“Demand for our high-tech materials remains intact. That is a strong foundation for our profitable growth in the long term, especially in an increasingly challenging market environment,” CEO Dr. Markus Steilemann said. “We have launched important strategic initiatives in 2018 to actively promote this growth path. These include investments in specific business segments with above-average demand potential and a stronger focus on efficiency.”
In an unsettled year, Covestro achieved solid results also in additional key figures in 2018. Free operating cash flow (FOCF) decreased to €1.7 billion due to increased investments. Return on capital employed (ROCE) stood at 29.5 percent, well over the multi-year average. Net financial debt remained on a low level of €348 million at the end of fiscal 2018.
“2018 was a successful year for Covestro, even though after a strong start to the year, we did not approach our record year of 2017 overall,” said Dr. Thomas Toepfer, CFO of Covestro. “The last two years were marked by unusually high margins. For 2019, we expect demand to continue to grow, however, margins will drop significantly due to competitive pressure.”
In 2018, Covestro took important strategic steps to further reinforce the Group’s position in relation to the competition. One key here is the investments to be made in profitable growth segments. The Group aims to build a new world-scale plant to produce the rigid foam precursor MDI in Baytown, Texas (US). Another example is the expansion of production activities for the high-margin specialty films business at four sites worldwide. Simultaneously, the aim is to diversify the Group’s portfolio to ensure even greater independence from cyclical fluctuations. Covestro today generates more than 50 percent of Group sales with resilient businesses.
By way of a program launched in 2018, Covestro will step up the focus on effectiveness and efficiency going forward. By 2021 at the latest, the cost savings are estimated at around €350 million per year with the goal of limiting the increase in operational costs. This will be accomplished mainly through stepped up cross-division partnerships and increased use of digital solutions. Initial measures will be implemented in the coming months:
A centralized marketing department will be set up to consolidate the global marketing and communications functions of the segments.
The company has consolidated all digital activities since 2017 in the ‘Digital@Covestro’ strategic program with the aim of advancing the digital transformation of the Group. Initial successes have become evident in recent months: Sales and marketing channels have been expanded and new online sales platforms developed. Since 2018, a global team has been working in R&D on faster and more efficient application development with the help of high-performance computer systems. New software solutions for predictive maintenance and repair of equipment were developed in production.
In 2018, Covestro continued the share buy-back program begun in the previous year. The company acquired shares in three tranches totaling more than 9.8 percent of the capital stock and valued at nearly €1.5 billion. Along with the dividend paid, Covestro, therefore, returned to stockholders a total of some €1.7 billion in the past fiscal year. The Board of Management plans to propose to the coming Annual General Meeting a new authorization to acquire treasury shares at an amount of up to 10 percent of the capital stock.
The Polyurethanes segment recorded stable performance in core volumes sold in 2018 with modest growth of 0.8 percent. Compared with 2017, EBITDA decreased by 19.1 percent to €1,763 million. Although greater total volumes and higher average selling prices on average improved earnings in the full year, these increases could not offset the negative effects of increasingly intense competition, particularly in the fourth quarter of 2018. In addition, there were non-recurring positive effects in fiscal 2017 due to which EBITDA was expected to decline in 2018.
Core volumes in Polycarbonates rose by three percent. EBITDA increased by 21.5 percent to €1,036 million. An overall positive margins trend and greater total volumes lifted earnings, as did the proceeds from the sale of the U.S. sheet business. Over the course of the fourth quarter of 2018, earnings were burdened by an increasingly challenging competitive environment.
Core volumes in the Coatings, Adhesives, Specialties segment expanded by 2.5 percent. Higher raw material prices and negative currency effects put downward pressure on EBITDA, which dropped by 4.5 percent to €464 million.
In the fourth quarter of 2018, Covestro saw volume growth of 1.7 percent. At the same time, the market environment became significantly more challenging. Group sales slid 7.1 percent. Apart from intensified competition, non-recurring effects such as higher logistics costs as a result of the low level of the Rhine River and expenses related to the efficiency program underway had a negative effect. EBITDA, therefore, decreased by 66.7 percent to €293 million. Net income dropped 86 percent to €79 million (Q4 2017: €566 million). At €363 million, FOCF was 44.6 percent below the figure for the prior-year quarter (€655 million).
Pictured: The Board of Management of Covestro presented the financial figures for 2018 at the Annual Press Conference (L-R) CEO Dr. Markus Steilemann, CTO Dr. Klaus Schäfer and CFO Dr. Thomas Toepfer.