Quarterly Report • Aug 3, 2016
Quarterly Report
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Interim Report
Financial Report as of June 30, 2016 Half-Year Financial Report
| 2nd quarter 2015 |
2nd quarter 2016 |
Change | 1st half 2015 |
1st half 2016 |
Change | |
|---|---|---|---|---|---|---|
| € million | € million | % | € million | € million | % | |
| Core volume growth1,2 | +6.7% | +7.7% | +4.2% | +8.1% | ||
| Sales | 3,210 | 2,990 | –6.9 | 6,264 | 5,865 | –6.4 |
| Change in sales | ||||||
| Volume | +7.4% | +4.5% | +4.8% | +4.9% | ||
| Price | –6.4% | –8.7% | –5.4% | –9.6% | ||
| Currency | +10.0% | –2.7% | +10.1% | –1.7% | ||
| Portfolio | 0.0% | 0.0% | 0.0% | 0.0% | ||
| Sales by region | ||||||
| EMLA3 | 1,420 | 1,340 | –5.6 | 2,788 | 2,641 | –5.3 |
| NAFTA4 | 888 | 787 | –11.4 | 1,719 | 1,569 | –8.7 |
| APAC5 | 902 | 863 | –4.3 | 1,757 | 1,655 | –5.8 |
| EBITDA6 | 439 | 542 | +23.5 | 832 | 1,050 | +26.2 |
| Adjusted EBITDA7 | 498 | 542 | +8.8 | 914 | 1,050 | +14.9 |
| EBIT8 | 267 | 364 | +36.3 | 473 | 704 | +48.8 |
| Adjusted EBIT9 | 327 | 364 | +11.3 | 578 | 704 | +21.8 |
| Financial result | (46) | (45) | –2.2 | (87) | (123) | –41.4 |
| Net income10 | 152 | 230 | +51.3 | 267 | 412 | +54.3 |
| Operating cash flow11 | 360 | 316 | –12.2 | 544 | 440 | –19.1 |
| Cash outflows for additions to property, plant and equipment and intangible assets |
130 | 79 | –39.2 | 224 | 126 | –43.8 |
| Free operating cash flow12 | 230 | 237 | +3.0 | 320 | 314 | –1.9 |
1 Core volume growth refers to the core products in the Polyurethanes, Polycarbonates and Coatings, Adhesives, Specialties segments. It is calculated as the percentage change in externally sold volumes in thousand tons compared with the prior year. Covestro also takes advantage of business opportunities outside its core business, for example the sale of raw materials and by-products such as hydrochloric acid, sodium hydroxide solution and styrene. These transactions are not included in core volume growth.
2 Reference values calculated based on the definition of the core business effective March 31, 2016
3 EMLA: Europe, Middle East, Africa and Latin America (excl. Mexico) region
4 NAFTA: United States, Canada and Mexico region
5 APAC: Asia and Pacific region
6 EBITDA: EBIT plus depreciation and amortization
7 Adjusted EBITDA: EBITDA before special items 8 EBIT: Income after income taxes plus financial result and income taxes
9 Adjusted EBIT: EBIT before special items
10 Net income: income after income taxes attributable to the stockholders of Covestro AG
11 Operating cash flow: cash flow from operating activities according to IAS 7
12 Free operating cash flow: operating cash flow less cash outflows for additions to property, plant, equipment and intangible assets
| Covestro Group Key Data 2 About This Report 4 |
|
|---|---|
| Covestro on the Capital Market 5 | |
| Interim Group Management Report as of June 30, 2016 | 7 |
| 1. Business Development 8 2. Business Development by Segment 11 |
|
| 2.1 Polyurethanes 11 | |
| 2.2 Polycarbonates 13 | |
| 2.3 Coatings, Adhesives, Specialties 15 | |
| 3. Asset and Financial Position of the Covestro Group 17 | |
| 4. Economic Outlook 19 5. Report on Future Perspectives 20 |
|
| 6. Employees 20 | |
| 7. Opportunities and Risks 21 | |
| Consolidated Interim Financial Statements as of June 30, 2016 | 22 |
| Covestro Group Consolidated Income Statement 23 | |
| Covestro Group Consolidated Statement of Comprehensive Income 24 | |
| Covestro Group Consolidated Statement of Financial Position 25 | |
| Covestro Group Consolidated Statement of Cash Flows 26 | |
| Covestro Group Consolidated Statement of Changes in Equity 27 | |
| Notes to the Consolidated Interim Financial Statements 28 | |
| 1. General Information 28 | |
| 2. Effects of New Financial Reporting Standards 30 | |
| 3. Segment and Regional Reporting 31 | |
| 4. Scope of Consolidation 35 | |
| 4.1 Changes in the Scope of Consolidation 35 4.2 Acquisitions and Divestitures 35 |
|
| 5. Earnings per Share 35 | |
| 6. Provisions for Pensions and Other Post-employment Benefits 36 | |
| 7. Stock-based Compensation Program 36 | |
| 8. Financing 37 | |
| 9. Financial Instruments 38 | |
| 10. Legal Risks 43 | |
| 11. Related Companies and Persons 44 12. Events After the End of the Reporting Period 45 |
|
| Responsibility Statement 46 Review Report 47 |
|
| Further Information | 48 |
| Segment and Quarterly Overview 49 | |
| Financial Calendar 52 | |
| Publishing Information 52 |
The consolidated interim report of Covestro AG meets the requirements for a half-yearly financial report pursuant to the applicable provisions of the German Securities Trading Act (WpHG) and in accordance with Section 37w of the German Securities Trading Act comprises condensed consolidated interim financial statements, an interim Group management report and a responsibility statement. The consolidated interim financial statements were prepared in accordance with IAS 34 according to the International Financial Reporting Standards (IFRSs) of the International Accounting Standards Board (IASB) as endorsed by the European Union (EU) and in effect at the closing date, as well as their Interpretations. This consolidated interim report should be read alongside the annual report for fiscal 2015 and the additional information about the company contained therein.
This Interim Report may contain forward-looking statements based on current assumptions and forecasts made by the management of 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 Group 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. The Group assumes no liability whatsoever to update these forward-looking statements or to conform them to future events or developments.
As the indicators in this report are stated in accordance with commercial rounding principles, totals and percentages may not always be exact.
Percentage deviations are only calculated and reported if they are no more than 100%. Larger deviations are reported as >100%, >200%, etc. If a deviation changes from positive to negative or vice versa, or if it is greater than 1,000%, this is shown by a period.
Covestro has existed as a company within the meaning of IFRSs since September 1, 2015. Therefore, all data for the reference period are as contained in the Combined Financial Statements. Please see the Notes to the Consolidated Financial Statements as of December 31, 2015, in our Annual Report 2015 for further information about the Combined Financial Statements. The Covestro Annual Report 2015 is available at www.covestro.com.
Covestro uses alternative performance measures (APM) to assess the performance of the Group which are not defined in the International Financial Reporting Standards (IFRSs). Operating profitability at Covestro is measured using ROCE (return on capital employed) along with EBITDA (earnings before financial result, taxes, depreciation and amorzitation). Covestro calculates Group liquidity using free operating cash flow (operating cash flow in accordance with IAS 7 less cash outflows for additions to property, plant, equipment and intangible assets). In addition, debt is monitored using net financial debt. The sections entitled "Business Development," "Financial Position and Net Assets" and "Report on Expected Developments" contain definitions of these alternative performance measures and information on how they are calculated.
The abbreviations used in this report are explained in the glossary of the Covestro Annual Report 2015.
This Interim Report was published in German and English on July 26, 2016. Only the German version is binding.
A few months ago, Covestro joined the MDAX and the STOXX Europe 600 indices. Now Covestro is included in two additional international stock indices. The company was added to the MSCI Global Standard Germany Index as of June 1, 2016, and to the FTSE Global Equity Index Series as of June 20, 2016. The MSCI Global Standard Germany Index is calculated by Morgan Stanley Capital International (MSCI). Its international counterpart is the MSCI World Index, which represents equity performance across 23 developed markets countries and is considered one of the world's most important stock indices. Calculated by the FTSE Group, the FTSE Global Equity Index includes 8,000 stocks from 48 countries.
Both indices are of major global importance for a number of equity funds. Inclusion in these indices makes Covestro's stock even more visible to international investors.
On May 12, 2016, Covestro held its first Capital Markets Day in Düsseldorf. Patrick Thomas (Board of Management Chairman) showcased the company's strategy, and Frank H. Lutz (Chief Financial Officer and Labor Director) outlined Covestro's key financials. Furthermore, the heads of segments presented the Group's three segments in detail. Attendees subsequently had the opportunity to familiarize themselves with the latest product innovations and current application trends in the innovation hub at Covestro headquarters in Leverkusen.
Stock prices in markets in industrialized countries were deeply in negative territory in the first six months of 2016. Accordingly, the major indices such as the EURO STOXX 50 and the German benchmark DAX Index lost ground. At the end of June, the MDAX, which is relevant for Covestro, had given up 4.5% from year-end 2015, while the STOXX Europe 600 Chemicals Index shed 10.3% during the same period.
In contrast, Covestro stock finished the second quarter at a Xetra closing price of €39.95, up 18.8% since the end of 2015, thus significantly outperforming the relevant indices.
At the company's first Annual Stockholders' Meeting on May 3, 2016, in Cologne, stockholders voted to approve the dividend of €0.70 per share proposed by the Board of Management and Supervisory Board of Covestro AG for the 2015 short fiscal year. This inaugural dividend was paid on May 4, 2016.
An additional analyst has been covering Covestro since the second quarter of 2016, for a total of 17 investment firms covering the company's stock at the end of the quarter. A buy recommendation was issued by 14 analysts, two gave neutral assessments, and one advised investors to sell. The median share price target was €41.
On June 10, 2016, Moody's Investors Service in London again assigned Covestro the long-term issuer rating of Baa2 with stable outlook. By leaving the investment grade rating unchanged, the agency underscores the company's creditworthiness on international capital markets.
| 2nd quarter 2016 |
1st half 2016 |
||
|---|---|---|---|
| Average daily turnover | million shares | 0.7 | 0.5 |
| High | € | 42.21 | 42.21 |
| Low | € | 30.91 | 25.48 |
| Closing prices (closing date) | € | 39.95 | 39.95 |
| Outstanding shares (closing date) | million shares | 202.5 | 202.5 |
| Market capitalization (closing date) | € million | 8,089 | 8,089 |
Xetra closing prices; source: Bloomberg
as of June 30, 2016
In the second quarter of 2016, the Covestro Group's core volume (in kilotons) was up substantially, by 7.7%, over the volume sold in the prior-year quarter. This was mainly attributable to the Polyurethanes and Polycarbonates segments, which saw strong growth rates of 9.0% and 8.5%, respectively. Core volumes in the Coatings, Adhesives, Specialties segment were down 1.8% below the figure in the prior-year quarter under the influence of the contractual termination of trading activities.
Second-quarter Group sales dropped by 6.9% as against the prior-year quarter to €2,990 million (previous year: €3,210 million). The decline in sales was chiefly the result of an 8.7% total decrease of the selling price level in all three reportable operating segments. In the Polyurethanes segment in particular, selling prices fell substantially below those of the prior-year quarter. In view of the mostly stable levels of supply and demand in Polyurethanes, the sharp price drop in this segment can be traced back to lower raw material prices. Moreover, exchange rate movements had a slightly negative effect on Group sales.
The total volumes sold boosted sales by 4.5% in the second quarter thanks especially to the growth in the Polycarbonates and Polyurethanes segments. Total volumes in Coatings, Adhesives, Specialties reduced sales by 0.6%. The difference between the effect of volumes on sales of 4.5% and the core volume growth of 7.7% was attributable primarily to lower volumes outside of the Polyurethanes core business.
All told, sales in the Polyurethanes segment were down 9.5% to €1,481 million in the second quarter (previous year: €1,637 million). The Polycarbonates segment saw stable sales of €831 million (previous year: €829 million). Sales of Coatings, Adhesives, Specialties declined 5.3% to €532 million (previous year: €562 million).
Group EBITDA was up 8.8% over the adjusted EBITDA in the prior-year quarter, growing from €498 million to €542 million in the second quarter of 2016. There were no special items which necessitated adjustments in the past quarter (previous year: minus €59 million). Overall, lower raw material prices and higher volumes more than offset the effects of lower selling prices. Exchange rate movements had a negative effect on earnings of around €7 million.
