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Monday - February 20, 2017

Financial News Conference

Address by Patrick Thomas and Frank H. Lutz

Chief Executive Officer and Chief Financial Officer of Covestro AG

(Please check against delivery)



(2017-700e-1)

Good morning, ladies and gentlemen.

Thank you for coming to Cologne today and attending our 2016 annual press conference. Today we would like to talk you through Covestro’s business performance and the events of 2016, before discussing the outlook for the current year.

Let me say from the outset: 2016 was an excellent year for Covestro.
We have reached or exceeded all our key financial targets and thus can look back on a record year.

Let us have a quick glance at the figures:

Our adjusted EBITDA in 2016 increased by 22.7 percent, surpassing the mark of two billion euros for the first time ever.

We delivered a net income of 795 million euros, more than double that of 2015.

This strong result is also reflected in our share price:

It gained some 94 percent, outperforming all other MDAX titles and indeed most other German shares in the market.

This outstanding performance is underpinned by the consistently strong demand for our products, leading to higher capacity utilization – the main driver of our strong earnings growth.

We also significantly optimized our production capacities and utilization in 2016.

Let me highlight one new production facility in particular: since June, Covestro has been producing on an industrial scale, foam components that are partly made using carbon dioxide. This innovation is an important milestone, and I will elaborate on it in more detail later.


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To reiterate: We have reached or exceeded all our business targets and I would now like to take you quickly through our key financials.

Our core volume growth of 7.5 percent is fully in line with our guidance of a mid- to high single-digit percentage increase. At the same time it is significantly stronger than in 2015, supported by the higher demand for our products.

Our adjusted EBITDA registered an increase of 22.7 percent, exceeding two billion euros for the first time. The increase in EBITDA was largely attributable to higher volumes, as well as a higher utilization of our production facilities.

Free operating cash flow grew by 41.8 percent to approximately 1.4 billion euros, reaching our original goal to outperform the 2015 figure.

Last but not least, we increased our rate of return. The return on capital employed (ROCE) was 14.2 percent in 2016, which is significantly above the prior-year figure and, as such, in line with our guidance.


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Ladies and gentlemen, our key financials are proof that our strategy is paying off.

Our strong core volume growth shows that our products address the needs that emerge from global macro trends.

Climate change, new mobility trends and a growing population, especially in ever-bigger cities, lead to very specific demands – demands that can only be fulfilled with the support of the right materials.

Our products help protect the environment by replacing other materials that can either not be produced sustainably or are not as sustainable during their lifecycle. A good example of this is our polyurethane insulation material that is highly durable and saves around 70 times more energy than is needed to produce it.

Our materials pave the way for automotive lightweight design, making mobility and transportation more efficient.

We enable more efficient food preservation through high insulation that improves the cold chain.

Our innovative materials for roofing and glazing face high interest from the construction sector and support the demand for affordable and energy-efficient housing

These are just a few of many examples that explain why Covestro is able to outgrow the global markets.


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If we now take a closer look at our regional core volume development, we can see that volumes have increased in all regions.

EMLA saw a core volume growth of 3.0 percent, with the largest market – Germany being flat.

In NAFTA, core volume growth was 6.0 percent. The biggest market in the region, the US, even showed an increase of 7.0 percent.

APAC saw the largest increase with 12.0 percent, heavily driven by the Chinese market, where our core volume growth was 18.0 percent.

Our strategic decision to increase our production capacities early on, pays off: we are now able to upscale production as demand for our products grows. The result: strong EBITDA growth.

And we are not relenting in these efforts: capacities were increased again in 2016, especially in the APAC region.

Based on our positive cash flow development, we increased our financial flexibility and will be able to finance upcoming investments or smaller acquisitions.


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Ladies and Gentlemen,

Whatever Covestro does is rooted in our corporate vision: we want to make the world a brighter place.

You might ask yourselves: What does that mean? How can a company like Covestro achieve that?

We want to develop innovative materials to replace other, less performing, less sustainable or simply more expensive materials. We want to replace them with materials that are more sustainable, more powerful and more cost-efficient.

We want to provide key industries with innovative polymer materials, technologies and application solutions that protect the environment, benefit society and create value.


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Allow me to guide you through some proof points for our strategy of focusing on innovation and sustainability: First, let us take a closer look at the use of carbon dioxide as a raw material.

This is an innovation we developed and which is market ready. Our Dormagen site features a revolutionary new production facility that opened in June 2016. We call the technology behind it cardyon – meaning ‘beyond carbon dioxide’. And that sums up our intention behind this effort pretty well.

