Business Development of the Covestro Group

Results of operations

The Group’s core volumes in the first quarter of 2020 were down 4.1% compared with the prior-year quarter, mainly due to considerably weaker demand in China. This is attributable mainly to coronavirus-related production stoppages at our customers there in February and March 2020. The Coatings, Adhesives, Specialties and Polycarbonates segments saw core volumes decrease by 5.2% and 4.9%, respectively. In the Polyurethanes segment, core volumes fell by 3.6% from their level in the prior-year quarter.

Group sales amounted to €2,783 million, down by 12.3% from the prior-year quarter (previous year: €3,175 million). The main factor here was the decline in selling prices, which had a negative impact of 9.1% on sales. This development was mainly driven by the increased competitive pressure in the Polyurethanes and Polycarbonates segments. Total volumes sold impacted sales, which declined by 2.7%. Exchange rate movements had a positive effect on sales amounting to 0.8%. In contrast, the change in the portfolio reduced sales by 1.3% overall. The sale of the European polyurethane systems house business in the fourth quarter of 2019 and the sale of the European polycarbonate sheets business in the first quarter of 2020 had a negative effect, whereas the step acquisition of shares and subsequent full consolidation of Japan-based DIC Covestro Polymer Ltd. in the second quarter of 2019 had a positive effect.

All segments saw sales decline in the first quarter of 2020. Sales in the Polyurethanes segment were down 13.7% to €1,274 million (previous year: €1,476 million), while sales in the Polycarbonates segment fell 14.8% to €733 million (previous year: €860 million). In the Coatings, Adhesives, Specialties segment, sales decreased by 8.8% to €572 million (previous year: €627 million).

The Group’s EBITDA declined by 42.5% to €254 million in the first quarter of 2020 (previous year: €442 million), in particular due to significantly lower margins. This was chiefly due to selling prices that fell on account of a year-over-year change in the supply/demand situation and volumes that decreased in connection with the coronavirus pandemic. The impact of the coronavirus pandemic reduced EBITDA by around €80 million in the first quarter of 2020, based on an internal calculation.

EBITDA in the Polyurethanes segment dropped by 68.2% to €50 million (previous year: €157 million), and in the Polycarbonates segment it was down by 29.7% to €109 million (previous year: €155 million). In the Coatings, Adhesives, Specialties segment, EBITDA fell by 11.0% to €130 million (previous year: €146 million).

In the first quarter of 2020, the Covestro Group’s EBIT was down by 74.6% to €67 million (previous year: €264 million).

Financial position

Operating cash flows decreased to minus €110 million from the prior-year quarter (previous year: €120 million), largely due to the significant drop in EBITDA.

Free operating cash flow amounted to minus €249 million in the first quarter of 2020 (previous year: minus €45 million). This was mainly attributable to the decrease in cash flows from operating activities. Cash outflows for additions to property, plant, equipment and intangible assets were down to €139 million (previous year: €165 million).

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In comparison with December 31, 2019, the Covestro Group’s financial debt increased by €754 million to €2,491 million as of March 31, 2020. The increase was due to the assumption of short-term loans totaling €500 million and a loan from the European Investment Bank (EIB) in the amount of €225 million for research and development. The focus here is, in particular, on sustainability and the circular economy in the European Union. Cash and cash equivalents were higher, mainly on account of the aforementioned net cash provided by financing activities, although negative free operating cash flow caused this figure to decline.

Material business events

On January 2, 2020, Covestro successfully concluded the sale of its European polycarbonate sheets business to the Serafin Group. This included central management and distribution functions in Europe and production sites in Belgium and Italy. Serafin has pledged to continue operations at all sites. Covestro will continue to act as a key supplier of raw materials for the foreseeable future.

Effective March 17, 2020, Covestro obtained a new syndicated revolving credit facility totaling €2.5 billion with a term of five years, including two options for extending the term by one year in each case. An important new feature of the credit line is its link to an ESG (environment, social, governance) rating: The lower (higher) the externally calculated ESG score is, the lower (higher) the interest component of the credit facility. The new facility replaces the existing revolving credit line of €1.5 billion and, like it, functions as a backup liquidity reserve.

Business performance in the first quarter of 2020 was heavily influenced by the dynamic evolution of the coronavirus pandemic. In China in particular, our customers experienced production stoppages in February and March 2020. As a reaction to the worldwide spread of the coronavirus, Covestro actively implemented crisis management plans and adapted workflows to local conditions. The Board of Management took steps early on to adjust the company’s activities to current conditions, protect the health of all Covestro employees, guarantee our capability to continue deliveries to customers, and safeguard Covestro’s strong liquidity position. Moreover, the Annual General Meeting originally planned for April 17, 2020, will now take place as a virtual meeting on July 30, 2020.