The Polycarbonates segment's adjusted EBITDA rose by 27.3% to €191 million (previous year: €150 million). Adjusted EBITDA for the Coatings, Adhesives, Specialties segment was €142 million, 3.6% higher than the prioryear figure of €137 million. In the Polyurethanes segment, adjusted EBITDA grew by 2.2% to €228 million (previous year: €223 million).
In the second quarter, the Covestro Group improved EBIT by 36.3% to €364 million (previous year: €267 million). No items of income or expense were recognized as special items in the second quarter (previous year: minus €60 million).
In the second quarter, research and development expenses declined modestly, by 3.1%, to €62 million (previous year: €64 million).
Taking into account a financial result of minus €45 million (previous year: minus €46 million), income before income taxes increased over the prior-year quarter to €319 million (previous year: €221 million). After tax expense of €86 million (previous year: €67 million), income after income taxes was €233 million (previous year: €154 million). After non-controlling interests, net income amounted to €230 million (previous year: €152 million).
In the second quarter, operating cash flow was down 12.2% to €316 million (previous year: €360 million). The key factors driving the decline, which far outweighed the improvement in EBITDA, were higher outflows for utilizing short-term personnel-related provisions and higher income tax payments.
Since fiscal 2016, the Covestro Group uses free operating cash flow as a significant key performance indicator for controlling the Group. This parameter reflects the company's internal financing capability.
In the second quarter, free operating cash flow rose to €237 million (previous year: €230 million). Reduced cash outflows for additions to property, plant, equipment and intangible assets more than offset the decrease in operating cash flow.
The Group's core volume (in kilotons) in the first six months of 2016 was up significantly over the prior-year period, by 8.1%. This was mainly the result of increases in Polyurethanes and Polycarbonates, which reported robust growth of 9.7% and 8.5%, respectively. In the Coatings, Adhesives, Specialties segment, core volumes were down 2.3% from the figure in the prior-year period as they were influenced by the contractual termination of trading activities.
In the first six months, Group sales dropped by 6.4% compared with the prior-year period to €5,865 million (previous year: €6,264 million). The decline in sales was chiefly the result of a 9.6% total decrease of the selling price level in all three reportable operating segments. In the Polyurethanes segment in particular, selling prices fell substantially below those of the prior-year period. Moreover, exchange rate movements had a slightly negative effect on Group sales.
The total volumes sold boosted sales by 4.9% in the first six months, mainly because of the substantial rise in the Polycarbonates and Polyurethanes segments. Total volumes in Coatings, Adhesives, Specialties reduced sales by 1.1%. The difference between the effect of volumes on sales of 4.9% and the core volume growth of 8.1% was attributable primarily to lower volumes outside of the Polyurethanes core business.
In total, sales in the Polyurethanes segment were down 9.6% to €2,884 million in the first six months (previous year: €3,191 million). In the Polycarbonates segment, sales climbed by 1.4% to €1,617 million (previous year: €1,594 million). Sales of Coatings, Adhesives, Specialties declined by 4.8% to €1,044 million (previous year: €1,097 million).
Consolidated EBITDA was up 14.9% over the adjusted EBITDA in the prior-year period, growing from €914 million to €1,050 million in the first half of 2016. There were no special items which necessitated adjustments in the past half year (previous year: minus €82 million).
In the first six months, the Covestro Group improved EBIT by 48.8% to €704 million (previous year: €473 million). No items of income or expense were recognized as special items in the first half of the year (previous year: minus €105 million).
In the first six months of 2016, research and development expenses amounted to €125 million, unchanged from the previous year (€125 million).
Taking into account a financial result of minus €123 million (previous year: minus €87 million), income before income taxes increased over the prior-year period to €581 million (previous year: €386 million). After tax expense of €164 million (previous year: €114 million), income after income taxes was €417 million (previous year: €272 million). After non-controlling interests, net income amounted to €412 million (previous year: €267 million).
In the first six months, operating cash flow was down 19.1% to €440 million (previous year: €544 million).
Free operating cash flow declined to €314 million in the first six months (previous year: €320 million). Reduced cash outflows for additions to property, plant, equipment and intangible assets in part offset the decrease in operating cash flows.
Alongside the key indicators of core volume growth, return on capital employed (ROCE) and free operating cash flow (FOCF), Covestro also determines EBIT and EBITDA. In order to facilitate a more accurate assessment of business operations, EBIT and EBITDA for the reference period are adjusted for special items (see table). The special items comprise effects that are nonrecurring or do not regularly recur or attain similar magnitudes. EBITDA, EBIT, adjusted EBITDA and adjusted EBIT are not defined in the International Financial Reporting Standards and should therefore be regarded only as supplementary information. EBITDA allows the comparison of operating performance over time since it is not affected by depreciation, amortization, impairment losses or impairment loss reversals.
Depreciation, amortization and impairments for the first half of 2016 decreased by 3.6% to €346 million (previous year: €359 million). They comprised €319 million (previous year: €337 million) in depreciation and impairments of property, plant and equipment and €27 million (previous year: €22 million) in amortization and impairments of intangible assets. No impairment loss reversals were recognized in either the reporting or reference period. Whereas in the first six months of 2015, €23 million in impairment losses were recognized as special items, no special items were recognized in the first half of 2016.
| EBIT 1st half 2015 |
EBIT 1st half 2016 |
EBITDA 1st half 2015 |
EBITDA 1st half 2016 |
|
|---|---|---|---|---|
| € million | € million | € million | € million | |
| Before special items | 578 | 704 | 914 | 1,050 |
| Polyurethanes | (61) | – | (38) | – |
| Polycarbonates | (1) | – | (1) | – |
| Coatings, Adhesives, Specialties | (4) | – | (4) | – |
| Others/Consolidation | (39) | – | (39) | – |
| Total special items | (105) | – | (82) | – |
| of which cost of goods sold | (83) | – | (60) | – |
| of which selling expenses | (1) | – | (1) | – |
| of which research and development expenses | (1) | – | (1) | – |
| of which general administration expenses | (36) | – | (36) | – |
| of which other operating income/expenses | 16 | – | 16 | – |
| After special items | 473 | 704 | 832 | 1,050 |
| Polyurethanes Key Data | |
|---|---|
| 2nd quarter 2015 |
2nd quarter 2016 |
Change | 1st half 2015 |
1st half 2016 |
Change | |
|---|---|---|---|---|---|---|
| € million | € million | % | € million | € million | % | |
| Core volume growth1 | +5.8% | +9.0% | +2.7% | +9.7% | ||
| Sales | 1,637 | 1,481 | –9.5 | 3,191 | 2,884 | –9.6 |
| Change in sales | ||||||
| Volume | +7.7% | +6.4% | +4.1% | +6.7% | ||
| Price | –9.9% | –13.1% | –8.6% | –14.4% | ||
| Currency | +9.2% | –2.8% | +9.6% | –1.9% | ||
| Portfolio | 0.0% | 0.0% | 0.0% | 0.0% | ||
| Sales by region | ||||||
| EMLA | 707 | 653 | –7.6 | 1,381 | 1,268 | –8.2 |
| NAFTA | 524 | 450 | –14.1 | 1,007 | 896 | –11.0 |
| APAC | 406 | 378 | –6.9 | 803 | 720 | –10.3 |
| EBITDA | 195 | 228 | +16.9 | 348 | 442 | +27.0 |
| Adjusted EBITDA | 223 | 228 | +2.2 | 386 | 442 | +14.5 |
| EBIT | 92 | 124 | +34.8 | 123 | 241 | +95.9 |
| Adjusted EBIT | 121 | 124 | +2.5 | 184 | 241 | +31.0 |
| Operating cash flow | 184 | 135 | –26.6 | 305 | 151 | –50.5 |
| Cash outflows for additions to property, plant, equipment and intangible assets |
49 | 46 | –6.1 | 82 | 70 | –14.6 |
| Free operating cash flow | 135 | 89 | –34.1 | 223 | 81 | –63.7 |
1 Reference values calculated based on the definition of the core business effective March 31, 2016
In the second quarter of 2016, core volumes in Polyurethanes rose by a substantial 9.0% over the prior-year quarter. The increase stemmed mostly from the MDI and TDI product groups. The Polyether Polyols product group generated slight core volume growth.
Sales of Polyurethanes fell off compared with the prior-year quarter and were down 9.5% to €1,481 million.
The development of total volumes sold had a positive effect of 6.4% on sales. The difference between this figure and the core volume growth of 9.0% was largely attributable to lower volumes outside of the core business.
Selling prices of Polyurethanes came in 13.1% lower than in the prior-year quarter. Against the backdrop of mostly unchanged supply and demand, the decline in selling prices in all three regions was due primarily to lower raw material prices.
The EMLA region's sales decreased 7.6% to €653 million, principally because of significantly lower selling prices despite a robust increase in volumes. Sales in the NAFTA region fell 14.1% to €450 million. The slight increase in sales resulting from higher volumes was not enough to offset the sharp drop in selling prices and the effects of exchange rate fluctuations. The APAC region saw sales decline by 6.9% to €378 million. Here also a sharp drop in selling prices and exchange rate movements had a more pronounced impact than the opposing effect exerted by large increases in volume.
EBITDA was up 2.2% over the adjusted EBITDA in the prior-year quarter, growing from €223 million to €228 million in the second quarter of 2016. There were no special items which necessitated adjustments in the past quarter (previous year: minus €28 million). Higher volumes contributed to improved earnings. Changes in margins, however, resulted in reduced earnings in some cases.
EBIT rose by 34.8% to €124 million (previous year: €92 million). No items of income or expense were recognized as special items in the second quarter (previous year: minus €29 million).
Free operating cash flow declined by 34.1% to €89 million (previous year: €135 million). This was mainly due to a larger amount of cash tied up in working capital and higher outflows for utilizing short-term personnel-related provisions. These factors overshadowed the positive effect of increased EBITDA.
In the first six months of 2016, core volumes in Polyurethanes rose by a substantial 9.7% over the prior-year period. The increase stemmed from all product groups, particularly MDI and TDI.
Sales of Polyurethanes fell off compared with the prior-year period, down 9.6% to €2,884 million in the first half of 2016.
The development of total volumes sold had a positive effect of 6.7% on sales. The difference between this figure and the core volume growth of 9.7% was due to lower volumes outside of the core business. In view of mostly unchanged supply and demand, the decline in selling prices of 14.4% was mainly due to the drop in raw material prices in all three regions compared with the level in the prior-year period.
EBITDA was up 14.5% over the adjusted EBITDA in the prior-year period, growing from €386 million to €442 million. There were no special items which necessitated adjustments in the first six months of 2016 (previous year: minus €38 million).
EBIT improved by 95.9% to €241 million (previous year: €123 million). No items of income or expense were recognized as special items in the first half of 2016 (previous year: minus €61 million).
Free operating cash flow declined by 63.7% to €81 million (previous year: €223 million). This was mainly due to a larger amount of cash tied up in working capital and higher outflows for utilizing short-term personnel-related provisions. These factors overshadowed the positive effect of increased EBITDA.
| 2nd quarter 2015 |
2nd quarter 2016 |
Change | 1st half 2015 |
1st half 2016 |
Change | |
|---|---|---|---|---|---|---|
| € million | € million | % | € million | € million | % | |
| Core volume growth1 | +9.1% | +8.5% | +7.3% | +8.5% | ||
| Sales | 829 | 831 | +0.2 | 1,594 | 1,617 | +1.4 |
| Change in sales | ||||||
| Volume | +9.6% | +7.9% | +7.5% | +8.3% | ||
| Price | –3.6% | –4.3% | –2.9% | –4.8% | ||
| Currency | +13.3% | –3.4% | +13.0% | –2.1% | ||
| Portfolio | 0.0% | 0.0% | 0.0% | 0.0% | ||
| Sales by region | ||||||
| EMLA | 292 | 300 | +2.7 | 570 | 585 | +2.6 |
| NAFTA | 198 | 193 | –2.5 | 380 | 385 | +1.3 |
| APAC | 339 | 338 | –0.3 | 644 | 647 | +0.5 |
| EBITDA | 149 | 191 | +28.2 | 265 | 368 | +38.9 |
| Adjusted EBITDA | 150 | 191 | +27.3 | 266 | 368 | +38.3 |
| EBIT | 104 | 142 | +36.5 | 177 | 269 | +52.0 |
| Adjusted EBIT | 105 | 142 | +35.2 | 178 | 269 | +51.1 |
| Operating cash flow | 68 | 89 | +30.9 | 99 | 183 | +84.8 |
| Cash outflows for additions to property, plant and equipment and intangible assets |
59 | 19 | –67.8 | 102 | 31 | –69.6 |
| Free operating cash flow | 9 | 70 | >600 | (3) | 152 |
1 Reference values calculated based on the definition of the core business effective March 31, 2016
In the second quarter of 2016, core volumes in the Polycarbonates segment were up by 8.5% over the prior-year quarter. All three regions contributed to the increase in volume, particularly APAC, where the considerable volume growth resulted from increases in nearly all customer industries.