We believe it is time to think beyond common practices, push boundaries and look into new ways to substitute carbon-based materials.

Among the alternatives we have in mind, carbon dioxide is very promising for the chemical and polymer industry and is already proving its value in soft foam applications.

We are committed to introduce CO2 into other materials, increase the amount we can use and promote this technology as a viable alternative that truly makes a difference.


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We undertake that effort because, as we know, fossil resources becoming scarcer by the day, while taking their toll on the environment.

Nevertheless, global oil consumption has increased steadily over the past
20 years.


Last year Covestro made a step forward to reduce the use of crude oil as a raw material in the foam production for mattresses. At our Dormagen site we started the production of an innovative foam component made with 20 percent CO2. In other words, we substitute around 20 percent of crude oil with CO2.

The advantages are obvious: the supply of CO2 is almost unlimited. It could even be taken from exhaust gases or used as a by-product of other chemical processes.

So we don’t need the processing part of the oil, leading to a better carbon footprint of the whole production process of our material.

Saving emissions through efficient processes while tapping into alternative resources is one of many great examples for how we push boundaries to make the world a brighter place.


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The second area I want to highlight today is the energy sector.

If you take a walk along a North Sea beach on a sunny day, you might very well see one of the many wind parks on the horizon.

And in all these windmills Covestro materials are potentially included.

The large rotor blades – up to 85 meters in length – are exposed to excessive forces. Cores made with resins based on polyurethanes can help to give them greater stability and durability, which, in turn, prolongs the lifecycle of the windmill. At the same time the production of windmills with those resins is faster and more cost-efficient. The first large rotor blade with Covestro materials inside has just been built in China.

The masts are covered in anti-rust primers, which are also based on polyurethane materials. Additionally, new coatings can be cured faster, reducing the production time for windmills.

Last but not least, the electricity has to be transported on-shore. This is done via undersea cables, which need to specifically be protected against damages that would otherwise lead to significant costs.

Our elastomers provide strong cable protection and the components do not need reworking – in contrast to concrete or steel – allowing for a time and cost advantage.


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With these products and materials in mind, I would like us to take a look at the world’s energy mix. The share of renewables is increasing continuously. The US Energy Information Administration expects the share of renewables to increase to 16 percent by 2040.

Wind energy is a particularly important source because it is available all around the globe.

As a consequence of the significant technological advances in recent years, global capacity is growing sharply. With a capacity of close to 500,000 megawatts, today’s wind energy generation is about 70 times higher than
20 years ago.


According to the Global Wind Energy Council, 2016 alone saw capacities increase by 15 percent, making wind energy a key technology for achieving a sustainable energy mix.

Covestro is helping to accelerate this development by delivering solutions for a more efficient use of sustainable energy sources, thus making the world a brighter place indeed.


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Finally, I would like to take a closer look at the automotive sector.

Some of you may have travelled here by car – but I bet your car didn’t look anything like the prototype we presented at the K fair in October.

That prototype was produced by Covestro in co-operation with the automotive supplier HELLA, and it is all about innovative design and functionality.

Talking about design, I am particularly proud of our cooperation with the UMEA University in Sweden, one of the world’s leading academies for automobile design. Industrial Design is a very creative process, but it also needs the right material to be turned into something real. Under the supervision of Prof. Demian Horst, his Master class developed completely new concepts for car exteriors, based on new material options such as Polycarbonates.

There are many advantages which we may see on the streets in the next decade: the use of polycarbonates instead of glass windows in the occupant cell for example gives passengers a panoramic view with no blind spots, while at the same time reducing the weight of the vehicle.

The surfaces of the car are seamless and homogeneous – and not just for aesthetic reasons. The less drag a vehicle creates, the less energy it consumes, and this translates directly into a greater range.

The rear lights of the car feature an innovative lighting solution based on holographic films. These films enable different lighting functions to be integrated into body components, which opens up entirely new options for using light as a design element.


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As you can see, our materials play a significant role to make tomorrow’s car more efficient and at the same time more design-driven.

What does this mean for Covestro as a material supplier? Looking at a conventional car today, you might find four to five kilograms of Covestro materials in the average vehicle.

In an E-car, the share of Covestro materials will be 20 to 25 kilograms! This trend is also driven by the steady increase of global production of E-cars.

Already by 2020, the automotive industry is likely to produce three times the number of E-cars per year produced in 2016.

