Tuesday - February 20, 2018

Financial News Conference

Address by Patrick Thomas and Dr. Markus Steilemann

Chief Executive Officer and interim Chief Financial Officer of Covestro AG and Chief Commercial Officer of Covestro AG

(Please check against delivery)


Good morning, ladies and gentlemen.

Today is a very special day for all of us at Covestro: The results we can present to you today are testimony to the work every single employee at Covestro did throughout the last year. And I can say: they did an excellent job.

Ever since we became Covestro we delivered on our promises and even managed to raise the bar.

Today, I am pleased to report very strong results for Covestro at my last Annual Press Conference for Covestro.

We are certainly looking back on a highly successful year.

2017 was, once more, a record year for Covestro, backed by continued very strong demand for our products.

This development was based on growth across our key industries. Covestro’s product portfolio continued to attract customers from a wide range of industries.

Subsequently, we can report excellent results for FY 2017.

Our net income was 153 percent above the previous year’s level, exceeding two billion.

I would also like to mention the share buy-back program we launched in fall 2017.

We decided to start a share buy-back simply because it was the best investment we could find to create value and to return cash to our shareholders. As of today, we have already bought back around four million shares.

And talking about shares, our share price showed remarkable developments throughout 2017. It rose by more than 30 percent, outperforming all relevant indices.


I would now like to take you through the development of our key financials for 2017.

Even though we adjusted our guidance for some of our Key Performance Indicators during the year, we once again reached or exceeded all our targets.

Our core volumes registered growth of 3.4 percent, ending up in the middle of our guidance of low-to-mid-single-digit percentage growth. It was lower than our extraordinary core volume growth in 2016, but above the 2015 levels. The reason is that we are already running our production facilities at close to full capacity.

For the first time, we also provided guidance for our EBITDA, which came in at 3.4 billion euros. At 70.6 percent above the 2016 level this is indeed with a significant plus.

Our 2017 Free Operating Cash Flow of 1.8 billion euros clearly significantly exceeded the average of the last three years.

Finally, our ROCE increased from 14.2 to 33.4 percent, so we reached our target as well.

To sum this up: Outstanding results and a record year!


Ladies and gentlemen,

The demand for sustainable, climate-friendly products is now higher than ever.

A growing population leads to both stronger demand for mobility as well as increasing urbanization.

In short: the trends which have led to Covestro’s successful development in the past years are still valid and we have been offering the solutions to serve the needs emerging from these trends.

Because of that, Covestro managed to outgrow the global GDP not only in 2017 but over the past couple of years, and we are confident to continue doing so in the years to come. This builds a solid foundation for further growth.


Taking a look at the sales development of individual regions, we registered solid core volume growth across all our regions in 2017. APAC showed an increase of 6 percent, EMLA of 3 percent. NAFTA grew slightly slower at just one percent, impacted by hurricane Harvey.

This core volume growth together with increased selling prices led to significantly higher margins for our products.

To further benefit from growth opportunities, we have been focusing on the optimization of our manufacturing capacities.

Let me highlight some of these measures:

We announced to invest about 200 million euros to increase the cost competitiveness at our Tarragona site and we will continue production there beyond the year 2020. We will build our own chlorine supply at this site to ensure a highly efficient, sustainable and independent supply of this crucial raw material.

Furthermore, we will also debottleneck the local MDI plant, increasing production capacity by 50,000 metric tons to around 220,000 metric tons per year. MDI is a precursor for rigid foam – an excellent insulation material used, for example, in buildings and refrigerators.

In Dormagen, we launched the operations at a new production facility for aqueous polyurethane dispersions, thus boosting our capacities in Europe.

We also reacted to the strong customer demand in polycarbonates. Shortly after doubling our production capacity at our Shanghai site, we will increase it once more, from 400,000 to 600,000 tons per year. We expect the expanded capacity to be available in about a year from now.

I would like to highlight that the facility in Shanghai is a prime example for our approach to use highly efficient and environmentally compatible technology. We are recycling the process saltwater at the production site to use it again to produce chlorine and sodium hydroxide, two chemicals that in turn are needed as raw materials for polycarbonates.