In the Polycarbonates segment, sales of €831 million were stable as against the prior-year quarter. The increase in total volumes sold had a positive effect of 7.9% on sales. Selling prices were down 4.3% overall. Lower raw material prices led to the drop in prices in the APAC and NAFTA regions. The EMLA region's selling prices remained at the level of the prior-year quarter. Exchange rate developments had a negative impact on sales.
All told, sales in the EMLA region grew 2.7% to €300 million on account of higher sales volumes with selling prices holding steady. The NAFTA region saw sales reduced by 2.5% to €193 million. The slight decrease in selling prices and the effects of exchange rate fluctuations overshadowed the increase in sales due to higher volumes. The APAC region's sales were nearly unchanged at €338 million. This was because a robust increase in sales volumes, a sharp drop in selling prices and adverse exchange rate effects mostly balanced each other out.
EBITDA in the Polycarbonates segment increased 27.3% over the adjusted EBITDA in the prior-year quarter, growing from €150 million in the previous year to €191 million in the second quarter. There were no special items which necessitated adjustments in the past quarter (previous year: minus €1 million). Larger sales volumes and improved margins had a positive effect on earnings.
EBIT rose by 36.5% to €142 million (previous year: €104 million). No items of income or expense were recognized as special items in the previous quarter (previous year: minus €1 million).
Free operating cash flow grew sharply to €70 million (previous year: €9 million). The improvement was largely attributable to an increase in EBITDA and lower cash outflows for additions to property, plant, equipment and intangible assets, as planned. These factors outweighed the higher outflows for utilizing short-term personnelrelated provisions.
In the first six months of 2016, core volumes in the Polycarbonates segment were up 8.5% over the prior-year period. There were increases in all three regions, particularly APAC and NAFTA.
In the Polycarbonates segment, sales climbed by 1.4% to €1,617 million in the first six months of 2016. The increase in total volumes sold had a positive effect of 8.3% on sales. Selling prices were 4.8% under those of the prior-year period. This decline in prices was mainly attributable to lower raw material prices in the APAC and NAFTA regions. In contrast, selling prices in the EMLA region held steady at the level of the prior-year period. Exchange rate developments had a slightly negative impact on sales.
EBITDA in the Polycarbonates segment increased 38.3% over the adjusted EBITDA in the prior-year period, growing from €266 million in the previous year to €368 million in the first six months. There were no special items which necessitated adjustments in the first half year (previous year: minus €1 million).
EBIT rose by 52.0% to €269 million (previous year: €177 million). No items of income or expense were recognized as special items in the first six months (previous year: minus €1 million).
Free operating cash flow grew sharply to €152 million (previous year: minus €3 million).
| 2nd quarter 2015 |
2nd quarter 2016 |
Change | 1st half 2015 |
1st half 2016 |
Change | |
|---|---|---|---|---|---|---|
| € million | € million | % | € million | € million | % | |
| Core volume growth1 | +6.5% | –1.8% | +6.4% | –2.3% | ||
| Sales | 562 | 532 | –5.3 | 1,097 | 1,044 | –4.8 |
| Change in sales | ||||||
| Volume | +6.9% | –0.6% | +5.5% | –1.1% | ||
| Price | –1.0% | –2.7% | –0.5% | –2.5% | ||
| Currency | +9.5% | –2.0% | +9.5% | –1.2% | ||
| Portfolio | 0.0% | 0.0% | 0.0% | 0.0% | ||
| Sales by region | ||||||
| EMLA | 285 | 272 | –4.6 | 554 | 534 | –3.6 |
| NAFTA | 130 | 117 | –10.0 | 253 | 231 | –8.7 |
| APAC | 147 | 143 | –2.7 | 290 | 279 | –3.8 |
| EBITDA | 135 | 142 | +5.2 | 266 | 281 | +5.6 |
| Adjusted EBITDA | 137 | 142 | +3.6 | 270 | 281 | +4.1 |
| EBIT | 113 | 119 | +5.3 | 224 | 238 | +6.3 |
| Adjusted EBIT | 115 | 119 | +3.5 | 228 | 238 | +4.4 |
| Operating cash flow | 131 | 72 | –45.0 | 166 | 126 | –24.1 |
| Cash outflows for additions to property, plant and equipment and intangible assets |
20 | 14 | –30.0 | 38 | 25 | –34.2 |
| Free operating cash flow | 111 | 58 | –47.7 | 128 | 101 | –21.1 |
1 Reference values calculated based on the definition of the core business effective March 31, 2016
In the second quarter of 2016, core volumes in the Coatings, Adhesives, Specialties segment declined 1.8% from the prior-year quarter, which had seen an unusually sharp increase of 6.5%. The contractual termination of trading activities contributed to the decline in the quarter under review as anticipated. Adjusted for this effect, core volume growth would have been slightly positive. Core volumes decreased in the NAFTA region, while they remained stable in EMLA and shrank only slightly in APAC.
Sales of Coatings, Adhesives, Specialties were down by 5.3% from the prior-year quarter to €532 million. Selling prices came in 2.7% lower on average than in the prior-year quarter, primarily due to lower prices in EMLA and APAC. In the NAFTA countries, selling prices were stable for the most part. Total volumes sold reduced sales by 0.6%. Moreover, exchange rate movements also had a slightly negative effect on sales.
In the EMLA region, sales decreased by 4.6% overall to €272 million, mainly because of lower selling prices on average. The key factors leading to a 10.0% decline in sales to €117 million in the NAFTA region were reduced volumes and exchange rate fluctuations. In the APAC region, the effect of higher sales volumes was offset by the sales-reducing effects of selling price and exchange rate changes. As a result, sales decreased by 2.7% to €143 million. The termination of the aforementioned trading activities is reflected in the lower sales in these regions.
EBITDA in Coatings, Adhesives, Specialties was up 3.6% over the adjusted EBITDA in the prior-year quarter, growing from €137 million to €142 million in the second quarter. There were no special items which necessitated adjustments in the past quarter (previous year: minus €2 million). Lower raw material prices had a positive impact on EBITDA.
EBIT rose by 5.3% to €119 million (previous year: €113 million). There were no special items in the past quarter (previous year: minus €2 million).
Free operating cash flow declined by 47.7% to €58 million (previous year: €111 million). This was mainly due to a larger amount of cash tied up in working capital and higher outflows for utilizing short-term personnel-related provisions.
In the first six months of 2016, core volumes in Coatings, Adhesives, Specialties were down 2.3% from the prioryear period for reasons including lower volumes sold in the NAFTA region. In EMLA and APAC, volumes dropped only slightly below those of the prior-year period. The contractual termination of trading activities contributed to the decline in the first six months as anticipated. Adjusted for this effect, core volume growth would have been slightly positive.
Sales fell 4.8% from the figure in the prior-year period to €1,044 million. Selling prices were 2.5% lower on average than in the same period of the previous year. The development of total volumes sold had a negative effect of 1.1% on sales. Moreover, exchange rate movements also had a slightly negative effect on sales.
EBITDA increased 4.1% over the adjusted EBITDA in the prior-year period, growing from €270 million in the previous year to €281 million. There were no special items which necessitated adjustments in the first half year (previous year: minus €4 million).
EBIT rose by 6.3% to €238 million (previous year: €224 million). No items of income or expense were recognized as special items in the first six months (previous year: minus €4 million).
Free operating cash flow declined by 21.1% to €101 million (previous year: €128 million).
| 2nd quarter 2015 |
2nd quarter 2016 |
1st half 2015 |
1st half 2016 |
|
|---|---|---|---|---|
| € million | € million | € million | € million | |
| EBITDA | 439 | 542 | 832 | 1,050 |
| Income taxes paid | (73) | (121) | (80) | (201) |
| Changes in pension provisions | 3 | (6) | 6 | (2) |
| (Gains) losses on retirements of noncurrent assets | 1 | – | (18) | – |
| Changes in working capital/other noncash items | (10) | (99) | (196) | (407) |
| Net cash provided by (used in) operating activities | 360 | 316 | 544 | 440 |
| Cash outflows for additions to property, plant, equipment and intangible assets |
(130) | (79) | (224) | (126) |
| Free operating cash flow | 230 | 237 | 320 | 314 |
| Net cash provided by (used in) investing activities | (147) | (73) | (377) | (110) |
| Net cash provided by (used in) financing activities | (212) | (1,122) | (280) | (822) |
| Change in cash and cash equivalents due to business activities | 1 | (879) | (113) | (492) |
| Cash and cash equivalents at beginning of period | 107 | 1,030 | 201 | 642 |
| Change in cash and cash equivalents due to exchange rate movements | (2) | – | 18 | 1 |
| Cash and cash equivalents at end of period | 106 | 151 | 106 | 151 |
1 Presentation changed to provide more relevant information pursuant to IAS 1.41 et seqq.
In the second quarter of 2016, operating cash flow amounted to €316 million, down from €360 million in the previous year. A considerable increase in EBITDA stood in contrast to higher income tax payments of €121 million (previous year: €73 million) and higher outflows for utilizing short-term personnel-related provisions. After cash outflows for additions to property, plant, equipment and intangible assets, free operating cash flow totaled €237 million (previous year: €230 million).
In the first six months of 2016, operating cash flow amounted to €440 million, down from €544 million in the previous year. After cash outflows for additions to property, plant, equipment and intangible assets, free operating cash flow totaled €314 million (previous year: €320 million).
Net cash outflow for investing activities in the second quarter of 2016 amounted to €73 million (previous year: €147 million). This figure mainly comprises cash outflows for additions to property, plant, equipment and intangible assets of €79 million (previous year: €130 million).
Net cash outflow for investing activities in the first six months of 2016 totaled €110 million (previous year: €377 million). Cash outflows for additions to property, plant, equipment and intangible assets of €126 million (previous year: €224 million) decreased as expected.
Net cash outflow for the Covestro Group's financing activities in the second quarter of 2016 amounted to €1,122 million (previous year: €212 million). In April and June 2016, the remaining loan liabilities in respect of Bayer Antwerpen NV, Diegem, Belgium, in the amount of €810 million were repaid along with additional liabilities to banks. Moreover, Covestro AG distributed dividends for the first time for a total of €142 million.
Net cash outflow for the Covestro Group's financing activities in the first six months of 2016 amounted to €822 million (previous year: €280 million), with borrowing of €1,740 million partly offsetting repaid debt of €2,392 million.
| Dec. 31, 2015 | June 30, 2016 | |
|---|---|---|
| € million | € million | |
| Bonds | – | 1,493 |
| Liabilities to banks | 482 | 398 |
| Liabilities under finance leases | 298 | 273 |
| Liabilities from derivatives | 31 | 39 |
| Other financial liabilities | 2,070 | 6 |
| Positive fair values of hedges of recorded transactions | (27) | (20) |
| Financial liabilites | 2,854 | 2,189 |
| Cash and cash equivalents | (642) | (151) |
| Current financial assets | (1) | (1) |
| Net financial debt | 2,211 | 2,037 |
1 Net financial debt is not defined in the International Financial Reporting Standards and is calculated as shown in this table.
