Earnings Call: Q3 2019

Oct 28, 2019

Ladies and gentlemen, thank you for standing by. Welcome to the Covestro Investor Conference Call on the Q3 twenty nineteen Results. The company is represented by Marcus Dialerman, CEO Thomas Tupper, CFO and Ronald Kohler, Investor Relations. During the presentation, all participants will be in a listen only I'd now like to turn the conference over to Ronald Kohler. Please go ahead, sir. Good afternoon, and welcome to our 3rd quarter conference call. For your information, we have posted our interim report on the conference call presentation on our website and we assume you have read our Safe Harbor statement. I would now like to direct you to turn it over to Marcus. Good afternoon to our European listeners and good morning to our U. S. Investors. Prior to presenting our 3rd quarter results, I would like to share our highlights Every third year, the disavow trade fair opens its doors for the top global trade fair of the plastics industry. It took place just last week, Three topics form the center of our booth, Circular Economy, Digitalization And Innovation. First, we commit to Circular Economy megatrends such as climate production and population wells require a fundamental rethink in lifestyle and consumer behavior as well as in global production. We need a complete transition from a threat away to a circular economy in order to handle limited resources, more responsibly, and protect the climate. Cobestra is committed to establishing new material cycles throughout the entire process chain over the next years decades. 2nd, due to the elevation. This is another driving force for the development of the economy and society in the coming years. Covestro will explore the resulting opportunities and is embedding digital Technologies and processes from the supply chain through to production, research and all interfaces to customers and to the development of new business models. 3rd, the dedication of Covestro to innovation. The highlight exhibit was an interior concept for future mobility that Covestro developed together with partners alumni Automotive value chain. Trends such as autonomous driving, electric drive systems and car sharing, turn the car into a multi functional mobile living and working space. The main features are newly designed surfaces that allow 5G communication the integration of ambient light, the latest infotainment systems and forward looking city concepts. Turning to page number 3. The first quarter developed in line with our expectation. The year on year comparison continues to look weak However, we delivered the predicted acceleration in core volume growth and a solid cash flow generation. We achieved a strong core volume growth of 5.3% this quarter. This growth demonstrates our capability to compensate declining automotive industry and withstand a weak macroeconomic environment. Our EBITDA decreased significantly year on year. However, with EUR 425,000,000, it was fully in line with our guidance. On the cash side, the management actions taken to optimize working capital show positive effects. Thus, we could achieve a solid free operating cash flow US243,000,000 in Q3. Within November December ahead of us, we are narrowing our full year 2019 guidance within the public ranges. If we now turn to Page 4, let me provide some more insights into our core volumes development by regions and industry in the third quarter 2019. Overall, demand stayed depressed and the economic environment continues to be characterized by several uncertainties such as the U. S. China trade conflict, tensions in Middle East and Brexit, still based on better product availability and helped by easier comparatives we managed to grow call volumes in every region. Asia Pacific was the best growth region this quarter, posted 9% call volume growth with China even growing double digit. Several industries also showed double digit growth rates in Asia Pacific, like construction, electronics wood furniture and medical. Automotive demand remained depressed. Year Middle East Latin America too and especially Germany suffered from the continuous weak demand in automotive. Double digit volume growth rate in Vit Furniture electronics more than compensated development and enabled us to achieve a positive growth of 4%. NAFTA MES, in particular, also suffered from the weak automotive industry on top sluggish demand in electronics. Strong growth rates in construction combined with solid in wood furniture and diverse other industries were able to counterbalance the weak spots. As a result, we achieved a positive growth of 2% for the quarter. Overall, we are satisfied to see that our diversification across industries and regions helps to contact the current weakness in the automotive industry and allows us to manage a challenging demand environment. I now hand over to Thomas for the full set of financials. Sales bridge for the quarter. And as you can see, we posted a sales decline of 14.6% in Q3. And the main drivers were deteriorating crisis in MDI TDI and PCS, reducing our sales by a total of 1,000,000. On the other hand, we delivered a positive volume growth contribution of 1,000,000. And also you can see in the bridge that FX effects added 1,000,000 