Report on Economic Position – Results of Operations, Financial Position, and Net Assets of the Covestro Group

Financial Position

Statement of Cash Flows

Cash Flows from Operating Activities/Free Operating Cash Flow

Net cash flows from operating activities amounted to €997 million (previous year: €970 million). A decline in EBITDA was more than offset by funds freed up from working capital, compared with funds tied up in the previous year, and lower income tax payments. In the previous year, the change in working capital had been impacted especially by the payment of short-term variable compensation for fiscal 2021. No short-term variable compensation was paid for fiscal 2022. Higher cash inflows from operating activities and lower cash outflows for additions to property, plant, equipment, and intangible assets of €765 million (previous year: €832 million) led to an increase in free operating cash flow to €232 million (previous year: €138 million).

• Additional information on the calculation of indicators is available in “Key Management Indicators.”

Cash Flows from Investing Activities

Net cash outflow for investing activities in fiscal 2023 totaled €925 million (previous year: €477 million). This was mainly attributable to cash outflows of €765 million (previous year: €832 million) for additions to property, plant and equipment and intangible assets and net outflows of €261 million for short-term bank deposits (previous year: net proceeds of €372 million). This was set against cash received in an amount of €54 million from the sale of the additive manufacturing business to Stratasys, a U.S.-Israeli manufacturer of 3D printers and 3D production systems, as well as an inflow of €39 million from the partial reversal of the tranche of the initial funding loan drawn down in December 2022, as announced by Bayer-Pensionskasse VVaG.

Capital expenditures in fiscal 2023 were targeted at maintenance and improvement of existing plants as well as new capacity in both segments. As in fiscal 2022, capital expenditure in the Performance Materials segment related to increasing capacity at the site in Antwerp (Belgium) to expand the production of aniline, a precursor for diphenylmethane diisocyanate (MDI). Investments were also made in the circular economy and in energy efficiency such as the installation of new catalysts at the site in Shanghai (China) and the modernization of the TDI plant in Dormagen (Germany). Strategically relevant capital expenditures in the Solutions & Specialties segment involved the construction of the company’s largest plant for thermoplastic polyurethane (TPU) in Zhuhai (China), which is planned to reach an annual capacity of 120,000 metric tons of TPU per year in the future.

Cash Flows from Financing Activities

In fiscal 2023, the Covestro Group’s net cash outflows for financing activities totaled €639 million (previous year: cash inflows of €64 million). They were mainly attributable to the early repayment of Schuldschein loans in an amount equivalent to around €260 million, payments for current liabilities to banks in China of €215 million, interest payments of €169 million (previous year: €131 million), and payments of €156 million (previous year: €160 million) for the settlement of lease liabilities. In addition, there were cash outflows in fiscal 2023 resulting from the repayment of a loan of Covestro AG in an amount of €125 million and the third tranche of the share buyback program in an amount of €49 million (previous year: €150 million). Cash inflows related primarily to current liabilities to banks in China amounting to €222 million and, in an amount of €100 million, to the last tranche of the Schuldschein loans issued in the year 2022.

• See “Share Buyback Program.”

Net Financial Debt

The Covestro Group’s gross financial debt as of December 31, 2023 was down €259 million compared with December 31, 2022, at €3,388 million (previous year: €3,647 million), predominantly due to a decrease in liabilities to banks by €265 million, which was in turn mainly attributable to the abovementioned partial early repayment of Schuldschein loans.

Cash and cash equivalents decreased in comparison with the figure on December 31, 2022, by €573 million to €625 million. This decline was mainly due to cash outflows for additions to property, plant and equipment and intangible assets of €765 million, negative cash flows from financing activities of €639 million, and net outflows for short-term bank deposits of €261 million. Conversely, higher cash flows from operating activities led to a €997 million increase in cash and cash equivalents. The abovementioned net cash outflows for short-term bank deposits drove up current financial assets to €276 million.

As a result, net financial debt increased by €53 million to €2,487 million in fiscal 2023 (previous year: €2,434 million).