The Covestro Group's net financial debt totaled €2,037 million as of June 30, 2016, decreasing by €174 million from December 31, 2015. Cash inflows from the company's first bond placement and from operations were used to distribute dividends and to repay in full the loan liabilities in respect of Bayer Antwerpen NV, Diegem, Belgium.
| Dec. 31, 2015 | June 30, 2016 | |
|---|---|---|
| € million | € million | |
| Noncurrent assets | 6,294 | 6,135 |
| Current assets | 4,237 | 3,974 |
| Total assets | 10,531 | 10,109 |
| Equity | 3,612 | 3,411 |
| Noncurrent liabilities | 2,355 | 4,428 |
| Current liabilities | 4,564 | 2,270 |
| Liabilities | 6,919 | 6,698 |
| Total equity and liabilities | 10,531 | 10,109 |
Total assets declined by €422 million compared with December 31, 2015, to €10,109 million as of June 30, 2016.
Noncurrent assets decreased by €159 million to €6,135 million as of June 30, 2016. The change is attributable primarily to the reduction in property, plant, equipment by €320 million to €4,614 million. This stands in contrast to a €191 million increase in deferred taxes to €831 million, which stemmed mainly from the recognition directly in equity of the remeasurement of provisions for pensions. Current assets declined by €263 million to €3,974 million. Cash and cash equivalents decreased, while trade accounts receivable increased.
Equity was €201 million lower, amounting to €3,411 million in the first six months of 2016. Income after income taxes stood in contrast to the remeasurement of provisions for pensions due to a lower interest rate and the dividend distribution, which had the effect of reducing equity.
Liabilities were down €221 million to €6,698 million as of June 30, 2016. Provisions for pensions and other post-employment benefits increased by €636 million. Noncurrent financial liabilities rose €1,446 million to €1,820 million, largely due to Covestro issuing bonds for the first time. Current financial liabilities decreased by €2,118 million to €389 million. This change is attributable to the repayment in full of the loan from Bayer Antwerpen NV, Diegem, Belgium, totaling €2,060 million.
| Dec. 31, 2015 | June 30, 2016 | |
|---|---|---|
| € million | € million | |
| Provisions for pensions and other post-employment benefits | 1,462 | 2,098 |
| Net defined benefit asset | – | – |
| Net defined benefit liability for post-employment benefits | 1,462 | 2,098 |
The net defined benefit liability for post-employment benefits increased by €636 million as compared with December 31, 2015, to €2,098 million as of June 30, 2016. This was due to the drop in long-term capital market interest rates for blue-chip corporate bonds.
| Growth1 2015 | Growth1 forecast 2016 (Annual Report 2015) |
Growth1 forecast 2016 |
|
|---|---|---|---|
| % | % | % | |
| World | 2.6 | 2.8 | 2.5 |
| European Union | 1.9 | 1.9 | 1.7 |
| of which Germany | 1.4 | 2.0 | 1.6 |
| United States | 2.4 | 2.7 | 1.9 |
| Asia | 4.7 | 4.6 | 4.6 |
| of which China | 6.9 | 6.3 | 6.5 |
1 Real growth of gross domestic product, source: IHS (Global Insight);
As of July 2016, growth forecast including "Brexit-effect"
In 2016, the global economy is expected to grow at a pace of 2.5%, slightly slower than in the previous year (Annual Report 2015 forecast: 2.8%). We believe the United States economy will expand much less robustly than expected in the Annual Report 2015. This development stems from weak growth of 0.8% in the first quarter of 2016 and low manufacturing industry performance as well as reduced investments and sustained sluggishness in exports.
The growth rate in the United Kingdom and, to a lesser extent, key trading partners such as the EU and the United States will be much lower due to the result of the EU membership referendum vote in the United Kingdom and its possible exit from the EU. This assumption is based on projected lower consumption and decreased investments in the United Kingdom due to the heightened uncertainty there. The slowing of growth in the United Kingdom has only a minimal effect on Covestro because the United Kingdom's share of the company's total business is insignificant.
As in the previous quarter, we expect somewhat less robust performance in our key customer industries than forecasted in the Annual Report 2015, in view of factors including the possible effects of a United Kingdom withdrawal from the EU as a result of the referendum. This is attributable to slightly weakened expectations concerning the performance of the automotive, furniture, consumer electronics and household appliance sectors as key segments of the electrical/electronics industry. We now anticipate growth to range from around 3% to 4% in the aforementioned sectors and industries. No significant changes from the forecast are expected for the global construction industry, for which we projected a growth rate of approximately 2%.
We have elected to increase the forecasts for the current fiscal year from our Annual Report 2015 based on the business performance described in this report and taking into account the potential risks and opportunities.
We now expect a mid- to high-single-digit increase in core volume growth, largely driven by the ongoing positive development in the Polyurethanes and Polycarbonates segments. As we noted in the Annual Report 2015, growth in the Coatings, Adhesives, Specialties segment is held back by the contractual termination of trading operations. Adjusted for these effects, we would expect core volume growth in the mid-single-digit-percentage range for Coatings, Adhesives, Specialties.
Free operating cash flow in 2016 should remain around last year's level. We expect a substantial increase for the Polycarbonates segment and a decrease for the Polyurethanes and Coatings, Adhesives, Specialties segments, however. The difference in performance in the various segments is chiefly due to changes in working capital, cash outflows for additions to property, plant and equipment, and income taxes.
We now anticipate ROCE1 to be above last year's level in fiscal 2016.
As of June 30, 2016, the Covestro Group had 15,727 employees worldwide (December 31, 2015: 15,761). The €175 million increase in personnel expenses as against the prior-year period to €951 million in the first six months of 2016 (previous year: €776 million) was due to factors including the sharp increase in headcount compared with June 2015.
| Dec. 31, 2015 | June 30, 2016 | |
|---|---|---|
| Production | 9,988 | 9,928 |
| Marketing and distribution | 3,528 | 3,490 |
| Research and development | 1,005 | 1,021 |
| General administration | 1,240 | 1,288 |
| Total | 15,761 | 15,727 |
2 The number of employees on either permanent or temporary contracts is stated in full-time equivalents, with part-time employees included on a pro-rated basis in line with their contractual working hours.
1 ROCE: The return on capital employed is calculated as the ratio of adjusted EBIT after taxes to capital employed. The capital employed is the capital used by the company. It is the sum of noncurrent and current assets less noninterest-bearing liabilities such as trade accounts payable.
As a global enterprise with a diversified portfolio, the Covestro Group is exposed to a wide range of opportunities and risks.
The Covestro Group regards opportunity and risk management as an integral part of corporate governance. Our opportunity and risk management system and the opportunity and risk situation are outlined in detail in section 21 of the Covestro Annual Report 2015 and there have been no material changes since December 31, 2015. At the time this half-yearly financial report was prepared, the Group still faced no risks that could endanger its continued existence.
Material developments that have occurred with respect to legal risks since publication of the Covestro Annual Report 2015 (Note 28 to the Consolidated Financial Statements) are described in Note 10 to the Consolidated Interim Financial Statements. The Covestro Annual Report 2015 is available at www.covestro.com.
as of June 30, 2016
| 2nd quarter 2015 |
2nd quarter 2016 |
1st half 2015 |
1st half 2016 |
|
|---|---|---|---|---|
| € million | € million | € million | € million | |
| Sales | 3,210 | 2,990 | 6,264 | 5,865 |
| Cost of goods sold | (2,418) | (2,143) | (4,832) | (4,220) |
| Gross profit | 792 | 847 | 1,432 | 1,645 |
| Selling expenses | (336) | (344) | (632) | (658) |
| Research and development expenses | (64) | (62) | (125) | (125) |
| General administration expenses | (116) | (100) | (209) | (214) |
| Other operating income | 9 | 35 | 51 | 85 |
| Other operating expenses | (18) | (12) | (44) | (29) |
| EBIT1 | 267 | 364 | 473 | 704 |
| Equity-method income (loss) | (6) | (5) | – | (10) |
| Interest income | 2 | 0 | 3 | 3 |
| Interest expense | (26) | (14) | (53) | (29) |
| Other financial result | (16) | (26) | (37) | (87) |
| Financial result | (46) | (45) | (87) | (123) |
| Income before income taxes | 221 | 319 | 386 | 581 |
| Income taxes | (67) | (86) | (114) | (164) |
| Income after income taxes | 154 | 233 | 272 | 417 |
| of which attributable to noncontrolling interest | 2 | 3 | 5 | 5 |
| of which attributable to Covestro AG stockholders (net income) | 152 | 230 | 267 | 412 |
| € | € | € | € | |
| Basic earnings per share | 1.09 | 1.13 | 1.91 | 2.03 |
| Diluted earnings per share | 1.09 | 1.13 | 1.91 | 2.03 |
1 EBIT = income after income taxes plus financial result and income taxes
| 2nd quarter 2015 |
2nd quarter 2016 |
1st half 2015 |
1st half 2016 |
|
|---|---|---|---|---|
| € million | € million | € million | € million | |
| Income after income taxes | 154 | 233 | 272 | 417 |
| Remeasurements of the net defined benefit liability for post-employment benefit plans |
357 | (208) | 41 | (623) |
| Income taxes | (114) | 68 | (12) | 202 |
| Other comprehensive income from remeasurements of the net defined benefit liability for post-employment benefit plans |
243 | (140) | 29 | (421) |
| Other comprehensive income that will not be reclassified subsequently to profit or loss |
243 | (140) | 29 | (421) |
| Changes in fair values of derivatives designated as cash flow hedges |
(2) | – | (4) | – |
| Reclassified to profit or loss | 2 | – | 3 | – |
| Income taxes | – | – | 0 | – |
| Other comprehensive income from cash flow hedges | – | – | (1) | – |
| Changes in exchange differences recognized on translation of operations outside the eurozone |
(122) | 31 | 176 | (54) |
| Reclassified to profit or loss | – | – | – | – |
| Other comprehensive income from exchange differences | (122) | 31 | 176 | (54) |
| Other comprehensive income that may be reclassified subsequently to profit or loss |
(122) | 31 | 175 | (54) |
| Effects of changes in scope of consolidation | (1) | – | (10) | – |
| Total other comprehensive income1 | 120 | (109) | 194 | (475) |
| of which attributable to noncontrolling interest | (4) | 2 | (1) | 1 |
| of which attributable to Covestro AG stockholders | 124 | (111) | 195 | (476) |
| Total comprehensive income | 274 | 124 | 466 | (58) |
| of which attributable to noncontrolling interest | (2) | 5 | 4 | 6 |
| of which attributable to Covestro AG stockholders | 276 | 119 | 462 | (64) |
1 Total changes recognized outside profit or loss
| June 30, 2015 | June 30, 2016 | Dec. 31, 2015 | |
|---|---|---|---|
| € million | € million | € million | |
| Noncurrent assets | |||
| Goodwill | 259 | 259 | 261 |
| Other intangible assets | 138 | 108 | 132 |
| Property, plant and equipment | 5,061 | 4,614 | 4,934 |
| Investments accounted for using the equity method | 227 | 217 | 227 |
| Other financial assets | 57 | 37 | 40 |
| Other receivables | 70 | 69 | 60 |
| Deferred taxes | 405 | 831 | 640 |
| 6,217 | 6,135 | 6,294 | |
| Current assets | |||
| Inventories | 1,921 | 1,685 | 1,783 |
| Trade accounts receivable | 1,794 | 1,776 | 1,486 |
| Other financial assets | 539 | 26 | 33 |
| Other receivables | 206 | 288 | 277 |
| Claims for income tax refunds | 6 | 48 | 16 |
| Cash and cash equivalents | 106 | 151 | 642 |
| 4,572 | 3,974 | 4,237 | |
| Total assets | 10,789 | 10,109 | 10,531 |
| Equity | |||
| Capital stock of Covestro AG | – | 203 | 203 |
| Capital reserves of Covestro AG | – | 4,908 | 4,908 |
| Other reserves | 1,717 | (1,721) | (1,515) |
| Equity attributable to Covestro AG stockholders | 1,717 | 3,390 | 3,596 |
| Equity attributable to noncontrolling interest | 11 | 21 | 16 |
| 1,728 | 3,411 | 3,612 | |
| Noncurrent liabilities | |||
| Provisions for pensions and other post-employment benefits | 1,409 | 2,098 | 1,462 |
| Other provisions | 217 | 312 | 309 |
| Financial liabilities | 521 | 1,820 | 374 |
| Other liabilities | 29 | 27 | 29 |
| Deferred taxes | 181 | 171 | 181 |
| 2,357 | 4,428 | 2,355 | |
| Current liabilities | |||
| Other provisions | 350 | 385 | 429 |
| Financial liabilities | 4,697 | 389 | 2,507 |
| Trade accounts payable | 1,456 | 1,262 | 1,403 |
| Income tax liabilities | 29 | 58 | 56 |
| Other liabilities | 172 | 176 | 169 |
| 6,704 | 2,270 | 4,564 | |
| Total equity and liabilities | 10,789 | 10,109 | 10,531 |
| 2nd quarter 2015 |
2nd quarter 2016 |
1st half 2015 |
1st half 2016 |
|
|---|---|---|---|---|
| € million | € million | € million | € million | |
| Income after income taxes | 154 | 233 | 272 | 417 |
| Income taxes | 67 | 86 | 114 | 164 |
| Financial result | 46 | 45 | 87 | 123 |
| Income taxes paid1 | (73) | (121) | (80) | (201) |
| Depreciation, amortization and impairments | 172 | 178 | 359 | 346 |
| Change in pension provisions | 3 | (6) | 6 | (2) |
| (Gains) losses on retirements of noncurrent assets | 1 | 0 | (18) | 0 |
| Decrease (increase) in inventories | (3) | 46 | 80 | 76 |
| Decrease (increase) in trade accounts receivable | (52) | (110) | (163) | (302) |
| (Decrease) increase in trade accounts payable | 11 | 11 | (185) | (131) |
| Changes in other working capital, other noncash items1 | 34 | (46) | 72 | (50) |
| Net cash provided by (used in) operating activities | 360 | 316 | 544 | 440 |
| Cash outflows for additions to property, plant, equipment and intangible assets |
(130) | (79) | (224) | (126) |
| Cash inflows from sales of property, plant, equipment and other assets |
1 | 0 | 21 | 3 |
| Cash outflows for noncurrent financial assets1 | (55) | (6) | (94) | (7) |
| Cash inflows from noncurrent financial assets1 | 0 | 0 | 27 | 2 |
| Cash outflows for acquisitions less acquired cash | 1 | – | (14) | – |
| Interest and dividends received | 2 | 0 | 2 | 5 |
| Cash inflows from (outflows for) other current financial assets1 | 34 | 12 | (95) | 13 |
| Net cash provided by (used in) investing activities | (147) | (73) | (377) | (110) |
| Financial transactions with the Bayer Group | (89) | – | (386) | – |
| (Cash outflows for) inflows from profit transfer to Bayer AG | (155) | – | (155) | – |
| Dividends paid | 1 | (143) | (10) | (143) |
| Issuances of debt | 372 | 42 | 834 | 1,740 |
| Retirements of debt | (309) | (1,007) | (509) | (2,392) |
| Interest paid | (32) | (14) | (54) | (27) |
| Net cash provided by (used in) financing activities | (212) | (1,122) | (280) | (822) |
| Change in cash and cash equivalents due to business activities | 1 | (879) | (113) | (492) |