mainly attributable to the US dollar and also to the Chinese yuan. So with that, let's turn to Page 6 for the EBITDA bridge. As you can see, we achieved an EBITDA of EUR 425,000,000 for Q3 in line with our guidance. And also as forecasted, the higher competitive pressure in polyurethanes and polycarbonate led to a continued decline in contribution margin. So that the negative pricing delta amounted to a negative 1,000,000 and you can find this also in the bridge. On the other hand, the positive volume development was translated into an EBITDA contribution of 1000000 thanks to a volume leverage of 53% and FX also had a small positive effect as you can see in the bridge. Finally, with respect to the other items, the main contributors were at lower costs driven by lower bonus provisions, and the progress that we made with our prospective cost cutting program. And on top, we benefited from a positive effect of 1,000,000, which comes from the adoption of IFRS 16 and the adoption of the accounting standards. And we have been pretty transparent about the effect that is recurring every quarter. So with that, let's turn to Page 7. And the highlight of this chart is the strong volume growth of 5.3%, which you can see on the upper half of the page. Overall, however, the macroeconomic environment has not improved, so strong remains. However, we achieved a strong volume increase, which we believe was a good result given the current demand weakness. If you look at the lower part of the page, you see that sequentially, the EBITDA margin declined from 14.3% to 13.4%. Which we consider a solid development within the currently very difficult industry environment. And with that, I would like to hand it back to Marcus for the segment details. Turning to page number 8, looking at our polyurethane segment on chart number 8, In Q3, we recorded a strong core volume growth, driven by all three product groups. Overall industry utilization stays at a low level due to additional capacities added during the last 15 months. Based on most recent data, industry demand growth remains solid at our predicted long term trend of around In MDI, the picture remains unchanged for this year. Few selected ramp ups, but no new startup leading to a slightly lower average industry utilization estimated at around 87% in full year 2019 versus 88% in 2018. Due to the currently low visibility on demand, we stay cautious about the further development in the short term. Midterm, we expect that current over capacities will be absorbed by growing market demand. The recent cancellation of 1 new 400 KT U. S. Project for 221 contributes to this view. For 2020, the only announced startup is our MDI facility in Brunspittle, Germany, with a 200 KT nameplate capacity. In TDI, the latest ramp ups of 3 world scale plants have increased supply pressure and continue to lower average industry utilization from a tight 85% in 2018 to around 76% in 2019. Of the roundabout 1,000,000 tons, additional capacity expected between 2018 and 2 23 800,000 tons have already been started up and partly our partly or fully ramped up. From current margin levels, we see limited further downside risk as we believe that high cost producers are currently operating at or below cash breakeven levels. Potential upside would, for example, come from closure of high cost plants as seen in the past. Finally, margins in polyether polyols continue to be below the long term average. Overall, the EBITDA margin of 13.3% in POR in third quarter 2019 was clearly below last year's level, primarily driven by significantly lower MDI and TDI margins. Taking a quarter on quarter perspective, the improvement reflects higher volumes and lower internal costs, thanks to undistrupted operation. Let's turn to Page 9. In polycarbonates, we recorded a strong core volume growth of 9.3% in the third quarter. The ongoing demand weakness in automotive could be compensated by double digit volume increases in construction, electronics, medical, and other smaller industries. Thanks to our position as cash cost leader in the industry, we have some flexibility to switch sales from one application and industry to the other, thus helping us to counteract any short after price declines continued in all regions, mainly in the commodity businesses. Consequently, net sales decreased by 13.2% year on year. The EBITDA margin came in significantly below previous year's level impacted by the negative pricing delta. In a quarter on quarter comparison, the segment margin decreased due to continuing price pressure. Let us take a short look at the overall industry prospects. Automotive represents more than 20% of the global polycarbonates demand in roughly 1 third of our volumes. Given the declining OEM production coupled with a massive destocking in the whole automotive value chain, the overall polycarbonate market growth will be relatively low this year. On the other hand, we expect capacity additions of around 5% to 6% this year. More than 10% additional capacities have been announced for next year, This is expected to lead This said, we are preparing ourselves for several more quarters of declining earnings. However, as the clear market innovation and cost leader, we should be able to