAT/net operating profit after taxes
Operating result (EBIT) after imputed income taxes
Capital employed
Capital employed is the sum of noncurrent and current assets less non-interest-bearing liabilities such as trade accounts payable.
WACC/weighted average cost of capital
Weighted average cost of capital reflecting the expected return on the company’s equity and debt capital
VC/value contribution
The difference between the operating result after imputed income taxes and the cost of capital. A positive value contribution means that value has been created.
EBITDA/earnings before interest, taxes, depreciation and amortization
EBIT plus depreciation and amortization of property, plant, equipment, and intangible assets
Core volume growth
Core volume growth refers to the core products in the Polyurethanes, Polycarbonates and Coatings, Adhesives, Specialties segments. It is calculated as the percentage change in externally sold volumes in thousand metric tons compared with the prior year. Covestro also takes advantage of business opportunities outside its core business, for example the sale of precursors and by-products such as hydrochloric acid, sodium hydroxide solution and styrene. These transactions are not included in core volume growth.
ROCE/return on capital employed
Ratio of operating result after imputed income taxes to the capital employed