| Cash and cash equivalents at beginning of year | 107 | 1,030 | 201 | 642 |
| Change in cash and cash equivalents due to exchange rate movements |
(2) | 0 | 18 | 1 |
| Cash and cash equivalents at end of year | 106 | 151 | 106 | 151 |
1 Presentation changed to provide more relevant information pursuant to IAS 1.41 et seqq.
| Accumulated other comprehensive income | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| Capital stock of Covestro AG |
Capital reserves of Covestro AG |
Retained earnings incl. total income |
Currency translation |
Cash flow hedges | Revaluation surplus |
Equity attributable to Covestro AG stockholders |
Equity attributable to noncontrolling interest |
Equity | |
| € million | € million | € million | € million | € million | € million | € million | € million | € million | |
| Dec. 31, 2014 | 1,427 | 340 | 2 | 1 | 1,770 | 17 | 1,787 | ||
| (Profit) loss transfer to Bayer AG | (155) | (155) | (155) | ||||||
| Dividend payments | (7) | (7) | (6) | (13) | |||||
| Other changes | (353) | (353) | (4) | (357) | |||||
| Income after income taxes | 267 | 267 | 5 | 272 | |||||
| Other comprehensive income | 19 | 177 | (1) | 195 | (1) | 194 | |||
| Total comprehensive income | 286 | 177 | (1) | 462 | 4 | 466 | |||
| June 30, 2015 | 1,198 | 517 | 1 | 1 | 1,717 | 11 | 1,728 | ||
| Dec. 31, 2015 | 203 | 4,908 | (1,999) | 484 | 0 | 0 | 3,596 | 16 | 3,612 |
| Dividend payments | (142) | (142) | (1) | (143) | |||||
| Other changes | 0 | 0 | 0 | 0 | 0 | ||||
| Income after income taxes | 412 | 412 | 5 | 417 | |||||
| Other comprehensive income | (421) | (55) | 0 | (476) | 1 | (475) | |||
| Total comprehensive income | (9) | (55) | 0 | (64) | 6 | (58) | |||
| June 30, 2016 | 203 | 4,908 | (2,150) | 429 | – | – | 3,390 | 21 | 3,411 |
Consolidated Interim Financial Statements
Pursuant to Section 37w of the German Securities Trading Act (WpHG), the consolidated interim financial statements of Covestro AG, Leverkusen, (Covestro AG) as of June 30, 2016, have been prepared according to the International Financial Reporting Standards (IFRSs) – including IAS 34 (Interim Financial Reporting) – of the International Accounting Standards Board (IASB), London, United Kingdom, endorsed by the European Union and in effect at the closing date, as well as the Interpretations (IFRICs) of the IFRS Interpretations Committee (IFRS IC) and the interpretations published by the Standing Interpretations Committee (SIC).
As explained in the consolidated financial statements as of December 31, 2015, the predecessor accounting approach was applied in the Combined Financial Statements1 in accordance with the rules on business combinations under common control. We also utilized the option of presenting the comparative information required under IFRSs as if the legal transfers of the business activities had already previously taken place. This method allows the presentation of prior-period financial information as contained in the published Combined Financial Statements. The "Treatment of costs for central services" and the "Treatment of current and deferred income taxes" in the reference period are described in detail in the consolidated financial statements as of December 31, 2015. For further information about the main assumptions, reference is additionally made to the published Combined Financial Statements.2
The accounting policies and valuation principles described in the consolidated financial statements as of December 31, 2015, were applied unchanged in preparing the consolidated interim financial statements as of June 30, 2016, subject to the effects of financial reporting standards adopted for the first-time in the current fiscal year as described in Note 2.
The consolidated interim financial statements are drawn up in euros. Amounts are stated in millions of euros (€ million) except where otherwise indicated.
1 Combined Financial Statements were prepared for the Combined Covestro Group for the fiscal years ended December 31, 2014, December 31, 2013, and December 31, 2012, and for the interim reporting period from January 1 to June 30, 2015, in accordance with the requirements of IAS 34. The combined annual financial statements and the combined interim financial statements are hereinafter referred to as the Combined Financial Statements.
2 The Combined Financial Statements, which were published for the purposes of the Initial Public Offering (IPO) of Covestro AG in a listing prospectus, are available, along with the listing prospectus itself, on the Covestro AG website.
In the reporting period, the following exchange rates were used for the major currencies of relevance to the Covestro Group.
| Closing Rates for Major Currencies | ||||||||
|---|---|---|---|---|---|---|---|---|
| Closing rate | ||||||||
| €1/ | June 30, 2015 |
Dec. 31, 2015 |
June 30, 2016 |
|||||
| BRL | Brazil | 3.47 | 4.31 | 3.59 | ||||
| CNY | China | 6.94 | 7.06 | 7.40 | ||||
| HKD | Hong Kong | 8.67 | 8.44 | 8.61 | ||||
| INR | India | 71.19 | 72.02 | 74.96 | ||||
| JPY | Japan | 137.01 | 131.07 | 114.05 | ||||
| MXN | Mexico | 17.53 | 18.91 | 20.63 | ||||
| USD | United States | 1.12 | 1.09 | 1.11 |
| Average rate | |||||
|---|---|---|---|---|---|
| €1/ | 1st half 2015 |
1st half 2016 |
|||
| BRL | Brazil | 3.30 | 4.13 | ||
| CNY | China | 6.94 | 7.30 | ||
| HKD | Hong Kong | 8.65 | 8.66 | ||
| INR | India | 70.11 | 74.93 | ||
| JPY | Japan | 134.14 | 124.50 | ||
| MXN | Mexico | 16.88 | 20.12 | ||
| USD | United States | 1.12 | 1.12 |
The amendments to IFRS 11 (Joint Arrangements) entitled "Accounting for Acquisitions of Interests in Joint Operations" clarify in particular that IFRS 3 must be applied when accounting for the acquisition of an interest in a joint operation in which the activity constitutes a business, insofar as this does not contradict the provisions of IFRS 11. They are being applied prospectively and have no material impact on the presentation of the Covestro Group's financial position or results of operations.
The amendments to IAS 16 (Property, Plant and Equipment) and IAS 38 (Intangible Assets) entitled "Clarification of Acceptable Methods of Depreciation and Amortisation" clarify that revenue-based depreciation of property, plant and equipment or amortization of intangible assets is inappropriate. They have no impact on the presentation of the Covestro Group's financial position or results of operations.
In accordance with the amendments to IAS 16 (Property, Plant and Equipment) and IAS 41 (Agriculture) entitled "Agriculture: Bearer Plants" published in June 2014, fruit-bearing plants used solely to grow agricultural produce are to be accounted for according to IAS 16. These amendments have no impact on the presentation of the Covestro Group's financial position or results of operations.
In August 2014, the IASB published "Equity Method in Separate Financial Statements (Amendments to IAS 27)." The amendments permit the equity method to be used to account for investments in subsidiaries, joint ventures and associates in an entity's separate financial statements. These amendments have no impact on the presentation of the Covestro Group's financial position or results of operations.
The "Annual Improvements to IFRSs 2012 – 2014 Cycle" were published in September 2014. These address details of the recognition, measurement and disclosure of business transactions and serve to standardize terminology. They consist mainly of editorial changes to and clarifications of existing standards. As a result, amendments were made to IFRS 5 (Non-current Assets Held for Sale and Discontinued Operations), IFRS 7 (Financial Instruments: Disclosures), IAS 19 (Employee Benefits) and IAS 34 (Interim Financial Reporting). Their application has no material impact on the presentation of the Covestro Group's financial position or results of operations.
The "Disclosure Initiative" published in December 2014 contains amendments to IAS 1 (Presentation of Financial Statements). These are intended to provide further clarification of the presentation and disclosure requirements formulated in IAS 1 and relate in particular to the materiality and aggregation of items, the presentation of the statements of financial position, of profit or loss and of other comprehensive income, the structure of information in the notes to the financial statements and the information on applicable financial reporting methods. The amendments have no material impact on the presentation of the consolidated financial statements.
The IASB published "IFRS 14 (Regulatory Deferral Accounts)" in January 2014 and amendments to IFRS 10 (Consolidated Financial Statements), IFRS 12 (Disclosure of Interests in Other Entities) and IAS 28 (Investments in Associates and Joint Ventures) entitled "Investment Entities: Applying the Consolidation Exception" in December 2014, which were to have been applied for the first time from January 1, 2016. As neither have yet been endorsed by the European Union, they have not been applied to date. The changes are not expected to have an impact on the presentation of the Covestro Group's financial position or results of operations.
The Board of Management of Covestro AG, as the chief operating decision maker of the Covestro Group, allocates resources to the operating segments and assesses their performance. The reportable segments and regions are identified, and the disclosures selected, in line with the internal financial reporting system (management approach). These disclosures are based on the Covestro Group's accounting policies, which are outlined in the consolidated financial statements as of December 31, 2015, subject to the effects of the first-time adoption of financial reporting standards in the current fiscal year as described in Note 2 above.
As of June 30, 2016, the Covestro Group comprises three reportable segments with the following activities.