outperform the industry. Over the cycle, we are convinced that polycarbonates remains a highly profitable business for us with an attractive growth profile. Let's turn to Chart number 10. The impact from globally weaker demand continued to hit our Coatings Adhesive Specialty segment. Core volumes declined in almost all customer industries. Thus, we recorded a negative core volume growth of 4.0% in the 3rd quarter. In consequence, net sales declined by 3.0 percent year on year. Positive effects from currency and the portfolio impact from the DCP acquisition could not fully compensate the volume loss and weaker pricing this quarter. EBITDA suffered from the negative volume leverage and margin pressure. In the 1st 9 months, we reported a core volume decline of 2.7%. We assume that we will return to positive core volume growth during the fourth quarter 2019. However, it is unlikely that this can compensate the year to date weakness. Therefore, we now expect a low single digit core volume decline for the full year 2019. We do not expect a fast recovery of the coatings end the TSYS market over the next quarters. In addition, a tougher competitive environment could further increase the pressure on prices. Thomas will now explain more financial details. Yes, thank you. Let's go to page 11 where you see the free operating cash flow development I think it's pretty clear that the lower EBITDA, the higher CapEx and EUR 350,000,000 cash out for our financial year 2018 bonus payment continue to be the main influences of our free operating cash flow generation this year. However, as you can also see, the free operating cash flow improved significantly during Q3 as we digested the negative phasing effects already in the first half of twenty nineteen, and additionally effective countermeasures reduced our working capital, thus we were able to generate a positive free operating cash flow of to 1,000,000 in Q3, leading to 1,000,000 free operating cash flow for the 1st 9 months of this year. So beginning of this year, we initiated a working capital optimization program, which yields the expected benefits And already during the 1st 9 months of the year, we were able to limit a seasonal increase of the working capital so that for the full year 2019, we expect a triple digit €1,000,000 positive contribution from changes in working capital to our free operating cash flow. So that overall we see ourselves on track to deliver a free operating cash flow within our guidance range. And based on the narrowed EBITDA guidance, we are also narrowing the free operating cash flow guidance to a range between 1,000,001,000,000 for the year. With that, let's turn to Page 12 where you can see the net debt development. As you can see, our total net debt level increased to EUR 3,400,000,000 at the end of September of this year. And the main increases are attributable to the payment of the dividends as see in the chart, which we did end of April, you see the adoption of IFRS 16 accounting standards, which had an effect of at EUR 649,000,000. And obviously, there was an increase in our pension provisions of EUR 574,000,000, and you all see these items in the bridge. And the increase in pension provisions came because of the decrease of a discount rate in Germany. So in combination with the lower EBITDA, these developments led to an increased ratio of total net debt to EBITDA of two point one times at the end of September. However, since the main deviations in total net debt have been triggered by accounting items, we continue to regard our balance sheet as being very solid. And with that, let's come to the guidance, which you have on chart 13. So overall, let me say that we confirm our guidance 2019, but we narrowed the guidance for our key KPIs within the public published ranges. Although we recorded a solid volume catch up in quarter 3, we continue to face weak overall demand on the back of an uncertain macroeconomic environment. And therefore, we now assume expecting to deliver between 1000000 and 1000000. And accordingly, we also narrowed the range for the expected ROCE to 8 to 10% for the full year. Furthermore, as you can see on the page, we expect an increase of D and A to around EUR 770,000,000, triggered by an additional million impairment linked to the disposal of the European polycarbonate sheets business in Q3. We expect an improving financial result of minus 1000000 to -1000000 on the back of less negative hedging effects, and we are increasing our guidance for of an internal 6% is still a valid assumption for the coming years. So full year, and we narrowed the expected range to EUR 1,570,000,000 to EUR 1,650,000,000 for 2019. And this full year guidance implies an EBITDA range of between 1000000 and 1000000 for Q4 2019. So that compared to Q4 2018, we assume further price deterioration only partly being counterbalanced by lower raw material prices, Strict cost discipline and some volume growth should allow us to mitigate the resulting negative pricing delta. So if we look ahead, we can say that during 2019, we suffered from continuing price declines for our products, but this is expected to give us a rather low starting point in December 2019 for the year 2020. So from today's perspective