The Urethane Blog

CFO Discusses Covestro IPO

Free from Bayer, Covestro Finally Can Build for the Future

The spun-off materials science company had to build out most functions from scratch but has seen surprising early business results.


When Bayer, the big Germany-based life sciences company, announced in October 2014 that it would spin off its materials science division, a clock started ticking.

Frank Lutz

Frank Lutz, CFO, Covestro

Two weeks later, Frank Lutz joined the division as its CFO. His mission: get it ready for an initial public offering by late the following year.

An IPO is rarely an easy undertaking. But in the case of Covestro — the name the business adopted upon going public — there was a lot more to do in a short period of time than is normal for a pre-IPO firm that has been in business for years.

“We call ourselves a 16,000-person startup company,” Lutz says of Covestro. Based in Leverkusen, Germany, the company develops high-tech polyurethane, polycarbonate, and adhesive/coating products designed to benefit the environment and society.

At Bayer, most functions were centralized for its three operating units (health care, crop science, and materials science). “We had to create a lot of corporate functions that you would expect to be present in a full-fledged company,” says Lutz. “We had a small accounting department, but no finance, tax, or audit departments, for example. There was intense time pressure to build all of that and find the right people. On the other hand, it was extremely interesting.”

The spinoff was necessary because Bayer was deploying most of its capital and generally paying more attention to the other two business units, which were generating higher profit margins. The materials business needed its independence in order to raise capital for future investments. If the spinoff had not occurred, the business’ outlook would be even more compromised now, given Bayer’s pending acquisition of Monsanto.

The IPO, the largest in Germany since 2007, came off on schedule in October 2015. The process of building the company is ongoing, however.

Human capital concerns remain at the forefront for Covestro, which employs many scientists and engineers. Those are in short supply in the United States and Europe, both of which contain one of the company’s three production facilities. (The problem does not apply to China, where the third production site is located.)

“It’s very difficult, and in both regions the demographic problems will only increase over the next few years,” Lutz says. “Human capital will be one of our biggest challenges as we try to replace the people that will retire over the next decade.”

Still, he adds, he prefers his current job to his previous one as CFO at MAN SE, a German mechanical engineering firm that primarily supplies to the trucking industry and is the parent of MAN Group, the world’s largest publicly traded hedge fund.

“This job is much more entrepreneurial,” he says. “There are still a lot of things to do that could not be accomplished prior to the IPO. We are still developing our long-term strategy. And we’re looking at how we can improve the structure of our businesses and our production footprint. Five years from now, things will most likely look a lot different. At the moment, things are in flux and can be shaped and formed.”

The development process has been buoyed by better-than-expected cash flow and profitability in Covestro’s first two years, according to Lutz. “We thought it would take at least three to four years to get our balance sheet structure to a position where we could afford acquisitions and big capacity investments,” he says. “But we are in that position now.”

Bayer still owns 53% of Covestro, but the companies are completely separate legal entities and Bayer does not call the shots, according to Lutz. Germany has a two-tiered board system, including a management board and a supervisory board, and Bayer is represented by only one seat (out of 12) on the latter. That composition, he says, “was a clear signal to the capital markets from the start that [Bayer doesn’t] want to interfere with the business.”

Meanwhile, in addition to making environmentally friendly products, Covestro — which supplies primarily to the automotive, construction, and electronics sectors, but also the clothing and furniture industries — has a long-term goal of running a business with zero environmental impact. It also sponsors or participates in a number of sustainability initiatives.

Still, even though the United States accounts for almost a third of Covestro’s business, Lutz is relatively sanguine regarding President Trump’s litany of environmentally unfriendly appointments and stances.

“He will not be able to stop the mega-trends, including the ones that support our business” like the demand for energy-efficient insulation, Lutz says. The company supplies the construction industry with insulation products that are designed to reduce energy consumption in residences. The products are selling well in Southern U.S. states.

“No political leader could stop those trends,” he adds.

Free from Bayer, Covestro Finally Can Build for the Future