The Polyurethanes segment develops, produces and markets high-quality precursors for polyurethanes. These precursors are isocyanates (TDI, MDI) and polyether polyols. Flexible polyurethane foam is used primarily in the furniture and automotive industries (e.g., cushions, mattresses, automobile seats); rigid foam is used in particular as insulating material in the construction industry and in refrigeration chains. The segment operates production facilities worldwide as well as systems houses for formulating and supplying customized polyurethane systems.
The Polycarbonates segment develops, produces and markets the engineering plastic polycarbonate in the form of granules and semifinished products (sheets). The material is used primarily in the automotive industry (e.g., in the passenger compartment and for vehicle lighting) and in the construction industry (e.g., for roof structures). It is also used in the electrical and electronics industry (e.g., for connector housings, computer cases and DVDs), the medical technology sector and the lighting industry (e.g., for LED components). The Covestro Group produces polycarbonate all around the world and processes it at compounding centers to meet specific customer requirements.
The Coatings, Adhesives, Specialties segment develops, produces and markets raw materials for coatings, adhesives and sealants as well as specialties – primarily for polyurethane systems. They include polymer materials and aqueous dispersions based on the isocyanates HDI and IPDI, which are produced at facilities located throughout the world. The main areas of application are automotive and transportation, infrastructure and construction, wood processing and furniture. The specialties comprise elastomers, high-quality films and raw materials for the cosmetics, textiles and health care sectors.
Business activities that cannot be allocated to any of the aforementioned segments are reported under "All other segments." The external sales from these activities are mainly based on by-products of chlorine production and use.
The costs of Corporate Center functions and higher or lower expenses for long-term stock-based compensation arising from fluctuations in the performance of Covestro AG stock are presented in our segment reporting as "Corporate Center and reconciliation."
The segment data are calculated as follows.
The following tables show the segment reporting data for the second quarter and for the first half year or as of June 30, respectively.
| Other /Consolidation | ||||||
|---|---|---|---|---|---|---|
| Polyure thanes |
Polycar bonates |
Coatings, Adhesives, Specialties |
All other segments |
Corporate Center and reconciliation |
Covestro Group |
|
| € million | € million | € million | € million | € million | € million | |
| 2nd quarter 2016 | ||||||
| Sales | 1,481 | 831 | 532 | 146 | – | 2,990 |
| (Adjusted) EBITDA | 228 | 191 | 142 | (1) | (18) | 542 |
| (Adjusted) EBIT | 124 | 142 | 119 | (3) | (18) | 364 |
| 2nd quarter 2015 | ||||||
| Sales | 1,637 | 829 | 562 | 182 | – | 3,210 |
| Adjusted EBITDA | 223 | 150 | 137 | (1) | (11) | 498 |
| Adjusted EBIT | 121 | 105 | 115 | (3) | (11) | 327 |
1 No further presentation of intersegment transfers is provided. These are neither reported separately to, nor do they influence the EBIT and EBITDA reported to the Board of Management of Covestro AG.
| Other /Consolidation | ||||||
|---|---|---|---|---|---|---|
| Polyure thanes |
Polycar bonates |
Coatings, Adhesives, Specialties |
All other segments |
Corporate Center and reconciliation |
Covestro Group |
|
| € million | € million | € million | € million | € million | € million | |
| 1st half 2016 | ||||||
| Sales | 2,884 | 1,617 | 1,044 | 320 | – | 5,865 |
| (Adjusted) EBITDA | 442 | 368 | 281 | (2) | (39) | 1,050 |
| (Adjusted) EBIT | 241 | 269 | 238 | (5) | (39) | 704 |
| 1st half 2015 | ||||||
| Sales | 3,191 | 1,594 | 1,097 | 382 | – | 6,264 |
| Adjusted EBITDA | 386 | 266 | 270 | 20 | (28) | 914 |
| Adjusted EBIT | 184 | 178 | 228 | 16 | (28) | 578 |
1 No further presentation of intersegment transfers is provided. These are neither reported separately to, nor do they influence the EBIT and EBITDA reported to the Board of Management of Covestro AG.
| Dec. 31, 2015 | June 30, 2016 | |
|---|---|---|
| € million | € million | |
| Polyurethanes | 918 | 1,120 |
| Polycarbonates | 494 | 574 |
| Coatings, Adhesives, Specialties | 373 | 443 |
| All other segments | 86 | 65 |
| Corporate Center | (5) | (3) |
| Working capital | 1,866 | 2,199 |
The following tables show information for geographical areas. The EMLA region consists of Europe, the Middle East, Africa and Latin America except Mexico, which together with the United States and Canada forms the NAFTA region. The APAC region includes Asia and the Pacific region. The "Consolidation" column shows the elimination of interregional sales.
The following tables show the regional reporting data for the second quarter and for the first half year.
| EMLA | NAFTA | APAC | Consoli dation |
Total | |
|---|---|---|---|---|---|
| € million | € million | € million | € million | € million | |
| 2nd quarter 2016 | |||||
| Net sales (external) by market | 1,340 | 787 | 863 | – | 2,990 |
| Net sales (external) by point of origin | 1,339 | 801 | 850 | – | 2,990 |
| Interregional sales | 173 | 126 | 36 | (335) | – |
| 2nd quarter 2015 | |||||
| Net sales (external) by market | 1,420 | 888 | 902 | – | 3,210 |
| Net sales (external) by point of origin | 1,414 | 904 | 892 | – | 3,210 |
| Interregional sales | 190 | 132 | 36 | (358) | – |
| EMLA | NAFTA | APAC | Consoli dation |
Total | |
|---|---|---|---|---|---|
| € million | € million | € million | € million | € million | |
| 1st half 2016 | |||||
| Net sales (external) by market | 2,641 | 1,569 | 1,655 | – | 5,865 |
| Net sales (external) by point of origin | 2,632 | 1,595 | 1,638 | – | 5,865 |
| Interregional sales | 351 | 269 | 61 | (681) | – |
| 1st half 2015 | |||||
| Net sales (external) by market | 2,788 | 1,719 | 1,757 | – | 6,264 |
| Net sales (external) by point of origin | 2,777 | 1,748 | 1,739 | – | 6,264 |
| Interregional sales | 393 | 299 | 68 | (760) | – |
3. Segment and Regional Reporting
The following table shows the reconciliation of (adjusted) EBITDA of the segments to income before income taxes of the Group.
|--|
| 2nd quarter 2015 |
2nd quarter 2016 |
1st half 2015 |
1st half 2016 |
|
|---|---|---|---|---|
| € million | € million | € million | € million | |
| (Adjusted) EBITDA of segments | 509 | 560 | 942 | 1,089 |
| (Adjusted) EBITDA of Corporate Center | (11) | (18) | (28) | (39) |
| (Adjusted) EBITDA | 498 | 542 | 914 | 1,050 |
| (Adjusted) depreciation, amortization and impairment losses of segments |
(171) | (178) | (336) | (346) |
| (Adjusted) depreciation, amortization and impairment losses of Corporate Center |
– | – | – | – |
| (Adjusted) depreciation, amortization and impairment losses | (171) | (178) | (336) | (346) |
| (Adjusted) EBIT of segments | 338 | 382 | 606 | 743 |
| (Adjusted) EBIT of Corporate Center | (11) | (18) | (28) | (39) |
| (Adjusted) EBIT | 327 | 364 | 578 | 704 |
| Special items of segments | (34) | – | (68) | – |
| Special items of Corporate Center | (26) | – | (37) | – |
| Special items | (60) | – | (105) | – |
| EBIT of segments | 304 | 382 | 538 | 743 |
| EBIT of Corporate Center | (37) | (18) | (65) | (39) |
| EBIT | 267 | 364 | 473 | 704 |
| Financial result | (46) | (45) | (87) | (123) |
| Income before income taxes | 221 | 319 | 386 | 581 |
As of June 30, 2016, the scope of consolidation comprised Covestro AG and 49 consolidated companies (December 31, 2015: 48 companies). As in the statements as of December 31, 2015, one joint operation is accounted for in line with Covestro's interest in its assets, liabilities, revenues and expenses in accordance with IFRS 11 (Joint Arrangements). The numbers of joint ventures (one) and associated companies (two) accounted for in the consolidated financial statements using the equity method according to IAS 28 (Investments in Associates and Joint Ventures) were unchanged as of June 30, 2016.
No reportable acquisitions or divestitures were made in the first half year of 2016.
Earnings per share are calculated according to IAS 33 (Earnings per Share) as the relationship of income after income taxes (net income) for the reporting period that is attributable to the stockholders of Covestro AG to the weighted average number of no-par voting shares of Covestro AG in issue. There were no dilution effects to consider. For information purposes, earnings per share are also reported for the first half year of 2015 on a basis of 140,000,000 shares.
| 1st half 2015 | 1st half 2016 | |
|---|---|---|
| € million | € million | |
| Income after income taxes | 272 | 417 |
| of which attributable to noncontrolling interest | 5 | 5 |
| of which attributable to Covestro AG stockholders (net income) | 267 | 412 |
| Shares | Shares | |
| Weighted average number of ordinary shares in issue | 140,000,000 | 202,500,000 |
| € | € | |
| Basic earnings per share | 1.91 | 2.03 |
| Diluted earnings per share | 1.91 | 2.03 |
The following parameters were used to calculate the present value of the benefit obligations.
| Discount Rate for Pension Obligations | ||
|---|---|---|
| Dec. 31, 2015 | June 30, 2016 | |
|---|---|---|
| % | % | |
| Germany | 2.60 | 1.60 |
| United States | 4.00 | 3.30 |
Effective January 1, 2016, Covestro established a new long-term compensation program named Prisma for the 2016 – 2019 performance period. Prisma is a stock-based compensation program with a cash settlement as defined by IFRS 2 (Share-based Payment). Those entitled to participate are senior executives and other managerial employees.
A percentage of the employee's annual base salary – based on his/her position – is defined as a target for variable payments (Prisma target opportunity). Depending on the absolute performance of Covestro stock, including the dividends paid out (total shareholder return), and the stock's performance relative to the STOXX Europe 600 Chemicals benchmark index, both during a four-year performance period, participants will be granted an award of up to 200% of their individual Prisma target opportunity at the end of the program. For the performance period ending on December 31, 2019, payment of the award will be made in January 2020 on the basis of the performance of Covestro stock, based on the initial price at the start of the performance period through to the final price determined as the average price for the last 30 days of stock exchange trading in 2019.
The fair value of the obligation under the Prisma stock-based compensation program was €5 million as of June 30, 2016, and was calculated using the Monte Carlo simulation method on the basis of parameters pertaining to the reporting date.
In the first quarter of 2016, Covestro AG established a Debt Issuance Program with a volume of €5,000 million as a framework to facilitate obtaining flexible financing from the capital market. The company is thus in the position to issue fixed- and variable-rate bonds as well as to undertake private placements.
Under the program, Covestro AG successfully placed its first bonds with a total volume of €1,500 million on March 3, 2016. The bonds comprise two fixed-rate tranches with terms of five-and-a-half years (a coupon of 1.00% and a volume of €500 million) and eight-and-a-half years (a coupon of 1.75% and a volume of €500 million) and a variable-rate tranche with a volume of €500 million, a term of two years and a coupon of 0.60 percentage points above the three-month Euribor.
The liquidity acquired in this way was used particularly to refinance the loans from Bayer Antwerpen NV, Diegem, Belgium. The remaining loan amount of €2,060 million was repaid in full during the first half of 2016.
In September 2015, Covestro AG concluded a syndicated multicurrency term and revolving credit facilities agreement (facilities agreement) for €2,700 million with a consortium of banks. In the course of the successful bond placement in March 2016, Covestro AG dissolved the term loan facility of €1,200 million that was part of this facilities agreement, as planned. The multicurrency revolving credit facility of €1,500 million with a term until September 2020 remains in place. No loans had been drawn against this syndicated credit facility as of June 30, 2016.