Again, Covestro products will play a significant role in the transformation from conventional towards electric mobility.

We will help to drive this transformation.

We will shape it and we will benefit from it.


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This concludes my overview of what we achieved in 2016 and our focus in 2017.

Let me now hand over to our CFO Frank H. Lutz, who will give you more details on our 2016 results.


(2017-700e-13)

Thank you, Patrick.

Good morning, ladies and gentlemen also from my side.

It is my pleasure to provide you with a more detailed look at our results for fiscal year 2016.

This will reveal that Covestro’s results depend largely on a balance – or imbalance - between supply and demand in our markets, and not so much on raw material prices. A look at our EBITDA of over two billion euros makes this crystal clear.

The adjusted EBITDA margin for the full year improved from 13.6 percent in 2015 to 16.9 percent in 2016, a thoroughly impressive year-on-year increase of 330 basis points.

In the past year, sales slightly decreased. This was because the impact of the decline in prices and negative currency effects was greater than the positive effect of the increase in volumes. After all, we – at least partially - pass on lower raw material prices to our customers.

In the fourth Quarter of 2016 the overall positive development continued. Even though growth was well below the average for the year due to force majeure being declared in the Polyurethanes segment. Main growth driver in the last quarter was therefore the Polycarbonates segment. However, in the fourth quarter, the economy picked up again. Prices rose as a result by 4.6 percent compared with the fourth quarter of 2015.

Despite the typical seasonal business slowdown at the end of the year, we were therefore able to lift margins by 380 basis points in the fourth quarter.

All told, we successfully increased adjusted EBITDA in 2016 in every quarter compared with the prior-year quarter. A repeat of our 2015 success!


(2017-700e-14)

Ladies and gentlemen, let’s look at Covestro’s individual segments in greater detail.

Based on preliminary estimates, worldwide market growth in Polyurethanes improved considerably: from two percent in the previous year to six to seven percent in 2016.

Our core volume growth was 7.7 percent, and we therefore succeeded in outperforming the market, despite the mentioned production difficulties in Europe in the fourth quarter.

Capacity utilization in the industry was up substantially due to strong market growth, since the supply side did not increase much during the same period.

The segment’s EBITDA margin increased to 15 percent. This was primarily the result of improved utilization, which brought our margin up to the level of our competitors.

Positive price movements lifted earnings in the fourth quarter and gave us momentum going into 2017.


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In the Polycarbonates segment, we generated impressive double-digit growth in core volumes of 10.3 percent in 2016.

In the fourth quarter, this figure was up again, enabling a very high level of utilization of our new production lines in China.

With a view to production capacity, we again succeeded in making Covestro the world’s top producer at the end of 2016 with a market share of 29 percent.

Covestro’s EBITDA margin improved from 17.7 percent in 2015 to 21.3 percent in 2016. The increase is due to higher volumes and an improved product mix. Run-up costs in China had a negative effect.


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In the Coatings, Adhesives, Specialties segment, our core volume growth – adjusted for the effects of the planned termination of trading activities – was up 4.5 percent. In view of our high market share and moderate market growth, this is an impressive number.

Our EBITDA margin rose slightly by 100 basis points from the 2015 figure to 24.5 percent despite the typical seasonal reduction in margins in the fourth quarter.

This year, the challenge will be the currently sharply rising price of our most important raw material, HMDA, which is largely based on butadiene.

However, we are optimistic about offsetting this pressure with our recently announced price increases.


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Our results for 2015 were substantially affected by the carve-out in that year. For 2016 we do not record any special items. This limits fair comparison with the previous year to a certain extent.

Going forward, we will concentrate on IFRS-based performance indicators as we did in 2016 and will have no adjustments. That does not mean we aim to hide special items, we rather provide more transparency by doing so.

We will still disclose all extraordinary items – I’ll speak about that in a minute - but we will leave it up to you to decide whether these truly represent items necessitating adjustments, or whether they are simply part of our ordinary business.

The gross margin improved by nearly six percentage points. This rise mostly reflects the positive price delta - the difference between purchasing price and selling price - and strong volume effects.

We increased our research and development expenses slightly by around one percent in 2016.

Finally we had two larger special items to report in 2016. Firstly, as announced, we received an insurance reimbursement totaling 30 million euros in the Polyurethanes segment.

Secondly, our other financial result was adversely impacted by a 30 million euro hedging loss, caused by high volatility of one of our core currencies at the beginning of the year.

