Actively Managing the Crisis: Covestro Adapts to Current Conditions

Covestro met its EBITDA guidance for the first quarter of 2020 in a business environment heavily impacted by coronavirus. Core volumes declined 4.1 percent compared with the prior quarter. This resulted primarily from significantly weaker demand in China in February and March 2020 due to coronavirus-related production shutdowns among local customers. [caption id="attachment_101209" align="aligncenter"] First Quarter 2020 Key Figures[/caption]   This situation resulted in Group sales declining approximately EUR 2.8 billion (-12.3 percent). EBITDA in the first quarter came in at EUR 254 million (-42.5 percent), within the expected range. Net income fell to EUR 20 million (-88.8 percent). Free operating cash flow (FOCF) was in negative territory at minus EUR 249 million, as expected. [caption id="attachment_101210" align="aligncenter"] First Quarter 2020 Segment Results[/caption]   CEO Markus Steilemann stated: "The coronavirus pandemic is an extraordinary situation and has intensified the current global uncertainties. Protecting the health of our employees, their families and our business partners is our priority. In addition, Covestro is doing everything it can to remain a reliable supplier to its customers during this crisis. We are confident that with our absolute focus on our customers, our rigorous cost discipline and our strong team spirit, we will successfully navigate this challenge."

Full-year guidance adjusted for coronavirus impact

Covestro adjusted its annual guidance in mid-April as a result of the anticipated negative effects of the coronavirus pandemic on global economic development and consequently on future business performance. Covestro CFO Dr. Thomas Toepfer said: "Due to the severe impact of the coronavirus pandemic on global markets, we needed to update our guidance. Covestro is in a solid position and still has a strong balance sheet and high liquidity. During these challenging times, we continue to review our operational efficiency, cost reduction programs and investments on an ongoing basis to maintain a stable financial foundation."   For the 2020 financial year, Covestro expects core volume growth to come in below the prior year. FOCF is expected to total between minus EUR 200 million and EUR 300 million, while return on capital employed (ROCE) is expected to range between minus 1 percent and 4 percent. EBITDA is projected to be between EUR 700 million and EUR 1.2 billion. In addition to the current productivity and efficiency program launched in October 2018, Covestro increased its additional short-term cost savings target for the current financial year by a further EUR 100 million to EUR 300 million. Current investments were reduced by approximately EUR 200 million, bringing total capital expenditure to EUR 700 million.   The Annual General Meeting, originally scheduled for 17 April 2020, was cancelled due to the coronavirus pandemic. In accordance with the adapted legal framework, the AGM will now be held as a fully virtual event without physical attendance on 30 July 2020.  

Liquidity secured, focus on sustainability and transformation unchanged

In March 2020, Covestro replaced its existing EUR 1.5 billion credit facility with a new, but not yet drawn, EUR 2.5 billion syndicated revolving credit facility to maintain the company's financial flexibility and secure liquidity. The interest component is linked to an ESG (environmental, social, governance) rating that provides financial incentives to Covestro for sustainable business development. Additionally, the company signed a short-term working capital facility of EUR 500 million, which was fully drawn during this period.   In addition, Covestro was able to secure EUR 225 million in credit from the European Investment Bank (EIB). The credit is being used to strengthen Covestro's research and development activities in the areas of sustainability and the circular economy within the European Union. Details relating to the strategic program for a comprehensive orientation toward the circular economy are expected to be presented in the second quarter of 2020.   To further develop the company's innovation capacity, Covestro expanded its strategic partnerships with newly formed companies earlier this year. The company continues its Covestro Venture Capital (COVeC) approach to invest in young companies in five technology focus areas. The latest example is Covestro's equity investment in French technology C.S.T. (Crime Science Technology). As a shareholder, Covestro is driving the development of sustainable innovation as a long-term growth driver in its core business.

Segment results impacted by coronavirus pandemic

In the first quarter of 2020, Covestro's business in all segments was impacted by the significant effects of the coronavirus pandemic, particularly in China.   Core volumes in the polyurethane segment declined 3.6 percent in this period compared with the same period of the prior year. This was primarily attributable to declining volumes in the electrical, electronics and household appliances sector and the automotive industry. As a result of increased competition worldwide and changes in total sales volumes, sales fell to EUR 1.3 billion (-13.7 percent). EBITDA fell to EUR 50 million (-68.2 percent) due to declining EBITDA margins.   Core volumes in polycarbonates declined 4.9 percent compared with the same period of the prior year. This was due to very low sales in the electrical, electronics and automotive industries. Declining selling prices and lower sales volumes caused sales in the polycarbonate segment to fall to EUR 733 million (-14.8 percent). Low margins resulted in EBITDA falling to EUR 109 million (-29.7 percent).   Core volumes in the coatings, adhesives, specialties segment declined 5.2 percent compared with the same period of the prior year. This development was driven by weak demand for coatings, particularly in the automotive industry and across all major customer industries. Due to the decline in total sales volumes and falling average selling prices, sales fell by 8.8 percent to EUR 572 million. EBITDA fell to EUR 130 million (-11.0 percent) due to negative volume impacts and weak margins. Lower costs enabled the EBITDA margin in the coatings, adhesives, specialties segment to increase to 22.7 percent despite the effects of coronavirus.