The following tables show the carrying amounts and fair values of financial assets and liabilities by category of financial instrument. The line items "Other receivables," "Trade accounts payable" and "Other liabilities" contain both financial instruments and nonfinancial assets or liabilities (such as other tax receivables or liabilities and advance payments for services to be received in the future).
| June 30, 2016 | ||||||||
|---|---|---|---|---|---|---|---|---|
| Valuation according to IAS 39 | ||||||||
| Carrying amount |
Carried at amortized cost |
Fair value recognized outside profit or loss |
Fair value recognized in profit or loss |
Fair value | ||||
| € million | € million | € million | € million | € million | ||||
| Assets | ||||||||
| Trade accounts receivable | 1,776 | |||||||
| Loans and receivables | 1,776 | 1,776 | 1,776 | |||||
| Other financial assets | 63 | |||||||
| Loans and receivables | 16 | 16 | 16 | |||||
| Available-for-sale financial assets | 6 | 5 | 1 | 6 | ||||
| Derivatives that do not qualify for hedge accounting |
33 | 33 | 33 | |||||
| Receivables under finance lease agreements1 |
8 | 17 | ||||||
| Other receivables | 357 | |||||||
| Loans and receivables | 61 | 61 | 61 | |||||
| Nonfinancial assets | 296 | |||||||
| Cash and cash equivalents | 151 | |||||||
| Loans and receivables | 151 | 151 | 151 | |||||
| Liabilities | ||||||||
| Financial liabilities | 2,209 | |||||||
| Carried at amortized cost | 1,897 | 1,897 | 1,970 | |||||
| Derivatives that do not qualify for hedge accounting |
39 | 39 | 39 | |||||
| Liabilities under finance lease agreements1 |
273 | 337 | ||||||
| Trade accounts payable | 1,262 | |||||||
| Carried at amortized cost | 1,239 | 1,239 | 1,239 | |||||
| Nonfinancial liabilities | 23 | |||||||
| Other liabilities | 203 | |||||||
| Carried at amortized cost | 29 | 29 | 29 | |||||
| Carried at fair value (nonderivative) | 5 | 5 | 5 | |||||
| Derivatives that do not qualify for hedge accounting |
7 | 7 | 7 | |||||
| Nonfinancial liabilities | 162 |
1 Valuation in accordance with IAS 17
| Dec. 31, 2015 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Valuation according to IAS 39 | ||||||||||
| Carrying amount |
Carried at amortized cost |
Fair value recognized outside profit or loss |
Fair value recognized in profit or loss |
Fair value | ||||||
| € million | € million | € million | € million | € million | ||||||
| Assets | ||||||||||
| Trade accounts receivable | 1,486 | |||||||||
| Loans and receivables | 1,486 | 1,486 | 1,486 | |||||||
| Other financial assets | 73 | |||||||||
| Loans and receivables | 16 | 16 | 17 | |||||||
| Available-for-sale financial assets | 6 | 5 | 1 | 6 | ||||||
| Derivatives that do not qualify for hedge accounting |
44 | 44 | 44 | |||||||
| Receivables under finance lease agreements1 |
7 | 18 | ||||||||
| Other receivables | 337 | |||||||||
| Loans and receivables | 65 | 65 | 65 | |||||||
| Nonfinancial assets | 272 | |||||||||
| Cash and cash equivalents | 642 | |||||||||
| Loans and receivables | 642 | 642 | 642 | |||||||
| Liabilities | ||||||||||
| Financial liabilities | 2,881 | |||||||||
| Carried at amortized cost | 2,552 | 2,552 | 2,573 | |||||||
| Derivatives that do not qualify for hedge accounting |
31 | 31 | 31 | |||||||
| Liabilities under finance lease agreements1 |
298 | 364 | ||||||||
| Trade accounts payable | 1,403 | |||||||||
| Carried at amortized cost | 1,386 | 1,386 | 1,386 | |||||||
| Nonfinancial liabilities | 17 | |||||||||
| Other liabilities | 198 | |||||||||
| Carried at amortized cost | 45 | 45 | 45 | |||||||
| Carried at fair value (nonderivative) | 4 | 4 | 4 | |||||||
| Derivatives that do not qualify for hedge accounting |
8 | 8 | 8 | |||||||
| Nonfinancial liabilities | 141 |
1 Valuation in accordance with IAS 17
The fair values of financial instruments are determined and reported in accordance with IFRS 13 (Fair Value Measurement) on the basis of the fair value hierarchy described below.
Level 1 covers fair values determined on the basis of unadjusted prices which exist in active markets.
Level 2 comprises fair values determined on the basis of parameters which are observable in an active market.
Level 3 applies to fair values determined using parameters whose input factors are not based on observable market data.
The following table shows the assignment of the financial instruments to the three-level fair value hierarchy.
| Fair value | Fair value | |||||||
|---|---|---|---|---|---|---|---|---|
| Dec. 31, 2015 |
Level 1 | Level 2 | Level 3 | June 30, 2016 |
Level 1 | Level 2 | Level 3 | |
| € million | € million | € million | € million | € million | € million | € million | € million | |
| Financial assets carried at fair value |
||||||||
| Available-for-sale financial assets |
1 | 1 | - | - | 1 | 1 | ||
| Derivatives that do not qualify for hedge accounting |
44 | - | 27 | 17 | 33 | - | 20 | 13 |
| Financial assets not carried at fair value |
||||||||
| Receivables under leasing agreements |
18 | - | 18 | 17 | 17 | |||
| Financial liabilities carried at fair value |
- | - | - | - | - | - | ||
| Derivatives that do not qualify for hedge accounting |
39 | - | 31 | 8 | 46 | - | 39 | 7 |
| Other liabilities carried at fair value (nonderivative) |
4 | - | 4 | 5 | - | 5 | ||
| Financial liabilities not carried at fair value |
- | - | - | - | - | - | ||
| Bonds | 1,555 | 1,555 | - | - | ||||
| Other financial liabilities | 2,937 | - | 2,937 | 752 | - | 752 | - |
During the first half of 2016, no transfers were made between the levels of the fair value hierarchy.
Because of the generally short maturities of cash and cash equivalents, trade accounts receivable and payable, and other receivables and liabilities, their carrying amounts do not significantly differ from the fair values.
The fair value of the bonds is based on quoted, unadjusted prices in active markets and therefore assigned to Level 1 of the fair value hierarchy.
Interests in nonconsolidated companies are categorized as available-for-sale financial assets. These equity instruments are recognized at cost because their fair value cannot be determined from a stock exchange or other market price or by discounting reliably determinable cash flows. The fair values of other remaining assets categorized as available-for-sale financial assets correspond to quoted prices in active markets (Level 1).
The fair values stated for noncurrent financial assets and liabilities are the present values of the respective future cash inflows or outflows. These are determined by discounting the cash flows at a closing-date interest rate that takes into account the term of the assets or liabilities and the creditworthiness of the counterparty. For this reason, these values are assigned to Level 2 of the fair value hierarchy.
The fair values of derivatives for which no publicly quoted market prices existed are determined using valuation techniques based on observable market data as of the end of the reporting period (Level 2). In applying valuation techniques, credit value adjustments are determined to allow for the contracting party's credit risk. The currency forward contracts are measured individually at their forward rates or forward prices on the closing date. These depend on spot rates or prices including time spreads.
Fair values measured using unobservable inputs are categorized within Level 3 of the fair value hierarchy. The fair values of noncurrent leasing receivables, reported for information purposes, are calculated on the basis of interest curves observable in the market. Additionally, a discount for cash flows that are very far in the future is applied as an unobservable factor.
The financial assets and liabilities recognized at fair value based on individual unobservable inputs (Level 3) comprise embedded derivatives and a contingent purchase price obligation recognized in connection with the acquisition of Thermoplast Composite GmbH, Markt Bibart. The variable portion of the purchase price is due once key personnel have fulfilled certain documentation requirements pertaining to the agreed transfer of knowledge.
The embedded derivatives are separated from their respective host contracts, which are generally sales or purchase agreements relating to the operational business. The embedded derivatives cause the cash flows from the contracts to vary with fluctuations in exchange rates, commodity prices or other prices, for example. The internal measurement of embedded derivatives is mainly performed using the discounted cash flow method, which is based on unobservable inputs. These include planned sales and purchase volumes, and prices or price indices derived from market data.
The table below shows the reconciliation of Level 3 financial instruments for the first half year of 2016.
| 2016 | |
|---|---|
| € million | |
| Net carrying amounts, Jan. 1, | 5 |
| Gains (losses) recognized in profit or loss | (4) |
| of which related to assets /liabilities recognized in the statement of financial position | (4) |
| Gains (losses) recognized outside profit or loss | – |
| Additions of assets (liabilities) | – |
| Settlements of (assets) liabilities | – |
| Reclassifications | – |
| Net carrying amounts, June 30, | 1 |
Gains and losses from Level 3 financial instruments recognized in profit or loss result primarily from embedded derivatives and are reported in other operating expenses or income.
As an international enterprise, the Covestro Group is exposed to numerous legal risks, particularly in the areas of product liability, competition and antitrust law, patent disputes, tax law, environmental law and compliance issues such as corruption and export control. The outcome of any current or future proceedings cannot be predicted. It is therefore possible that legal judgments or regulatory decisions or future settlements could give rise to expenses that are not covered, or not fully covered, by insurers' compensation payments and could significantly affect the earnings of the Covestro Group.
The legal risks that are material to the Covestro Group were described in Note 28 to the consolidated financial statements as of December 31, 2015. In the current fiscal year, there have been changes and / or new developments in respect of the legal proceedings described below.
In 2014, an action was brought against the Cologne Regional Administration before the Administrative Court in Cologne in which the individual plaintiff demanded that approval for operation of the carbon monoxide pipeline between Dormagen and Leverkusen be revoked. The plaintiff feared acute danger to nearby residents on account of alleged safety deficiencies. The Covestro Group pointed out that the safety of the pipeline had been demonstrated by an expert opinion of the German Technical Inspection Association (TÜV). The action has meanwhile been dismissed as inadmissible and no appeal was lodged within the statutory deadline.
In 2013, following unsuccessful negotiations, the company Utility Centre Maasvlakte Leftbank, Rotterdam, Netherlands, (UCML), a Uniper Group company, asserted a claim for reimbursement against the joint venture LyondellBasell Covestro Manufacturing Maasvlakte V.O.F, Rotterdam, Netherlands (LCMM). UCML was claiming the cost of CO2 certificates that UCML had to purchase under the EU emissions trading system in order to perform its supply agreement with LCMM. The Covestro Group, as a partner in the joint venture, bears 50% of any liability for potential reimbursement claims against LCMM. In the second quarter of 2016, LCMM and UCML reached an agreement stipulating extension of the supply arrangement and a waiver of all reimbursement claims by UCML. The legal dispute has thus been fully resolved.
Related companies and persons as defined in IAS 24 (Related Party Disclosures) are those legal entities and natural persons that are able to exert influence on Covestro AG and its subsidiaries or over which Covestro AG or its subsidiaries exercise control or have a significant influence. They include, in particular, Bayer AG, Leverkusen, (Bayer AG) which, as defined in IAS 24, is classified as the ultimate controlling company on account of its majority interest in Covestro AG, and the Bayer AG subsidiaries which are not part of the Covestro scope of consolidation, as well as nonconsolidated subsidiaries, joint ventures and associated companies, post-employment benefit plans and the corporate officers of Covestro AG.
| Dec. 31, 2015 | June 30, 2016 | |||
|---|---|---|---|---|
| Receivables | Liabilities | Receivables | Liabilities | |
| € million | € million | € million | € million | |
| Bayer AG | 2 | 14 | 0 | 2 |
| Bayer Group companies | 51 | 2,243 | 50 | 131 |
| Nonconsolidated subsidiaries and associates | 1 | 4 | 1 | 4 |
| Joint ventures | 1 | 0 | 1 | 0 |
| Associates | 4 | 0 | 2 | 0 |
| 1st half 2015 | 1st half 2016 | |||
|---|---|---|---|---|
| Sales of goods and services |
Purchases of goods and services |
Sales of goods and services |
Purchases of goods and services |
|
| € million | € million | € million | € million | |
| Bayer AG | 7 | 26 | 0 | 0 |
| Bayer Group companies | 42 | 445 | 39 | 257 |
| Nonconsolidated subsidiaries and associates | 20 | – | 17 | 2 |
| Joint ventures | 5 | – | 2 | 0 |
| Associates | 7 | 339 | 5 | 246 |
The sale of products and goods and other typical business activities result in revenues from subsidiaries of Bayer AG.