On the whole, we were able to boost our earnings per share by an impressive 132 percent over the previous year.


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We delivered in 2016 and generated free operating cash flow of nearly 1.4 billion euros: a record.

As usual, both positive and negative effects were in play here, and all told, free operating cash flow tracked EBITDA.


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We reduced total net debt by approximately one billion euros in 2016 thanks to our high Free Operating Cash Flow.

The ratio of net debt to EBITDA declined to 1.3 and is therefore already below our during the IPO announced target of 1.5 until 2019. With an equity capital ratio of about 41 percent we have a more than healthy balance structure.

In the fourth quarter of 2016, we made use of our very good liquidity and transferred bonds in the total amount of 450 million euros to finance some of our pension provisions.

Naturally, this had no effect on our net debt, but instead shifted this amount from net financial debt to pension provisions.


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Ladies and gentlemen, we want our stockholders to participate in Covestro’s excellent performance in fiscal year 2016.

The Board of Management therefore proposes a dividend payment of 1.35 euro per share. This equals a payout ratio of 34 percent, which is within the corridor we envisaged.

Considering 2016 as a whole, the dividend should not be the only thing to make our stockholders happy: Our stock price performance was also outstanding.

In 2016, our first full year as a listed company, Covestro was the most successful MDAX stock with a gain of around 94 percent. From its closing price of 33.64 euros on December 30, 2015, our stock price rose to 65.18 euros as of December 30, 2016. And - as you know - the trend continued during the first weeks of this year.

Covestro was also among the frontrunners in terms of all German stocks, being the second strongest German stock in 2016.

Covestro was also included into major indices during the year, thereby gaining further attention on global stock markets: In April, Covestro was added to the STOXX® Europe 600 index, and the MSCI Global Standard Germany index added our stock at the end of May. Since December, we have also been included in the FTSE 4 Good sustainability index.

With these very satisfying developments, back to Patrick.


(2017-700e-21)

Thank you, Frank.

Many figures, but in the end, that’s the outcome, right? And if they look like this, I don’t mind seeing them more often. However, this was 2016, what can we expect for 2017:

Generally speaking, we anticipate global growth to pick up in 2017 compared to last year. Main drivers include accommodative central bank policies as well as announced and continued stimulus programs in the US and China.

However, there may also be volatility ahead, since we see geopolitical challenges and uncertainties, I guess you know what I mean.

But nevertheless, our end-markets should develop positively.

As China is reducing its tax incentives, the automotive industry will likely register significantly slower growth this year.

However, the global construction industry should grow by two to three percent on the back of a continued recovery in Europe, a stable investment sentiment in North America and a positive development in China.

Electronics show a regionally differentiated picture with strong growth in emerging economies, Asia in particular, and moderate growth in developed countries. Overall, we forecast global growth of some four percent.

Finally, we expect the global furniture industry to register slightly increased growth of three to four percent, mainly driven by the increasing demand in the US.


(2017-700e-22)

This market forecast makes us optimistic for Covestro in 2017. We have built a solid position in each of our key end-markets by addressing the macro trends that affect our clients.

Against this backdrop, we want to build on the business successes of 2016 and use the momentum to carry us forward, while being fully aware of the volatile market we are in. The same applies for an uncertain global political and economic development.

We expect core volume growth in the low to mid-single-digit percentage range.

Our Free Operating Cash Flow should be slightly above the average of the last three years.

And regarding our return on capital, we expect the ROCE to be slightly above the level of 2016.

Before we will answer your questions, let me please recap the strong prospects of Covestro:

Over the last years, we have built up a strong market position that now allows for exploiting growth opportunities, for further optimizing our asset utilization – and strong results.

Our innovations are pushing boundaries – today and tomorrow. We provide key materials to help master the predominant challenges of humankind such as climate change, urbanization and increasing mobility.

On this strong foundation, we look forward to pursuing our long-term profitable growth strategy and our foremost ambition: to make the world a brighter place.

Thank you very much for your attention.

We are now happy to take your questions.


Forward-Looking Statements
This release may contain forward-looking statements based on current assumptions and forecasts made by Covestro AG. Various known and unknown risks, uncertainties and other factors could lead to material differences between the actual future results, financial situation, development or performance of the company and the estimates given here. These factors include those discussed in Covestro’s public reports which are available on the Covestro website at www.covestro.com. Covestro assumes no liability whatsoever to update these forward-looking statements or to conform them to future events or developments.