Ladies and Gentlemen,

The mind-set of Covestro has always been “Pushing Boundaries”. We want to push the boundaries of what is possible. Thereby, we are constantly striving for our overall goal: Making the world a brighter place by coming up with innovative solutions and products.

Let me introduce you to some highlights Covestro achieved here in 2017.

When it comes to optimizing production processes, our researches have achieved a very notable success: We succeeded in developing a process to obtain aniline from biomass. As you know aniline is an important compound in the chemical industry and in Covestro’s manufacturing processes.

Aniline is currently produced from the fossil raw material benzene. Our newly developed process allows us to completely eliminate the use of fossil raw materials by extracting aniline purely from plants. This is good for the environment, preserves raw material for future generations – and will also make us less dependent on raw material price volatility in the future.

Our sustainable production process for aniline has recently received an award from prestigious Technology Review magazine, published by the well-known Massachusetts Institute of Technology. Covestro is now officially among the most innovative companies of 2017.

Another area in which we keep pushing boundaries, for the benefit of society, is the automotive sector. In terms of performance, safety, comfort and appearance, our materials open up completely new possibilities for the different components of a vehicle.

We recently announced a collaboration between Audi, BASF Coatings and Covestro to develop a new clearcoat with biobased hardener. It has been applied for the first time to test bodies of the Audi Q2 under near-series conditions at the Audi plant. Its huge benefit is that it helps to improve the car manufacturer’s eco-balance without compromising product quality.

The second vehicle you see here is particularly futuristic – a solar-powered electric car called Sonnenwagen. It faced the challenge to push boundaries by taking part in the World Solar Challenge, the toughest solar race in the world, by racing 3,000 kilometres from Darwin to Adelaide without using a drop of fuel.

The Team Sonnenwagen from Aachen University has been powered by Covestro. A partially bio-based coating protected the vehicle against the temperatures of up to 45 degrees Celsius as well as high UV radiation and high dust content in the Outback region. The refinish coating is made with raw materials from Covestro and is particularly suited to application on body parts made of carbon fiber composites.

As you can see, Covestro products are tested under rough conditions to make our everyday life better. This does not only become clear when you look at our solutions for the automotive industry, but also when looking at other industries.

I assume that every one of you owns a smartphone. Some might even have two. Don’t you all want your smartphone to be as light and thin and as robust as possible?

The same applies to other electronic devices like laptops and tablets. This is where Covestro comes into play: We have developed a sophisticated composite technology that is based on continuous fibre-reinforced thermoplastics in combination with a highly efficient production method to reduce the weight of electronic devices by 15 percent.

Apart from the users, the manufacturers of these devices also benefit from reduced weight and lower shipping costs while reducing their logistics-related ecological footprint.


Whatever Covestro does, we follow a holistic approach on sustainability. For several years now, we have applied the “people, planet, profit” principle.

We want to foster increased value on several levels – all at the same time: on an economic level, on an environmental level and on a social level.

Whatever choice we make, the basic rule is quite simple: there must be a positive impact on at least two of these levels and at least a neutral impact on the third.

To achieve our vision of making the world a brighter place, we do not only strive for sustainable and innovative products, but also support outstanding ideas.

We are proud sponsor of the United Nations’ Young Champions of the Earth prize, which was awarded for the first time in 2017.

As we helped to select the six winners of the prize, we were amazed by their ideas and commitment to find answers to today’s environmental challenges. This is exactly what drives us, too.

We will therefore support them to turn their ideas into actions.

With our “Inclusive Business,” we have been working on solutions including affordable housing, sanitation, food preservation and post-harvest technologies for millions of people in underserved markets such as Indonesia, Thailand and India.

In India for example, solar dryers made of polycarbonate by Covestro enable farmers to dry fruit, vegetables, meat or whatever is needed in an efficient way.

Ladies and Gentlemen,

Industrial production is responsible for around one quarter of the global water consumption – and we believe that it is our responsibility to find ways to save resources and reduce that share.