and based on a mark to market assessment, we would expect a low triple digit million burden from a negative pricing delta for 2020. And as a consequence, we are preparing for another challenging year next year, which will be ahead of us. So with that, back to Markus for the summary. Yes. Thanks Thomas. And now we are switching to Page number 14. The third quarter developed in line with our expectations. We achieved strong volume growth in a challenging economic environment. The diversification our sales towards several customer industries and the capability to switch volumes rapidly from one industry to another thanks to our cost leader position enabled us to counteract the automotive industry weakness. Our EBITDA came in as expected. Thanks to our strict cost discipline, we faced only a slight further decline of earnings in Q3 compared to Q2. In Q3, we again demonstrated our capability to manage working capital. This compensated a negative cash phasing effects from first half and ensured that we could remain on track overall, we currently operate in very challenging markets characterized by oversupply due to increased capacities and simultaneously weakening demand. As a consequence, our earnings in 2019 remain significantly below mid cycle levels. Finally, we used the K Fair last week to demonstrate our commitment to Circular Economy, dedication to digitalization and continued efforts and innovation to drive growth. With that, we would like to Thank please. Your questions will be answered in the order that they are received. Please ensure that the mute function on your telephone is switched off you. And the first question comes from Mr. Christian Faitz calling from Kepler Cheuvreux. Yes, good afternoon. Thank you, Marcus Thomas and Ronald. A couple of questions, if I may. First of all, question. Can you talk about current demand trends, I. E, how has October started? And what are your order books for your key industries, suggesting at present? Second question, in last year's Q3 call, you told us about some of your customers relocating production outside of China to avoid trade tariffs. Is that a process which is concluded now? And has this actually been to your benefit? Hi, Christian. This is Marcus speaking. So looking, at, let's say, the Q4 order books slash the October order books and we're almost through to October I think we are with regard to the Autobox in line. What we would expect was to give guidance, let's say, for the full year. So, yes, that's that's how I would comment that. So we do not see, anything that would significantly positively or negatively deviate in terms of the order books, from what we have given as a guidance for the full year, or what we would expect, let's say, for the for the fourth quarter. With regard to the second question you asked and spoke about companies relocating outside of China, is this completed now, I would say, we just see, yeah, these trends because we're talking about supply chains, relocation of assets, just continuing, because that is not something that is happening in months, sometimes you can simply because companies are switching business. So one loses business, other companies taking it up. But if companies really relocating, that is a longer term process. And in that context, I would expect that this trend also mid to long term would continue because currently, we do not see any signs that a trade, conflict between the U. S. And China will be sorted out short term, maybe not even midterm, And my personal opinion is also maybe not even long term. So I think this will be a continued trend. Do we benefit from it? I mean, you can see that with the strong volume growth, which was not only based on the comparison quarter from last year, but also clearly due to our leading cost position, has from our view benefited Covestro and whether this is, related to the relocation of assets of our customers, I would say partially yes because compared to some other competitors, we have the ability to globally deliver, and we have regionally well established supply chains. And so I would say without having any real hard data that specifically would target to that point, yes, we have benefited from it. Okay. Thanks very much, Marcus. The next question comes from Thomas Swoboda calling from Societe Generale. Over to you. Or is it fair to assume that your capacity utilization was higher, especially in polycarbonates and also in polyurethanes than the numbers you have provided us for the market globally. So that was the first question. The second question is on the margin development in polyurethanes compared to polycarbonate. You have said in your prepared remarks, you expect polycarbonates margin to further deteriorate. Historically polycarbonate was less profitable than polyurethanes. However, it was visa versa the last couple of years. Are we going back to the historic ranges where polyurethanes are more profitable than polycarbonate? And lastly, and the 3rd question, on supply demand in polycarbonates, My question is, have you seen your competitors actively reducing capacity, cancelling, build out plans or strategically delaying startup updates and so on. Thomas, thanks for the question. This is Marcus speaking. So