Results of Operations, Financial Position, and Net Assets of the Covestro Group

Results of Operations

The coronavirus pandemic had a significant impact on Covestro’s results of operations in fiscal year 2020. In the second half of fiscal year 2020, we charted a recovery in demand for our products that differed in degree depending on the region and industry.

Covestro Group Quarterly EBITDA (bar chart)

Sales

In the year 2020 as a whole, the Group’s core volumes sold decreased by 5.6% from the prior year, primarily on account of weaker demand in the first half of 2020 driven by the coronavirus pandemic. The Polyurethanes and Polycarbonates segments reported declines of 6.1% and 3.0%, respectively. Core volumes sold fell by 8.9% in the Coatings, Adhesives, Specialties segment.

In fiscal 2020, Group sales were down by 13.7% year over year to €10,706 million (previous year: €12,412 million). This is largely due to lower selling prices, which reduced sales by 5.7%. This development was mainly driven by the increased competitive pressure in the Polyurethanes and Polycarbonates segments. In addition, the drop in total volumes sold had a negative effect on sales of 5.1%. Exchange rate movements also had a negative impact of 1.6%. Changes in the portfolio had an overall negative effect on sales of 1.3%. The sale of the European polyurethane systems house business in the fourth quarter of the year 2019 adversely affected sales in fiscal 2020, as did the sale of the European polycarbonate sheets business in the first quarter of fiscal year 2020. In contrast, the step acquisition of shares and subsequent full consolidation of DIC Covestro Polymer Ltd., Tokyo (Japan), in the second quarter of fiscal 2019 had no notable effect on sales in the year 2020 as a whole.

Sales in all reportable segments were down in fiscal 2020. In the Polyurethanes segment, sales fell by 13.1% to €5,021 million (previous year: €5,779 million), and the Polycarbonates segment’s sales slid 14.1% to €2,985 million (previous year: €3,473 million). The Coatings, Adhesives, Specialties segment’s sales declined by 13.9% to €2,039 million (previous year: €2,369 million).

EBIT

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Covestro Group summary income statement

	2019	2020	Change
	€ million	€ million	%
Sales	12,412	10,706	–13.7
Cost of goods sold	(9,658)	(8,207)	–15.0
Gross profit	2,754	2,499	–9.3
Selling expenses	(1,380)	(1,195)	–13.4
Research and development expenses	(266)	(262)	–1.5
General administration expenses	(372)	(310)	–16.7
Other operating expenses (–) and income (+)	116	(36)	.
EBIT	852	696	–18.3
Financial result	(91)	(91)	–
Income before income taxes	761	605	–20.5
Income taxes	(204)	(151)	–26.0
Income after income taxes	557	454	–18.5
of which attributable to noncontrolling interest	5	(5)	.
of which attributable to Covestro AG shareholders (net income)	552	459	–16.8

The cost of goods sold was down by 15.0%, amounting to €8,207 million (previous year: €9,658 million), on account of lower raw material prices. The ratio of the cost of goods sold to sales therefore decreased to 76.7% (previous year: 77.8%).

Gross profit sank by 9.3% to €2,499 million (previous year: €2,754 million), primarily due to a decline in total volumes sold. In contrast, lower raw material costs more than compensated for the low level of selling prices, which boosted earnings.

Selling expenses were 13.4% lower, coming in at €1,195 million (previous year: €1,380 million) and yielding an almost unchanged ratio of selling expenses to sales of 11.2% (previous year: 11.1%). Research and development expenses (R&D) fell by 1.5% to €262 million (previous year: €266 million). As a share of sales, this produced an R&D ratio of 2.4% (previous year: 2.1%). General administration expenses were down by 16.7% to €310 million (previous year: €372 million), for an almost unchanged ratio of administration expenses to sales of 2.9% (previous year: 3.0%). Cost-cutting measures in the sales, R&D, and general administration functions led to a significantly lower cost level than in the previous year.

Net other operating expenses totaled €36 million (previous year: net other operating income of €116 million). In the reporting period, positive one-time effects from the previous year, including insurance reimbursements of €63 million and proceeds from divestitures amounting to €53 million, stood in contrast to expenses relating to the planned acquisition of the Resins & Functional Materials (RFM) business from Koninklijke DSM N.V., Heerlen (Netherlands) totaling €32 million and lower insurance reimbursements of €21 million.

EBIT amounted to €696 million, down 18.3% in the reporting period (previous year: €852 million). The EBIT margin fell to 6.5% (previous year: 6.9%).

EBITDA

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Calculation of EBITDA

	2019	2020
	€ million	€ million
EBIT	852	696
Depreciation, amortization, impairment losses and impairment loss reversals	752	776
EBITDA	1,604	1,472

In the year 2020 as a whole, depreciation, amortization and impairment losses rose by 3.2% to €776 million (previous year: €752 million). This item comprised €754 million (previous year: €732 million) in depreciation and impairment losses on property, plant and equipment and €22 million (previous year: €20 million) in amortization and impairment losses on intangible assets. This included €20 million (previous year: €28 million) in impairment losses and €0 million (previous year: €1 million) in reversals of impairment losses.