In cooperation with our partners we have developed a method to reuse process wastewater from the production of chlorine by recycling the salt that is used in the process.

We have had a promising start: The new method is currently being tested in the plants in Krefeld-Uerdingen and Shanghai. In Krefeld-Uerdingen, we expect to reduce the amount of salt released into the Rhine by 16,800 tons. In addition, we expect nearly 1,000 tons less CO2 release less per year.

To be honest: There are still a few hurdles to overcome, but we wouldn’t be Covestro if we didn’t constantly thrive for pushing boundaries.

For us, these examples are some of many proof points that our strategy of focusing on innovation and sustainability is paying off.


This concludes my overview on what we have achieved in 2017.

As you know, Covestro will have a new Chief Financial Officer in the near future. Dr Thomas Toepfer will be joining us on April 1st. We are proud to have such an experienced and widely recognised manager joining us.

Until April 1st though, I am also acting as CFO and as such I will continue to talk you through our financial results in more detail now.


As said before, we have achieved impressive results in 2017.

Across all regions and key industries, we experienced a solid core volume growth of 3.4 percent in 2017.

Our EBITDA margin improved from 16.9 percent to 24.3 percent for the full year. Equally impressive is the fact that we did not see the typical seasonal slow-down in the fourth quarter.

However, we need to put the margin into perspective. Excluding an extraordinary positive effect of the TDI fly-up margin and the one-time items, our margin would be at around 20 percent. This still represents a progression of three percentage points, but shows a level we deem more appropriate to reflect last year’s performance.

Overall, we were able to increase our EBITDA each quarter versus the respective prior year in the last twelve quarters.


Ladies and gentlemen,

I would now like to take a more detailed look at Covestro’s individual segments.

Driven by the accelerating global GDP growth, the demand for Polyurethanes remained strong. However, the industry in 2017 was characterized by operating at its limits in light of the constrained available capacities. This is why we are working hard on expanding our capacities.

Even though we were constrained by the limited product availability, we increased our core volumes by 3.4 percent in the Polyurethanes segment.

EBITDA rose by 151.1 percent to 2.2 billion euros. Just as on group level, adjustments for TDI fly-up margins and one-time items would lead to a margin of some 20 percent, which we consider more sustainable going forward.


In Polycarbonates, we delivered a strong core volume growth of five percent for the full year, thanks to the contribution of all three regions. In line with the Polyurethanes segment, our growth was restricted by limited product availability across the market.

We achieved double-digit growth rates in automotive, electronics, medical and niche industries, which drove our sales.

Again, we were able to increase the segment’s EBITDA by 21.2 percent reaching EUR 853 million and a margin of 22.8 percent - an improvement of 150 basis points.

Our earnings were positively affected by higher core volumes, improved product mix and increased selling prices, the latter compensating higher input prices.


In Coatings, Adhesives and Specialties, we kept our core volumes stable year-on-year in a difficult year.

Especially the second half of the year was affected by destocking, a weaker underlying demand and negative effects from Hurricane Harvey. On top, in Q4, we saw the usual seasonal dip and partially some market share losses.

Our EBITDA decreased by 9.4% year-on-year to 453 million euros.

Driven by the higher oil price, from today’s perspective, we might even have to cope with increasing raw material prices for several quarters.

Despite these short-term headwinds, CAS remains an attractive, resilient business with EBITDA margins above 20%. We are also confident that we will see core volume growth return to the low-to mid-single digit percentage range.


Getting back to the Group level, I would like to take a look at our free operating cash flow.

Our FOCF reached a record of more than 1.8 billion euros in 2017.

This strong improvement of some 35 percent was fully driven by the significant EBITDA increase. The figure was reduced by more intense working capital needs, higher capex and higher tax payments based on increased earnings.

Our working capital to sales ratio reached 15.4 percent and is therefore at the low end of our targeted corridor.


Now let us have a look at the development of our financial structure.

In 2017, we managed to significantly reduce our net financial debt by some
1.2 billion euros to 283 million euros.