on capacity utilization, very short and briefly, I would say, we, as Covestro should have better capacity utilization than what see on average of the industry. And the main reason for that is not only, I think, our very strong market access and customer centricity, but particularly the costly in the commodity area. And, we outlined this earlier in our comments, given during the presentation, that this also enables us, to still produce this positive margin contribution when some of the high cost producers already getting cash negative when producing. So having said that, we clearly assume, that we are having better utilization than the rest of the market. Another evidence for that is we are fully loaded. So our capacities are fully loaded. We sell everything that we can sell. In polycarbonates and polyurethane. Our assets are fully available. So we do not have any major planned or unplanned shutdowns. And that also has helped us to achieve the strong volume growth in polycarbonate and in polyurethane in the third quarter. On the second part of the margins, with regard to profitability, I would say that the margins for polycarbonate would continue to remain under pressure, simply due to the fact that we have had additional entrants and entries in the market in 2019. We said that earlier between 5% 6% additional capacity, while at the same time, one major outlet for polycarbonate, which is the automotive industry, let's say, downturn with regard to overall demand. And that shift also volumes into the commodity segment, which even further increases the pricing pressure. And we do not expect that this, pricing pressure in particular on the commodity segment will end soon, simply due to the fact that first, there is no additional demand short term, maybe even midterm for the automotive industry foreseeable. And secondly, we see additional capacity announced for next year in the range of additional 10%. Again, announced that does not mean that it comes to fruition, that that is what we see. On polyurethane, I think, and we have tried to explain it a little bit earlier that on TDI, we see limited further opportunities for price to decline and margins to get under even further pressure because some of the high cost producers already most likely ceased production and cannot compete anymore. Similar? Is it with MDI? And in this context, you also ask about, well, how do we see the opportunity of polycarbonate profitability, maybe historically go back, let's say, below, polyurethane profitability. This is very difficult to predict, but let me remind you of one fact We have since this has happened last time significantly moved the product mix strategically to products with higher margins and where the volatility of those margins is lower. That's number 1. We have significantly worked on our cost position And thirdly, the last time when you have seen margins deteriorating that much, we also were not fully loading our assets. So all these three factors from my perspective would possibly support, let's say, a margin development, even under very difficult circumstances for polycarbonate. So On your last third question, particularly polycarbonate supplydemand and competitors cancelling capacities are delaying startups on purpose. We have not heard about, major or smaller polycarbonate player announcing cancellation of capacities However, we have seen already in recent months, so called strategic revenues, including all options, from some larger players, for example, a larger European player who has put all options on the, on the, on the plate for its German based asset. And, in addition, We also have seen delays of ramp up, at least, and we don't know exactly for what reason, from one Chinese competitor, And if you look at the overall capacity addition in 2019, the announcement for overall capacity addition was way higher than what have practically seen. I think it was a double the rate. If I'm not totally mistaken, if you would have taken all unconstrained announcement, it would have been 12% and we only have seen 5% to 6%. So that gives you maybe also a complete picture. It does indeed. That was very helpful. Thank you. Thank you. The next question comes from Markus Mayer calling from Baader Bank. Please go ahead with your question. 3 questions from my side as well. Coming back on the order book visibility, has the visibility changed in the order backlog or is it still as long as it has been during the last months? That would be my first question. And my second question is, you've already indicated on the EBITDA guidance for next year or at least on the pricing delta. If we would do a free operating cash flow bridge, the net working capital inflow, I suppose, should be you'll be lower in 2020. But CapEx spending is higher and also earnings are at least from this pricing test indicates below. So fair to assume that the 2020 free operating cash flow should be most likely lower year over year? And then the last level is on inventories at your customers? Do you have any feeling or any idea or clue where the levels are compared to the part of this automotive weakness? Thank you so much. Marcus, this is Marcus speaking. Thanks for your questions. I will give, or provide you with