Covestro continues its profitable growth path with a record year

Materials manufacturer Covestro had an outstanding fiscal year 2017. Driven by a high demand for high-performance plastics and significantly higher margins, Covestro increased group sales by 18.8% to 14.1 billion euros over the past fiscal year. This was accompanied by an increase in Ebitda at group level for the year as a whole of 70.6% to 3.4 billion euros over the prior-year period. Net income more than doubled from 795 million to 2 billion euros. As a result of these excellent results, Covestro intends to pay its shareholders a dividend of 2.2 euros per share (previous year: 1.35 euros).

“We have achieved an impressive result in 2017 and significantly exceeded our overall targets”, said CEO Patrick Thomas. “Compared with our first year as an independent company, we have once again clearly improved and demonstrated that our success is sustainable. There is one simple reason for that: We have managed to successfully unlock Covestro’s potential even further. We are now in a strong position from which we will accelerate further value creation”.

In fiscal year 2017, Covestro also achieved very strong results in other key figures: The group’s core volumes rose by 3.4% over the prior-year period amidst continually high capacity utilization. Covestro’s free operating cash flow (FOCF) reached a new record high increasing to 1.8 billion euros, equivalent to a rise of 34.8% compared with 2016. Return on capital employed (ROCE) stood at 33.4% and was thus also much higher than in the previous year (14.2%).

Given the strong development, Covestro now expects to deliver a cumulative free operating cash flow of 5 billion euros within three years. The estimation announced in 2017 was five years. Due to high cash inflows, Covestro’s board of management decided in October 2017 to buy back their own shares up to 1.5 billion euros, or up to 10% of the capital stock. The buy-back began in November 2017 as planned. In addition, net financial debt decreased by 1,216 million to 283 million euros in 2017 (previous year: 1,499 million euros).

Sustainability as a driver of growth

For 2018, Covestro expects solid growth in the main customer industries including the automotive, furniture, construction, and electrical and electronics industries. Within these industries, Covestro considers in particular the social trend toward greater sustainability as a driver of growth. “In more and more industries, customers are increasingly looking for sustainable solutions and that is exactly what we offer. We are extremely well positioned to take advantage of the exceptional growth potential in these future-oriented segments”, said Patrick Thomas. He further mentioned areas of growth such as e-mobility, energy-efficient construction and energy-saving LED lamps.

In the coming years, Covestro intends to significantly increase its investments to continue to take exceptional advantage of the expected growth in the main customer industries. These investments include all segments and regions, and are expected to be in excess of the depreciation level. Furthermore, Covestro remains prepared to use opportunities for acquisitions that strengthen the portfolio and create value.

Digitalization and sustainability key elements of strategy

True to Covestro’s purpose to make the world a brighter place, sustainability has always been firmly anchored in its strategy. In addition to this commitment, Covestro has integrated the Sustainable Development Goals of the United Nations in its strategy. “Sustainability is and remains a key driver of innovation”, explained Markus Steilemann, CCO and future CEO of Covestro. “By 2025, we want to spend 80 percent of our research and development expenditure in areas that contribute to the Sustainable Development Goals”.

Steilemann considers digitalization as a further driver of innovation: “With our comprehensive program, we are taking advantage of the opportunities that digitalization provides, making it a key focus in our company. As part of this focus, we will set new standards of collaboration with our customers”. An example of this is a soon-to-be-launched digital marketplace that will simplify access to basic products and connect customers with Covestro and other providers. By the end of 2019, new digital business models such as the digital marketplace are expected to generate cumulative sales of up to one billion euros.

Ongoing positive development expected for 2018

On the basis of anticipated stable growth in the main customer industries and current economic forecasts, Covestro expects ongoing positive development for 2018. The company expects a low- to mid-single-digit percentage increase in core volume growth. Covestro anticipates free operating cash flow significantly above the average of the last three years. In 2018, ROCE is expected to approach the previous year’s level. Ebitda is estimated to be around the level of 2017. For the first quarter of 2018, Covestro anticipates Ebitda significantly above the level of the first quarter of 2017.

Polyurethanes and Polycarbonates increase profitability

In the polyurethanes segment, Covestro increased its core volumes over the previous year in all three regions - an overall increase of 3.4%. Meanwhile, Ebitda rose by 151.1% to 2,212 million euros. This growth was primarily the result of significant improvements in margins in the MDI and TDI product groups. Moreover, the increased sales volume, gains from the sale of a systems house in North America (39 million euros), and an insurance reimbursement (35 million euros) all had a positive effect. Furthermore, the decision to continue production in Tarragona (Spain) led to a reversal of provisions (72 million euros).

Core volumes in the polycarbonates segment rose by 5.0%. Here, too, all three regions contributed to growth. This segment’s Ebitda rose 21.2% to 853 million euros. Higher core volumes and increased selling prices had a positive effect on earnings, while sales were mainly driven by increased demand in the automotive, and electrical and electronics industries.

In 2017 as a whole, core volumes in the coatings, adhesives, specialties segment saw virtually no change (-0.3%) amidst a challenging competitive environment. Ebitda was down 9.4% from the previous year’s figure, dropping to 453 million euros. Increased selling prices on average were not able to fully offset the higher cost of goods sold.

Meanwhile, expanded production of polyurethane dispersions commenced in Dormagen (Germany) and Barcelona (Spain) to meet the increasing demand from the coatings and adhesive industry. Covestro also began operations at a new production facility in Dormagen for high-quality, multi-layer flat films used in security cards or automotive interiors.

Fourth quarter 2017 with new record results

In the fourth quarter 2017, Covestro reported its most successful quarter in the Company’s history and continued the outstanding performance achieved over the fiscal year. Group sales increased by 16.7% to 3.5 billion euros in the final quarter compared with the fourth quarter 2016, driven by higher selling prices and increased sales volumes. Ebitda increased even more sharply from 390 million to 879 million euros, more than doubling over the previous year. Net income at 566 million euros rose several times over the figure in the fourth quarter of 2016 (124 million euros). Free operating cash flow increased 45.9% to 890 million euros.