Covestro ‘Confirms Guidance’ for 2019 After 1st 6 Months

Based on the results of the first half of 2019, Covestro has confirmed its guidance for the current fiscal year. As expected, ongoing intense competitive pressure and uncertainties in major sales markets persisted into the second quarter. Whereas core volumes rose by 1.1 percent, group sales fell to €3.2 billion (-16.9 percent) due to lower selling prices. At €459 million, EBITDA stabilized at the level of the first quarter of 2019 (€442 million), but remained well under the outstanding result achieved in the prior-year quarter (-53.4 percent).

The decline in earnings resulted mainly from lower margins in the Polyurethanes and Polycarbonates segments. Net income declined to €189 million, while free operating cash flow amounted to minus €55 million on account of lower cash flows from operating activities and higher investments. 

“The economic situation is still challenging, since global economic and political uncertainties remain,” CEO Dr. Markus Steilemann said. “Nonetheless, we reached our earnings targets and were able to increase our core volumes again in the second quarter. This underscores the trend towards more sustainable solutions, which we offer to many industries.” 

The results for the first six months were well under the previous year’s level, but this was because 2018 was marked by exceptionally high margins in some product groups. 

“Our half-year results met our expectations in the current economic environment. Thus, we confirm our guidance for the fiscal year,” CFO Dr. Thomas Toepfer said. “At the same time, we will closely follow further developments in our major sales markets. The automotive industry developed much weaker than expected, on the other hand the construction sector as well as the wood and furniture industry evolved better.”

For fiscal 2019, Covestro continues to project core volume growth to be in the low- to mid-single-digit percentage range. FOCF is expected to be between €300 million and €700 million, with ROCE between eight percent and 13 percent. EBITDA for the fiscal year is forecasted to be between €1.5 billion and €2 billion, while in the third quarter, the EBITDA is expected to be around €410 million. 

Progress on portfolio optimization and investments 

In the second quarter, Covestro made further progress on improving the portfolio. The European systems houses business is being sold to H.I.G. Capital for a price in the high double-digit millions of Euros. 

Simultaneously, the Group continues to focus on value-creating investments: In May, Covestro laid the foundation for expanding production of polycarbonate films in Dormagen, Germany. This investment is part of a program totaling €100 million with which Covestro aims to reinforce the high-margin specialty films business. Provided the necessary official permits are obtained, construction of a dedicated chlorine supply facility for the existing MDI production in Tarragona, Spain, will begin at the end of the year. The first internal milestone was met in Baytown, Texas, where a large-scale plant for the rigid foam precursor MDI is planned. Now, the 100-person project team will begin with the detailed technical planning.

Core volume growth in Polyurethanes and Polycarbonates

In the Polyurethanes segment, core volumes grew by 0.7 percent. Sales declined 24.3 percent to €1,489 million, driven by lower selling prices as a result of increased competition. The downturn in selling prices was also evident in EBITDA, which decreased to €172 million (-70.5 percent).

Core volumes in Polycarbonates rose by 4.4 percent over the prior-year quarter. Whereas the electrical and electronics industry and the construction sector contributed to this growth, volumes in the automotive industry declined. Sales were down 15 percent to €898 million in the second quarter of 2019. EBITDA in the Polycarbonates segment was 46 percent lower, amounting to €154 million, mostly due to the drop in selling prices.

The Coatings, Adhesives, Specialties segment saw a decline in core volumes of 4.7 percent. As a result, sales were down 1.3 percent to €621 million. Exchange rate movements and the gradual purchase of the shares of Japan-based DIC Covestro Polymer Ltd. had a positive effect, however. The increase in the stake held in the Japanese joint venture also led to a positive non-recurring effect on EBITDA, which grew 7.9 percent to €150 million in the second quarter of 2019.

Intensified competition a hallmark of H1 2019

On the whole, the first six months of 2019 saw growing competition, as expected. Volumes sold remained mostly stable (-0.4 percent), while Group sales dropped 16.4 percent to €6,386 million due to lower selling prices. In the Polyurethanes and Polycarbonates segments in particular, selling prices were well below those of the prior-year period. As a result, EBITDA was down 56 percent to €901 million. Net income stood at €368 million (-70.5 percent). Free operating cash flow decreased to minus €100 million.