an answer on the first one. And, Thomas, definitely on the second one. And the third one, we're still sorting it off. No jogger side, that will also be done by Thomas. So on the first one, I think the order book visibility in principle is, as as usual. We have limited visibility about 6 to 8 weeks. But we have to, let's say, we've taken to conservation some special effects. So as I said, general direction, no significant difference. However, there's smaller orders coming in. So customers really ordering hand to mouth just what they need on short notice. In some areas, the other topic is that we, for example, in polycarbonate slightly shifted the portfolio due to tactical reason and to load our assets a little bit more into the commodity area. And there you have normally different buying patterns compared to the more specialized area. So these reasons lead to a slightly different, order book visibility, but not if you really compare apples to apples, then more or less it has stayed the same. With that, I would like to hand over to Thomas. Yes, I think your question was how is free operating cash flow developing? So let me maybe start with EBITDA first and give a little bit a little bit more structure to the building blocks that I think you guys should consider. However, I would also clearly say This is not a guidance. This is way too early for this, but just to give a little bit more structure and clarity on some of the building blocks that we currently see. So first of all, we indicated to you that in terms of EBITDA, we do see a negative pricing delta. And we said it could be a low triple digit number that you plug in here. On the other hand, we always said that on the volume side, we would expect a positive effect on EBITDA from the volume and again, I would attach a low triple digit positive number to this. FX, difficult to say, but I think to take something like a neutral effect would be probably not totally wrong. And then, on the other bucket, I will probably attach a negative number to this simply because driven by our higher CapEx, we're also facing higher costs in order to get this CapEx into the ground. So I think that if you take this together, again, too early to give a guidance, but, to negatives, one positive, nobody should totally exclude the case that the EBITDA might be below the 2019 number next year. From that into cash flow, I think you named some of the buckets, I would say, topics were expecting a higher number, the working capital, positive contribution is probably lower simply because we have already significantly will have improved our level this year. On the other hand, there will be some relief from the bonus payment where we had to digest 1,000,000 from 2018 as a cash out this year. And the same is true for the tax where we had some tired cash tax payment this year, which will obviously not reoccur next year. Again, 2 positives to negatives, on the back of a potentially lower EBITDA, nobody should be surprised if the cash flow in 2020 could also be a lower number. Again, I'm repeating myself. This is not a guidance. This is more, what are the structures of the building blocks that you guys should consider? Okay, understood. So maybe on your last question in terms of customer inventories, levels, in particular, I assume or no, I recall you, we were referring to automotive. Destocking from our perspective might continue into the 4th quarter. However, we expect that it will be a little bit better Q1, but there's still very, very high uncertainties. The direct inventories, also given the chemical nature of the respective raw materials in MDI, and TDI are normal. There might be still slightly higher volumes in polycarbonates, but also here, handle it with care, handle this with care. Because some of the grades are highly specific, particularly also in the automotive industry, and you might have them sitting on stocks, but you cannot use them for any other purpose. So even though there might be inventories, you still might need to order special grades. Whereas in the commodity area, we do not assume that there is high inventories actually on stock or that, for example, traders carry a lot of those inventories that should be through meanwhile. Hope that helps. Okay. Yes. Definitely. Thank you so much. The next question comes from Sebastian Bray, who's calling from Berenberg Bank. Please go ahead with your question. I would have 2, please. The first is on the assumed negative pricing delta of a low digit €1,000,000 sum at EBITDA. Could you please give an indication of how this is split between CAS and polycarbonate? And in particular, an overview of capacity utilization or at least for competitive outlook in the CAS? I know we don't usually talk about utilizations for this segment, but is the competitive situation become tougher. That's my first question. And my second question is on the impact of higher pension provisions on the P and L for next year. It looks as if by the end of the year, you'll have million of pension liability. Could you please remind us of the implied additional P and L costs that you have to foot as a result of this? Yes. With respect to the first one, so again, we said we are expecting a negative, but low triple