LEVERKUSEN (dpa-AFX) – The plastics group Covestro had to accept significant business losses in a difficult industry environment at the start of the year. However, the operating result collapsed much less than experts had expected, even after the DAX group had recently made somewhat more confident statements. This was mainly due to cost reductions. “Demand in the first quarter was still weak, but we took the right measures on the cost side,” said CFO Thomas Toepfer, according to a statement on Thursday evening. Analysts reacted quite positively, but not enthusiastically. Shares rose on Friday.
With an increase of a good two percent to 36.61 euros, the papers were in the DAX top group. In the course of the year so far, however, the papers are on the bottom line, which in this rating means one of the lower places in the leading German index, which has increased by more than 13 percent in 2023 so far. During this period, the European chemical stock index rose by around eight and a half percent.
With sales falling by a fifth to 3.74 billion euros, earnings before interest, taxes, depreciation and amortization fell by almost two thirds to 286 million euros in the first quarter compared to the same period last year, as Covestro announced on the basis of preliminary results.
At the beginning of March, CEO Markus Steilemann had announced an operating result of 100 to 150 million euros. At the end of March, however, the company had already said that things were generally looking a little better in terms of business development. At the time, analysts attributed this primarily to the group’s savings program. While sales fell short of the experts’ expectations, the operating result was significantly higher.
While demand has remained weak, Covestro has benefited significantly from savings, said Deutsche Bank analyst Tim Jones. Most of the surprisingly good development in operating profit is due to lower fixed costs, the rest to higher sales prices than expected.
Chetan Udeshi, an analyst at Bank JPMorgan, was similar to the Deutsche Bank expert on the earnings drivers, but also noted that it was unclear to what extent the fixed cost reduction would carry over into the second quarter, or whether it was only temporary.
The bottom line was a loss of 30 million euros from January to the end of March, after a surplus of 416 million euros a year ago. The operating free cash flow – i.e. the money that ultimately gets stuck at Covestro in day-to-day business or flows out – was negative at 140 million euros. According to Udeshi, the operating free cash flow was significantly weaker than he had expected. This was also due to the build-up of inventories, which were quite low at the end of 2022.
The entire industry has been suffering from very weak demand, especially since autumn. Due to delivery bottlenecks, many customers had previously filled their warehouses to a large extent. In this situation, consumer sentiment collapsed, and people became more cautious when making purchases in view of high inflation and uncertain economic prospects. This also caused demand to collapse at chemical companies.
The chemical group BASF only presented key data for the first quarter in the middle of the week, which were not as bad as feared. Analyst Oliver Schwarz from Warburg Research had spoken of a slight mood lift, but also emphasized that it was still uncertain whether the low had already been overcome or not.
In any case, Covestro still does not dare to make an annual forecast in the uncertain economic environment for the time being. Management is likely to give more details on the prospects on April 28 when the full quarterly figures are published.
So far, it has only been said that the operating result (Ebitda) is likely to fall significantly in the current year, after having collapsed by almost half in 2022 from a particularly high previous year’s value to 1.6 billion euros. According to a presentation to analysts in early March, 2023 would result in an operating profit of one billion euros if profit margins were achieved throughout the year as in January. To what extent this is already waste remains to be seen. Before the publication of the key data, analysts expected an operating profit of 1.25 billion euros.
Covestro manufactures, among other things, plastics for car parts and laptop covers, as well as foam precursors for insulating materials, car parts, seats and mattresses. In 2022, the group felt the effects of weak demand, high energy and gas prices and the massive corona restrictions in China.
The Performance Materials division came under particularly strong pressure in the past year in relation to the bulk business with standard polycarbonates, standard urethane components and basic chemicals. The Solutions & Specialties division, in which Covestro offers special products such as tailor-made urethane components, coatings and engineering plastics, on the other hand, had held up much better, also thanks to the sustainable coating resins business acquired from the Dutch DSM Group in 2021./mis/knd/jha/
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