This was mainly due to our significant free operating cash flow.

Our total net debt to EBITDA ratio has improved to 0.4x at the end of 2017 – after 1.3x at the end of 2016.

Based on the faster pay down of debt than originally expected and to financials that further improved Covestro’s positioning in its current rating category, Moody’s lifted our credit rating outlook from stable to positive in December 2017.

In short: we have a very robust balance sheet.


Ladies and Gentlemen,

At our Capital Markets Day in June 2017, we made the commitment to generate five billion euros of cumulative FOCF until year end 2021.

This is a forecast we want to adjust today: we are now expecting to reach our target of a cumulative free operating cash flow of five billion euros by the end of 2019, thereby cutting the original time frame from five to three years.

Obviously, this anticipation is subject to no major drops in the global economy or similar unexpected events.


Our strong cash generation has brought up an interesting but nonetheless challenging situation: how do we make best use of the free cash flow to create further value?

In line with our dividend policy, our dividend proposal for fiscal year 2017 is 2.20 euros per share. This is an increase of 63 per cent over the dividend for 2016 and a dividend yield of 2.4 per cent.

In order to further improve our portfolio, we continue to screen the market in a disciplined way for external growth options with value-creation as our key focus.

We will continuously optimize our portfolio, which also includes the evaluation of potential disposals.

Last but not least, I have already mentioned our share buy-back program, which is a key part of our value creation. So far the feedback of our shareholders and the capital markets on our program has been very positive. The buy-back began on November 21, 2017 and will be completed no later than mid-2019. As of today, we already bought back ca. 4 million shares, which represents around 2% of the capital stock.


Ladies and Gentlemen,

The positive results we achieved are also reflected in the share price of Covestro.

There were some extraordinary events influencing the development of the share price in 2017.

Our launched share buy-back program did have a positive effect on the price.

At the same time, our free float has more than doubled over the course of the year, as Bayer sold several packages of Covestro shares, reaching 75.4 percent free float at the end of 2017. We are delighted to see that these share placements did not have a lasting negative impact on our share price.

In fact, several billion euro share placements could not stop our share from outperforming relevant indices, including the DAX, the MDAX and the STOXX Europe 600 Chemicals indices.

Starting at 65 euros, our share price closed in 2017 at more than 86 euros per share, increasing by 32 per cent.

I assume that our shareholders are just as pleased with this development as we are – and as you know, our free float has increased further in early 2018 and so has the share price.


As this is my last Annual Press Conference as the CEO of this exciting company, let me express how proud I am of what the whole Covestro team has achieved over the course of the last years.

It is not only that we have reached our targets again and exceeded them significantly. 2017 has been our second year as a stand-alone company and our second straight record year. That proves how well our long-term strategy for an independent Covestro plays out.

Together with our committed employees around the world, we have managed to unlock the potential of Covestro. Our company continues to have the right answers for the needs emerging from global trends. And our innovation and sustainability driven-approach is set to lead to superior solutions for our customers and thereby to continuously increasing demand.

I want to end my speech with this pleasant outlook and I am happy to hand over to my colleague Markus, who will follow this review with a more detailed look at what to expect from Covestro in 2018.

Thank you Patrick.

As Patrick Thomas has impressively shown you, our ambitious strategy as an independent company has proven to be highly successful.

We have specifically aligned our offerings to address global trends and this is reflected in the very strong demand for our future-oriented products.

This has resulted in sharp growth and, consequently, high capacity utilization with corresponding exceptional earnings.

Looking forward to 2018, we want to use this strong starting position to make Covestro even better – to lift it to the next level so to say.


This year, we will be concentrating on four areas to continue advancing our company.

Firstly, Covestro currently holds market-leading positions in all segments. We want to further expand and strengthen these leading positions. Thereby, as described by Patrick, we are benefitting from an increasing demand for sustainable solutions and superior materials. To continue to benefit disproportionally from this demand in the future, we are following our smart capex approach when it comes to organic growth: we will – based on the level of 2017 – significantly increase our investments to return to a level above depreciations in the mid-term. This includes different debottlenecking projects as well as potential brownfield investments. For example, we already launched initial measures at various sites with existing infrastructure.

