Business Development of the Covestro Group

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

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Covestro Group quarterly EBITDA

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The Group’s EBITDA 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 IFRS 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 EBIT 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, free operating cash flow 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

ROCE measures profitability and is calculated as the ratio of EBIT after imputed income taxes (NOPAT = net operating profit after taxes) to the average capital employed. Imputed 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.

The value contribution 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.

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 EBITDA 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.

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 core volume growth met our forecast target. At €473 million, free operating cash flow for fiscal 2019 was in the announced range, as well as ROCE 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).