The Group’s EBITDA in the year as a whole decreased by 8.2% from the prior-year period to €1,472 million (previous year: €1,604 million). EBITDA in the Polyurethanes segment slid by 3.5% to €625 million (previous year: €648 million). In contrast, the Polycarbonates segment’s EBITDA rose by 3.2% to €553 million (previous year: €536 million). At €341 million, EBITDA in the Coatings, Adhesives, Specialties segment dropped by 27.3% from the prior-year figure (previous year: €469 million).

Net income

In the fiscal year, the financial result was unchanged at €–91 million (previous year: €–91 million) and largely consisted of net interest expense of €–47 million (previous year: €–45 million). In view of the financial result, income before income taxes was down by 20.5% to €605 million (previous year: €761 million). The change in income resulted in the income tax expense declining by 26.0% to €151 million (previous year: €204 million). After taxes and noncontrolling interests, net income shrank by 16.8% and amounted to €459 million (previous year: €552 million).

Return on capital employed (ROCE) and Value Contribution

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Calculation of the value contribution

2019

2020

€ million

EBIT

852

696

Effective tax rate¹

+26.8%

+25.0%

Taxes²

(228)

(174)

Net operating profit after taxes (NOPAT)

624

522

Weighted average cost of capital (WACC)

+6.8%

+7.3%

Average capital employed

7,406

7,475

Cost of capital

(504)

546

Value contribution

120

(24)

ROCE

+8.4%

+7.0%

¹	The calculation of the effective tax rate is presented in note 13 “Taxes” in the Notes to the Consolidated Financial Statements.
²	The imputed income taxes used in the calculation of NOPAT are determined by multiplying EBIT by the effective tax rate.

The Covestro Group’s NOPAT totaled €522 million (previous year: €624 million), and average capital employed amounted to €7,475 million (previous year: €7,406 million). This resulted in a decline in ROCE to 7.0% (previous year: 8.4%), which fell below the WACC of 7.3% (previous year: 6.8%). The company therefore did not generate a premium on the cost of capital. The above figures resulted in a Value Contribution of €–24 million (previous year: €120 million).

Additional information on the calculation of indicators is available in “Management.”

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Calculation of average capital employed

Dec. 31, 2018¹

Effects of IFRS 16

Jan. 1, 2019

Dec. 31, 2019

Dec. 31, 2020

€ million

Goodwill

256

–

256

264

255

Other intangible assets

–

114

109

Property, plant and equipment²

4,409

660

5,069

5,286

5,175

Investments accounted for using the equity method

214

–

214

192

173

Other noncurrent financial assets³

–

Other receivables⁴

361

–

361

376

309

Deferred taxes⁵

256

–

256

221

253

Inventories

2,213

–

2,213

1,916

1,663

Trade accounts receivable

1,786

–

1,786

1,561

1,593

Claims for income tax refunds

–

104

Assets held for sale^{6, 7}

–

Gross capital employed

9,635

660

10,296

10,053

9,626

Other provisions⁸

(721)

–

(721)

(422)

(360)

Other liabilities^{9, 10}

(335)

–

(335)

(284)

(269)

Deferred tax liabilities¹¹

(153)

–

(153)

(204)

(177)

Trade accounts payable¹⁰

(1,536)

–

(1,536)

(1,431)

(1,241)

Income tax liabilities

(279)

–

(279)

(164)

(162)

Liabilities directly related to assets held for sale^{12, 13}

–

(8)

(7)

Capital employed

6,611

660

7,272

7,540

7,410

Average capital employed

7,406

7,475

¹	Reference information was not restated for financial reporting standard IFRS 16.
²	As of January 1, 2019, this also contains the right-of-use assets from initial application of IFRS 16.
³	Other noncurrent financial assets were adjusted for nonoperating assets.
⁴	Other receivables were adjusted for nonoperating and financial receivables.
⁵	Deferred taxes were adjusted for deferred taxes from defined benefit plans and similar obligations.
⁶	Assets held for sale have been included in the calculation of capital employed since January 1, 2019. The prior-year figures were not restated.
⁷	Assets held for sale were adjusted for nonoperating and financial assets.
⁸	Other provisions were adjusted for provisions for interest payments.
⁹	Other liabilities were adjusted for nonoperating and financial liabilities.
¹⁰	Reference information was restated accordingly. See note 4.1 “Change in presentation of rebates granted to customers” in the Notes to the Consolidated Financial Statements.
¹¹	Deferred tax liabilities were adjusted for deferred tax liabilities from defined benefit plans and similar obligations.
¹²	Liabilities directly related to assets held for sale have been included in the calculation of capital employed since January 1, 2019. The prior-year figures were not restated.
¹³	Liabilities directly related to assets held for sale were adjusted for nonoperating and financial liabilities.

EBIT/earnings before interest and taxes

Income after income taxes plus financial result and income tax expense

EBITDA/earnings before interest, taxes, depreciation and amortization

EBIT plus depreciation and amortization of property, plant, equipment, and intangible assets

Net income

Income after income taxes that is attributable to the shareholders

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

ROCE/return on capital employed

Ratio of operating result after imputed income taxes to the capital employed

WACC/weighted average cost of capital

Weighted average cost of capital reflecting the expected return on the company’s equity and debt capital

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.

Annual Report 2020

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