Furthermore, we will be concentrating even more intently on using the resources available in our organization as efficiently as possible and make all operational processes as efficient as possible. We want to set standards in all processes and all segments in which we operate in terms of efficiency and effectiveness.

Secondly, the ongoing optimization of our processes and our product portfolio will be decisive for further growth and profitability.

Thirdly, we have laid the basis to further expand our strong competitive position through a focused Research & Development approach. We are thereby specifically developing our portfolio towards products to make our business even more independent from cyclical variations. Already today, we derive around 50 percent of our sales and earnings from businesses that are less cyclical. This involves taking bold steps when it comes to innovations while also making use of the opportunities afforded by the digital transformation. Thereby, we heavily focus on the customer journey, which I will get back to later.

And, not least of all, we want to continue to use our copious liquidity and strong balance sheet to unlock value.

Alongside organic growth, we also continuously explore avenues for value adding acquisitions. However, the decisive word here is “value adding”.

The bottom line is that we will continue to develop our company in 2018 in line with our vision “to make the world a brighter place” and create value for our shareholders.


Ladies and Gentlemen,

At the start of his speech, Patrick explained that the reason for Covestro’s success is that with our materials we are offering solutions for the challenges of the global megatrends. And we will to continue doing so. Because these global trends drive the demand on which basis’ disproportionate growth opportunities arise.

Let me show you some very specific examples.

Cooling of food is a central task in food chains and thereby in the supply of billions of people. According to the Food and Agriculture Organization of the United Nations (FAO), 1.3 billion tons of edible foodstuffs per year are either rotting or ends up as waste.

In accordance with that, a working cold chain from the reefer container to the refrigerator in the kitchen at home is essential. Increasing wealth of an ever-larger part of the world population is leading to an increasing demand for fresh food from around the world as well as modern and efficient cooling options.

With regard to our product portfolio, this means that the market for refrigerator insulation alone is expected to grow by some eight per cent per year over the coming years.

Covestro participates in this growth, because we are able to provide the raw material TDI for insulation foam which has particularly good insulation properties. And we can do so along the entire cooling chain.

Another example is increasing mobility, which leads to a globally increasing demand for cars.

Some of you may have attended our Covestro Mobility Day in January. If so, you will be well aware that we are making an important contribution to the vehicle of tomorrow, regarding the freedom in design as well as lightweight construction.

We expect the relevant automotive market segments to grow by some five per cent per year until 2021.

Lightweight design is also clearly driven by another trend: climate change. The weight and fuel or energy consumption of a car is taking an ever important role – and less weight means less consumption.

The trend to individualize and interact with the car plays an increasingly important role for car manufacturers as well. For example, polycarbonate can be formed way more flexibly than glass and is thereby well-suited for the design of complex geometries. This opens an entirely new world of options for car designers to stand out from the broad mass. The same is true for the bigger and bigger displays to interact with passengers, to check the status of the car or simply to be entertained.


However, climate change is leading to significant growth in another industry sector.

The market for offshore wind energy is expected to grow by 19 per cent per year in the near future. If you are aware of the dimensions of these colossal wind turbines, it is easy to understand how important it is to use materials with the right properties. Because the more durable a wind turbine is, the lower the energy production cost will be in the end.

Our polyurethane resins, for example, are exceptionally well-suited to provide increased stability and quicker production to the rotor blades, just like our coatings offer lasting corrosion protection for the steel masts despite the harsh conditions at sea.

Another market with great potential is modern city planning. Architects and engineers around the world are striving to create urban spaces combining modern human needs with sustainability.

Let’s take street lighting for example, where LED technology increases traffic safety while also helping to reduce power consumption.

Annual growth in the LED street light segment is expected to be around twelve per cent. Our specialized polycarbonates can be found in LED lenses – not only in street lamps, but also in cars.


The fact that sustainability is an innovation driver is also reflected in the United Nations Sustainable Development Goals, which we have integrated in our strategy.