Financial Management

The main purpose of financial management is to ensure solvency at all times, continuously optimize capital costs, and reduce the risks of financing measures. Financial management for the Covestro Group is performed centrally by Covestro AG.

Covestro AG operates a Debt Issuance Program with a total volume of €5.0 billion to facilitate obtaining flexible financing from the capital market. The company is thus in the position to issue fixed- and variable-rate bonds with different maturities as well as to undertake private placements. Covestro AG successfully placed several bonds from its Debt Issuance Program. The €500 million euro bond placed in March 2016 carries a fixed coupon of 1.75% and matures in September 2024. The additional €1.0 billion in euro bonds placed in June 2020 consist of one €500 million euro bond with a fixed coupon of 0.875% maturing in February 2026, and another €500 million euro bond with a fixed coupon of 1.375% maturing in June 2030. All outstanding bonds have been assigned a Baa2 rating with stable outlook by Moody’s Investors Service, London (United Kingdom).

In addition, Covestro published a Green Financing Framework in May 2022, which enables green bonds or other debt instruments to be issued where the funds raised are tied to sustainable investments that we can use, e.g., to (re)finance products or projects with a clear benefit for the environment. The framework’s conformity to the Green Bond Principles of the International Capital Markets Association (ICMA) has been confirmed by the independent ESG rating agency ISS ESG. The first green euro bond was issued in November 2022 under the Green Finance Framework with a fixed coupon of 4.75% and a volume of €500 million, maturing in November 2028. All the proceeds from the bond issue were used to fund sustainable projects that contribute to the circular economy and originate in areas such as renewable energy, energy efficiency, and sustainable building.

• Additional information is available at: www.covestro.com/en/investors/debt/bonds

On October 7, 2022, Covestro for the first time issued Schuldschein loans with a total volume equivalent to around €650 million; the last tranche of €100 million was received in the first quarter of 2023. The issue was denominated in U.S. dollars and euros. Linked to an ESG rating, these Schuldschein loans were issued in tranches comprising fixed and variable interest rates with terms of three, five, and seven years. In October 2023, Covestro prematurely repaid Schuldschein loans in an amount equivalent to around €260 million.

In fiscal 2020, Covestro AG obtained a syndicated revolving credit facility totaling €2.5 billion with a term of five years. It included two options to extend the term by one year in each case and represents a back-up liquidity reserve. One option to extend was exercised in March 2021 to extend the term of the syndicated revolving credit facility to March 2026. Using the second of two agreed options, the term was extended in March 2022 by another year to March 2027. One feature of the credit line is its link to an environmental, social, governance (ESG) rating: The better (worse) the externally calculated ESG score is, the lower (higher) the interest component of the credit facility. The syndicated credit facility was unused as of December 31, 2023.

On August 26, 2022, Covestro additionally established a Euro Commercial Paper Programme (ECPP) with a potential total volume of €1.5 billion in order to allow the company to issue notes in different currencies and tenors of up to one year on a flexible basis. As of December 31, 2023, no commercial paper was outstanding under the ECPP.

On June 21, 2023, Moody’s Investors Service, London (United Kingdom), confirmed Covestro’s Baa2 investment-grade rating with a stable outlook. Covestro intends to continue to maintain financing structures and financial ratios that support a solid investment-grade rating in the future.

The Covestro Group pursues a prudent debt management strategy to ensure flexibility, drawing on a balanced financing portfolio. This is based for the most part on bonds, syndicated credit facilities, and bilateral loan agreements.

As a company with international operations, Covestro is exposed to financial opportunities and risks. These are continuously monitored within the context of Covestro’s financial management activities. Instruments including derivatives are used to minimize risks.

For a detailed presentation of financial opportunities and risks as well as further explanations, please see Covestro’s opportunities and risks report.

• See “Opportunities and Risks Report.”
• See note 24.2 “Financial Risk Management and Information on Derivatives” in the Notes to the Consolidated Financial Statements.