Germany's Covestro Q2 net income falls 69% amid lower selling prices

Covestro's second-quarter net income fell sharply amid lower selling prices and margins for its polyurethanes and polycarbonate business segments, the German producer said on Wednesday.

Key points:

- Earnings before interest, taxes, depreciation and amortisation (EBITDA) for 2019 is forecast to be between €1.5bn and €2bn, while in the third quarter, the EBITDA is expected to be around €410m.

Divisional performance:

- Growth in polyurethanes (PU) sales volumes by 0.7% was not enough to keep the division balanced, as revenue declined by 24.3% to €1.49bn with EBITDA falling by 70.5% to €172m as increased competition drove down selling prices.

- Although sales volumes for the polycarbonate (PC) rose by 4.4% compared to the second quarter 2018, revenue for the sector dropped by 15% to €898m and EBITDA fell 46% to €154m.

- This was largely attributed to a slowdown in the automotive industry as the electrical and electronic industries and construction sector contributed to growth.

- Sales for the company’s coatings, adhesives, and specialities segment deflated by 4.7%, pulling revenues down 1.3% to €621m. The gradual purchase in shares of Japan-based DIC Covestro Polymer Ltd boosted EBITDA for the segment by 7.9% to €150m in the second quarter of 2019.

- Chemicals analysts German investment bank Baader state that the weak performance was better than feared, and the producer is on track to reach lower-end expectations for 2019.

- “If we assume, Covestro would reach a year-on-year flat EBITDA (i.e. €293mn), the full year EBITDA would reach €1.68bn (versus consensus of €1.71bn," Baader analysts said.

“Given the worsening business environment…we think it will be difficult for Covestro to reach a year on year flat fourth quarter EBITDA  in 2019 and consequently see more than 4% downward revision risk for Covestro.”

Outlook:

- Covestro continues to project single-digit increase in sales volumes for 2019.

- Year-end free operating cash flow (FOCF) is tipped to be €300-700m, with a 8-13% return on capital employed (ROCE)

- EBITDA for 2019 is expected to reach €1.5-2bn, with €410m expected in the third quarter.