digit negative pricing delta for 2020 relative to 2019, if you stake what we expect as the starting point in terms of prices end of this year. Now your question was how to split this. I would say it will mainly come from PCS and to some extent also from Cusp, but the major portion is PCS, which is reflected in here. And then your second question, yes, we have higher pension provisions on the balance sheet because of the lower discount rate. The impact on our P and L for next year, is negligible, I would say. And I would also remind you that the cash effect of this is negligible. We're paying a very constant cash out on pendants of roughly 1,000,000 every year. And that is pretty much independent at least in the short term. Of how big the provision on the balance sheet is. So I would say on both ends, no major effects to be expected next year. That is understood. Thank you. The next question comes from Jean Baptiste Rolland, who's calling from Bank of America Merrill Lynch. Please go ahead with your question. Good afternoon, Marcus, Thomas and Ronald. Thank you for taking my question. I have one please. You mentioned capacity additions of 10% next year in polycarbonate. I'm just wondering, how much do you bake in in terms of capacity additions for the years beyond, how much do you also expect for growth in polycarbonate demand in 2020? And a second question to that is how when you say that you believe that, term outlook for polycarbonate remains sound. What sort of how long is how long do you think midterm is really? Thank you. So Coming, this is Marcus speaking. So thanks for your question. So, talking about capacity additions of 10%. Again, that is announced capacity please always handle this with care, because you have seen already this year as, outlined earlier, that announced capacity and real capacity must not necessarily be the same number. Normally, they are a little bit lower. However, 10% is what we take as a planning assumption. And if you now would, let's say, move ahead, in the next couple of years. Currently, what has been announced is for 2 21, 11% and for 2 22, something around 14%. And to put this into perspective, all of those capacity restrictions are currently announced for China, and all of those capacity additions coming from Chinese players. And, in this context, It is always important to understand that this has been encouraged by the respective government, as this was one of the strategic polymers that the Chinese government wanted to see local self sufficiency but we also have to be clear in this context that this encouragement and respective policies have been withdrawn these meanwhile. So also this is part of the overall picture in this context. Mid term, remain sound for PCS. How long will this be? You asked, we normally plan for 5 years. So and if we talk about 5 years between 4% 5% growth of polycarbonate is what we assume. I hope that helps. Yes, it does. Thank you very much. Thank you very much. The next question comes from Georgina Iwamoto calling from Goldman Sachs. Over to you. Hi, good afternoon. I'm Thomas and Marcus. Thanks for taking my questions. I've got 2. The first one is on kind of the volume outlook for next year. You've got a clear strategy to full utilize your plans as far as possible. I just wanted to see if you could confirm what kind of capacity you expect to have to grow into for 2020. And then my second question is on polycarbonates, you set out some helpful expectations for further weakening of mix over the next few quarters. And you've previously disclosed about 60% of sales in polycarbonates is resilient. Can you give us an idea of where that figure is today and where you see that heading to in the next few quarters? Thanks. Hi, Georgina. This is Marcus speaking. Thanks for your question. So The volume outlook, should be around 4% also, let's say, on the, average that we planned for. And for example, 200,000 tons of capacity and MDI coming on stream next year. And so if we also assume for the rest of the portfolio also due to a different turnaround pattern and things like that because many of the larger turnarounds have happened actually within this year, particularly in the first half, we would think that we have enough for 4% growth, if there will be no outages of our plants. So considering this 4% is what we would think would be achievable with the next year. Now coming to the second question, polycarbonates. We still intend strategically to grow the share of the resilient portfolio. And yes, it was around 60%. However, this year, it is clear also due to the short term tactics to load our assets and to compensate for the losses in the automotive industry, that we, would lose parts of the share tactically when year. And if things are continuing, that also might lead in the next quarters to further tactical losses and a shift, therefore, of the respective parts that are resilient versus the parts that are commodity or non resilient. Midterm, however, there's a few trends that would continue to help recover of the automotive industry, 5G medical application. So there's a couple of things that we have in our plate, why we believe that once we are through, this very challenging environment and things