They seek to improve the lives of all people on earth. Yet, they also express the need for more sustainable solutions.

Assumptions are, that across all 17 goals, they are expected to account for an aggregate market of up to twelve trillion euros by 2030.

On the basis of these figures, we estimate that the market relevant for Covestro is worth up to 14 billion euros. This is roughly equal to the entire sales that we generated in 2017.


We want to specifically harness this market. Looking ahead to the next few years, we will be focusing on innovative products and solutions addressing the UN Sustainable Development Goals.

And we have demonstrated that we are very successful when it comes to monetarizing research. Currently, we derive around 20 percent of our sales from products that have been revised or developed in the past five years.

As you can see, we are operating in an environment offering a basis for generating profitable growth.

In order to take our so far very successful sustainability-oriented research to a new level, we will be orienting our research and development projects even more strictly.

Covestro wants to commit 80 percent of its R&D spend to addressing the United Nations Sustainable Development Goals by 2025, up from 50 percent in 2017.


The future of our industry and the solutions that we offer our customers is being enriched by a further dimension, namely, the digital transformation, which touches on such aspects as research, our production processes and our interface with the customer.

With this in mind, we have integrated the systematic utilization of digitalization in our corporate structures. Our activities cover all functions and corporate processes.

For example, we will be making greater use of digital processes in production and in our supply chain by not only managing and monitoring our production facilities digitally, but also designing them and mapping and planning processes ahead digitally.

In particular, the focus of the digital transformation will be a digital customer journey. Therefore, we require digital platforms, permitting customers to pursue sourcing strategies that are even more flexible and tailored to their specific needs as a basis for improving the user experience.

And obviously, we will also be exploring new ways of operating our business and tapping new sources of sales.


Let me give you a specific example: The digital marketplace that we announced at the end of 2017 has since been launched, simplifying customers’ access to basic products and connecting them with Covestro and – going forward – other suppliers. By the end of 2019, we want to generate cumulative sales of up to one billion euros via these new digital business models such as the digital marketplace.

Using the platform sourced from a suitable strategic partner, we will also be opening up the Chinese online market over the next few months. We’ll keep you posted!


Ladies and gentlemen,

As you can see, we have not only achieved outstanding performance since becoming independent but have also ushered in the next steps for long-term success.

Because we have the clear goal to continue the strong development of Covestro: We want sustainable success. We want to continue our success course in 2018.

We will specifically identify the strongest growth opportunities in our key industries and opportunities to generate demand via innovative solutions.

For Covestro, growth means profitable growth, so we aim to be able to continue working on the high profitability levels of 2017.

We are creating value for our customers, our employees, society and our shareholders.

And we are confident that the market will also find a fair valuation for the strengths of Covestro in 2018.

Finally, as I already mentioned, we will focus on the digital transformation of our company.

All in all, we are using the achieved results to lift Covestro to the next level and continue to be successful going forward.


Ladies and Gentlemen,

This year has started well and we assume similar positive economic conditions as seen in 2017. We are confident that our industries will – in total – continue to outgrow global GDP.

Based on the lasting strong demand for our products and our smart capacity optimizations, we expect our core volumes to grow at a low- to mid-single-digit percentage pace.

With regards to our Free Operating Cash Flow, we also expect this figure to be significantly above the average of the past three years.

On ROCE, we plan to close in on the same level as in 2017.

With regard to EBITDA, we had a highly encouraging start to the year so far. We expect our EBITDA in Q1 2018 will significantly increase compared to Q1 2017.

For the full year 2018, we assume an EBITDA around the 2017 level. In our view, this adequately takes into account the growth opportunities as well as the risk of increasing competitive pressure which may arise from the ramp-up of new capacities by our competitors.

As you can see, we are well positioned and moving forward in 2018 with great confidence.

This brings me to the end of my presentation. I now invite you to ask any questions that you may have.

Thank you very much!

Forward-looking statements
This news 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 at The company assumes no liability whatsoever to update these forward-looking statements or to conform them to future events or developments.