The goods and services received mainly comprise operational goods and service transactions with Currenta GmbH & Co. OHG, Leverkusen, (Currenta) and its subsidiaries. These transactions relate to the Chempark sites operated by Currenta, which are used jointly by Bayer and Covestro. The decline in goods and services received compared with the prior-year period resulted from the fact that certain services procured from Bayer Group service companies before the legal and economic independence of Covestro have now been transferred to Covestro Group companies within the context of independence.
Receivables from and payables to related parties mainly comprise leasing and financing matters, trade in goods and services and other transactions. The reduction in liabilities to Bayer Group companies to €131 million (December 31, 2015: €2,243 million) was primarily the result of the repayment of loans described in Note 8.
Notes to the Consolidated Interim Financial Statements 12. Events After the End of the Reporting Period
Since July 1, 2016, no events have occurred that we expect to materially affect the net assets, financial position or results of operations of the Covestro Group.
Leverkusen, July 20, 2016 Covestro AG
The Board of Management
To the best of our knowledge, and in accordance with the applicable reporting principles for interim reporting, the consolidated interim financial statements give a true and fair view of the net assets, financial position and results of operations of the Covestro Group, and the interim Group management report includes a fair review of the development and performance of the business and the position of the Covestro Group, together with a description of the principal opportunities and risks associated with the expected development of the Covestro Group for the remainder of the fiscal year.
Leverkusen, July 20, 2016 Covestro AG
The Board of Management
We have reviewed the condensed consolidated interim financial statements – comprising the income statement, statement of comprehensive income, statement of financial position, income statement, statement of cash flows, statement of changes in equity and selected explanatory notes – and the interim Group management report of Covestro AG, Leverkusen, for the period from January 1 to June 30, 2016, which are components of the halfyearly financial report pursuant to Section 37w of the German Securities Trading Act (WpHG). The company's Board of Management is responsible for the preparation of the condensed consolidated interim financial statements in accordance with the IFRSs applicable to interim reporting as adopted by the EU and the interim Group management report in accordance with the requirements of the German Securities Trading Act applicable to interim group management reports. Our responsibility is to issue a review report on the condensed consolidated interim financial statements and the interim Group management report based on our review.
We have conducted the review of the condensed consolidated interim financial statements and the interim Group management report in accordance with the German generally accepted standards for the review of financial statements promulgated by the Institute of Public Auditors in Germany (IDW) and additionally observed the International Standard on Review Engagements "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" (ISRE 2410). Those standards require that we plan and perform the review so that we can preclude through critical evaluation, with moderate assurance, that the condensed consolidated interim financial statements have not been prepared, in all material aspects, in accordance with the IFRSs applicable to interim financial reporting as adopted by the EU, and that the interim Group management report has not been prepared, in all material aspects, in accordance with the requirements of the German Securities Trading Act applicable to interim group management reports. A review is limited primarily to inquiries of company personnel and analytical procedures and therefore does not provide the assurance attainable in a financial statement audit. Since, in accordance with our engagement, we have not performed a financial statement audit, we cannot express an audit opinion.
Based on our review, no matters have come to our attention that cause us to presume that the condensed consolidated interim financial statements have not been prepared, in all material respects, in accordance with the IFRSs applicable to interim reporting as adopted by the EU, nor that the interim Group management report has not been prepared, in all material respects, in accordance with the provisions of the German Securities Trading Act applicable to interim group management reports.
Essen, July 21, 2016
PricewaterhouseCoopers Aktiengesellschaft Wirtschaftsprüfungsgesellschaft
Petra Justenhoven Dietmar Prümm
Wirtschaftsprüferin Wirtschaftsprüfer
Further Information
| Polyurethanes | Polycarbonates Adhesives, Specialties |
Coatings, | Others /Consolidation | Covestro Group | ||||||
|---|---|---|---|---|---|---|---|---|---|---|
| 2nd quarter 2015 |
2nd quarter 2016 |
2nd quarter 2015 |
2nd quarter 2016 |
2nd quarter 2015 |
2nd quarter 2016 |
2nd quarter 2015 |
2nd quarter 2016 |
2nd quarter 2015 |
2nd quarter 2016 |
|
| € million | € million | € million | € million | € million | € million | € million | € million | € million | € million | |
| Sales | 1,637 | 1,481 | 829 | 831 | 562 | 532 | 182 | 146 | 3,210 | 2,990 |
| Change in sales | ||||||||||
| Volume | +7.7% | +6.4% | +9.6% | +7.9% | +6.9% | –0.6% | –1.7% | –10.8% | +7.4% | +4.5% |
| Price | –9.9% | –13.1% | –3.6% | –4.3% | –1.0% | –2.7% | –2.0% | –8.3% | –6.4% | –8.7% |
| Currency | +9.2% | –2.8% | +13.3% | –3.4% | +9.5% | –2.0% | +4.3% | –0.7% | +10.0% | –2.7% |
| Portfolio | 0.0% | 0.0% | 0.0% | 0.0% | 0.0% | 0.0% | 0.0% | 0.0% | 0.0% | 0.0% |
| Core volume growth1 | +5.8% | +9.0% | +9.1% | +8.5% | +6.5% | –1.8% | +6.7% | +7.7% | ||
| Sales by region | ||||||||||
| EMLA | 707 | 653 | 292 | 300 | 285 | 272 | 136 | 115 | 1,420 | 1,340 |
| NAFTA | 524 | 450 | 198 | 193 | 130 | 117 | 36 | 27 | 888 | 787 |
| APAC | 406 | 378 | 339 | 338 | 147 | 143 | 10 | 4 | 902 | 863 |
| EBITDA | 195 | 228 | 149 | 191 | 135 | 142 | (40) | (19) | 439 | 542 |
| Adjusted EBITDA | 223 | 228 | 150 | 191 | 137 | 142 | (12) | (19) | 498 | 542 |
| EBIT | 92 | 124 | 104 | 142 | 113 | 119 | (42) | (21) | 267 | 364 |
| Adjusted EBIT | 121 | 124 | 105 | 142 | 115 | 119 | (14) | (21) | 327 | 364 |
| Depreciation, amortization, impairment losses and impairment loss reversals |
103 | 104 | 45 | 49 | 22 | 23 | 2 | 2 | 172 | 178 |
| Operating cash flow | 184 | 135 | 68 | 89 | 131 | 72 | (23) | 20 | 360 | 316 |
| Cash outflows for additions to property, plant, equipment and other intangible assets |
49 | 46 | 59 | 19 | 20 | 14 | 2 | 0 | 130 | 79 |
| Free operating cash flow |
135 | 89 | 9 | 70 | 111 | 58 | (25) | 20 | 230 | 237 |
1 Reference values calculated based on the definition of the core business effective March 31, 2016
| Polyurethanes | Polycarbonates | Adhesives, Specialties | Coatings, | Others /Consolidation | Covestro Group | |||||
|---|---|---|---|---|---|---|---|---|---|---|
| 1st half 2015 |
1st half 2016 |
1st half 2015 |
1st half 2016 |
1st half 2015 |
1st half 2016 |
1st half 2015 |
1st half 2016 |
1st half 2015 |
1st half 2016 |
|
| € million | € million | € million | € million | € million | € million | € million | € million | € million | € million | |
| Sales | 3,191 | 2,884 | 1,594 | 1,617 | 1,097 | 1,044 | 382 | 320 | 6,264 | 5,865 |
| Change in sales | ||||||||||
| Volume | +4.1% | +6.7% | +7.5% | +8.3% | +5.5% | –1.1% | –0.8% | –6.5% | +4.8% | +4.9% |
| Price | –8.6% | –14.4% | –2.9% | –4.8% | –0.5% | –2.5% | –0.3% | –9.4% | –5.4% | –9.6% |
| Currency | +9.6% | –1.9% | +13.0% | –2.1% | +9.5% | –1.2% | +4.6% | –0.3% | +10.1% | –1.7% |
| Portfolio | 0.0% | 0.0% | 0.0% | 0.0% | 0.0% | 0.0% | 0.0% | 0.0% | 0.0% | 0.0% |
| Core volume growth1 | +2.7% | +9.7% | +7.3% | +8.5% | +6.4% | –2.3% | +4.2% | +8.1% | ||
| Sales by region | ||||||||||
| EMLA | 1,381 | 1,268 | 570 | 585 | 554 | 534 | 283 | 254 | 2,788 | 2,641 |
| NAFTA | 1,007 | 896 | 380 | 385 | 253 | 231 | 79 | 57 | 1,719 | 1,569 |
| APAC | 803 | 720 | 644 | 647 | 290 | 279 | 20 | 9 | 1,757 | 1,655 |
| EBITDA | 348 | 442 | 265 | 368 | 266 | 281 | (47) | (41) | 832 | 1,050 |
| Adjusted EBITDA | 386 | 442 | 266 | 368 | 270 | 281 | (8) | (41) | 914 | 1,050 |
| EBIT | 123 | 241 | 177 | 269 | 224 | 238 | (51) | (44) | 473 | 704 |
| Adjusted EBIT | 184 | 241 | 178 | 269 | 228 | 238 | (12) | (44) | 578 | 704 |
| Depreciation, amortization, impairment losses and impairment loss reversals |
225 | 201 | 88 | 99 | 42 | 43 | 4 | 3 | 359 | 346 |
| Operating cash flow | 305 | 151 | 99 | 183 | 166 | 126 | (26) | (20) | 544 | 440 |
| Cash outflows for additions to property, plant, equipment and other intangible assets |
82 | 70 | 102 | 31 | 38 | 25 | 2 | 0 | 224 | 126 |
| Free operating cash flow |
223 | 81 | (3) | 152 | 128 | 101 | (28) | (20) | 320 | 314 |
1 Reference values calculated based on the definition of the core business effective March 31, 2016
| 1st quarter 2015 |
2nd quarter 2015 |
3rd quarter 2015 |
4th quarter 2015 |
1st quarter 2016 |
2nd quarter 2016 |
|
|---|---|---|---|---|---|---|
| € million | € million | € million | € million | € million | € million | |
| Sales | 3,054 | 3,210 | 3,020 | 2,798 | 2,875 | 2,990 |
| Polyurethanes | 1,554 | 1,637 | 1,512 | 1,385 | 1,403 | 1,481 |
| Polycarbonates | 765 | 829 | 819 | 759 | 786 | 831 |
| Coatings, Adhesives, Specialties | 535 | 562 | 519 | 477 | 512 | 532 |
| Core volume growth1 | +1.7% | +6.7% | –0.6% | +3.0% | +8.5% | +7.7% |
| Adjusted EBITDA | 416 | 498 | 471 | 256 | 508 | 542 |
| Polyurethanes | 163 | 223 | 175 | 63 | 214 | 228 |
| Polycarbonates | 116 | 150 | 171 | 123 | 177 | 191 |
| Coatings, Adhesives, Specialties | 133 | 137 | 137 | 84 | 139 | 142 |
| EBIT | 206 | 267 | 287 | (80) | 340 | 364 |
| Polyurethanes | 31 | 92 | 60 | (157) | 117 | 124 |
| Polycarbonates | 73 | 104 | 127 | 70 | 127 | 142 |
| Coatings, Adhesives, Specialties | 111 | 113 | 113 | 60 | 119 | 119 |
| Financial result | (41) | (46) | (56) | (32) | (78) | (45) |
| Income before income taxes | 165 | 221 | 231 | (112) | 262 | 319 |
| Income after taxes | 118 | 154 | 161 | (81) | 184 | 233 |
| Net income | 115 | 152 | 160 | (84) | 182 | 230 |
| Operating cash flow | 184 | 360 | 379 | 550 | 124 | 316 |
| Cash outflows for additions to property, plant and equipment and intangible assets |
94 | 130 | 128 | 157 | 47 | 79 |
| Free operating cash flow | 90 | 230 | 251 | 393 | 77 | 237 |
1Reference values calculated based on the definition of the core business effective March 31, 2016
| Q3 2016 Interim Report October 25, 2016 | |
|---|---|
| Annual Report 2016 February 20, 2017 | |
| Q1 2017 Interim Report April 25, 2017 | |
| Annual Stockholders' Meeting 2017 May 3, 2017 |
Covestro AG Kaiser-Wilhelm-Allee 60 51373 Leverkusen Germany Email: [email protected]
Local Court of Cologne HRB 85281 VAT No. DE815579850
IR contact Email: [email protected]
Press contact Email: [email protected] Translation
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