Covestro Group Business Development

The Group’s core volumes in 2018 as a whole rose 1.6% over the prior-year period. All segments contributed to this growth. The Polycarbonates and Coatings, Adhesives, Specialties segments reported growth rates of 3.0% and 2.5%, respectively. The Polyurethanes segment expanded core volumes by 0.8%.

In fiscal 2018, Group sales rose 3.4% year over year to €14,616 million (previous year: €14,138 million). This is largely due to higher selling prices, which were up 4.5% on average. The increase in total volumes sold had a positive effect of 2.3% on sales. In contrast, the effects of exchange rate developments had a negative impact on sales with 3.0%. The portfolio effect from the sale of the U.S. sheet business in the Polycarbonates segment additionally reduced sales by 0.4%.

In 2018, growth in Group sales was driven chiefly by the Polycarbonates segment. Sales here rose 8.4% to €4,051 million (previous year: €3,737 million). Sales of Coatings, Adhesives, Specialties increased by 1.5% to €2,361 million (previous year: €2,327 million) and the Polyurethanes segment remained stable at €7,362 million (previous year: €7,386 million).

Covestro Group
Quarterly Sales

€ million

Covestro Group
Quarterly EBITDA

€ million

The Group’s EBITDA in 2018 as a whole decreased 6.8% over the prior-year period to €3,200 million (previous year: €3,435 million). This drop was primarily due to significantly more intense competition, which led to substantially lower margins in the fourth quarter of 2018. In addition, this period saw various nonrecurring expenses, such as higher logistics costs due to the low level of the Rhine River and expenses related to the Perspective efficiency program. In the full year 2018, higher volumes and the change in margins, which was still positive on the whole, were unable to balance out the negative effects of exchange rate movements and increases in other functional cost items.

In the Polyurethanes segment, EBITDA slid 19.1% to €1,763 million (previous year: €2,179 million). The Polycarbonates segment’s EBITDA rose 21.5% to €1,036 million (previous year: €853 million). At €464 million, EBITDA in the Coatings, Adhesives, Specialties segment was down 4.5% on the prior-year figure (previous year: €486 million).

Depreciation, amortization and impairments for 2018 as a whole decreased 1.1% to €620 million (previous year: €627 million). They comprised €599 million (previous year: €602 million) in depreciation and impairments of property, plant and equipment and €21 million (previous year: €25 million) in amortization and impairments of intangible assets. These included impairment losses totaling €7 million (previous year: €6 million). There were no impairment loss reversals in fiscal 2018 (previous year: €18 million).

In the 2018 fiscal year, the Covestro Group’s EBIT dropped 8.1% to €2,580 million (previous year: €2,808 million).

Taking into account a financial result of minus €104 million (previous year: minus €150 million), income before income taxes declined 6.8% from the prior-year period to €2,476 million (previous year: €2,658 million). After tax expense of €647 million (previous year: €641 million), income after income taxes was €1,829 million (previous year: €2,017 million). After noncontrolling interests, net income amounted to €1,823 million (previous year: €2,009 million).

At €2,376 million, operating cash flows remained at the previous year's level in fiscal 2018 (previous year: €2,361 million). A decline in EBITDA and increased income tax payments stood in contrast to a decrease in cash tied up in working capital.

In the reporting period, free operating cash flow was down 9.4% to €1,669 million (previous year: €1,843 million) due to a rise in cash outflows for additions to property, plant, equipment and intangible assets. These outflows totaled €707 million in 2018 (previous year: €518 million).

In the 2018 fiscal year, Covestro earned a substantial premium on its capital costs. The ROCE of 29.5% (previous year: 33.4%) was well under the WACC of 6.7% (previous year: 6.6%). At €1,474 million, however the resulting positive value contribution fell below the prior-year figure of €1,710 million.

Calculation of return on capital employed

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

See sectionl 17 “Alternative Performance Measures“

This 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.

Target Attainment

The Covestro Group’s fiscal year was successful on the whole. However, the very positive business performance in the first six months was followed by progressive weakening throughout the rest of the year. In the first half of the year, the MDI and TDI product groups and the PCS segment generated record-breaking margins, largely due to a positive supply/demand situation. Increasing competitive pressure in the fourth quarter of 2018 led to a massive decrease in margins, especially in the Polyurethanes segment. In addition, earnings were diminished by nonrecurring expenses such as logistics costs due to the low level of the Rhine River and expenses related to the Perspective efficiency program. As a result of this development, the forecast lifted in July 2018 had to be adjusted on November 20, 2018.

At 1.6%, our core volume growth met our forecast target. All segments further expanded core volumes compared with the previous year. In line with the most recent projection, free operating cash flow and ROCE fell slightly below the prior-year figures. Overall we generated a significant premium on capital costs, as in the previous year.