are either recovering or coming through in terms of growth and significant growth and volume contribution to portfolio, that we will go back to the 60% plus and beyond for the polycarbonates portfolio. I hope that helps. Yes, it does help, but I do have one follow-up on that. If you do have a kind of auto recovery, would you expect those auto OEM related volumes to come back in at the same margin as we've seen in 2018 Or are the auto OEM customers likely to negotiate a bit harder this time? Well, what is what is clear, and we have to try to outline that there is some relationship, let's say, about overall length of the non differentiated or commoditized market margins and prices somehow into the more resilient part of the business. However, the resilient part of the business has much less volatility and also on average definitely higher margins. So would we go exactly back to the level of 2018 once we see a first recovery no. Are those margins totally out of reach mid to long term? Also no. I mean, that is the true picture because we currently are in a situation where we have, land markets where we see also for the next quarters that there's more pressure coming on the polycarbonate commodity area, and that will also have some impact on the, specialized grades. But mid term, again, once things are back to normal, I think we can also see very healthy margins in the automotive segment again. Okay, great. Thank you so much. Welcome. The next question comes from isha Sharma is calling from MainFirst. Please go ahead with your question. You mentioned that the high group volumes were head by better availability. Is it also the case for polycarbonates with such a sharp increase that we have seen in Q3? Or do you see just stronger end market trends compared to the first half? That would be different. Secondly, could you please put some more color on the volume decline that we have seen at cars? Which end markets show weakness and how should we think of this going into 2020? The last one would be again the pricing guidance, please, for 2020, you mentioned, that you will see increased pressure in polycarbonates as well as cars but how should we imagine this for polyurethanes? Do you expect a significant recovery or more like a flattish development? Thank you. Yes, thanks for your questions. This is Marcus speaking. So, looking into your first question, the story is similar actually for polycarbonates. So also polycarbonates, the availability was the main driver. It was not the demand as we outlined, the demand in particular for polycarbonate in the automotive industry and also the exposure towards the automotive industry in polycarbonate is higher than in the rest of the portfolio. So that means it's not demand driven, but simply our own supply capabilities that have improved due to the major turnarounds, planned turnarounds, have been finished in the first half. And since Q3, we were able, to continue let's say, to fully push volumes out of the plants, which we then did. And that also helped us, let's say, to fully utilize and get the respective volume leverage. On your second question, that was the volume decline in the coatings, adhesives and specialties arena, for the markets with about is particularly automotive, but also the industrial coatings area. These are the 2 major, end users where we saw a decline in the respective applications. And, we do currently not see that this trend will be short term turned around because we do not see any strong signals or even weak signals that would indicate that this would short term, recover. And that may also be true for some more quarters as far as we look at the coatings that he's in specialty areas. And the good thing about the specialty business is that it is special. And the bad thing about it is that it is a special business. So it is very difficult to switch from one application and push one materials into others. Like we, for example, do it for polycarbonates. So on the pricing lines, I would like to hand over to Thomas. Yes, Isha. I mean, just to be very clear, what we said is, if we take the expected pricing level for December, which we expect as of today. And then do a mark to market into 2020, we said this would then probably be a low triple digit negative pricing delta that this would generate in 2020 relative to 2019. Taking the expected starting point of end of December of this year. And that negative pricing delta will mainly come or will mainly concern PCS to some extent CUS and to a lesser extent PUR. Thank you very much. The next question comes from Jeffrey Hair who's calling from UBS. Please go ahead with your question. Hi, Marcus and Thomas and Ronald thank you for being able to ask the question. I'll just go last, can you just help us understand, will you have any startup costs relating to the Brunsville plant in either Q4 or the first quarters of next year? And if you do, could you just sort of maybe give us some guidance as to what those would be? I would say, I mean, we're expecting rooms better to start up at the beginning of next year, if everything goes well. But I would say there is no specific high cost attached to the start up and to the ramp up. Or at least not to a degree that you would kind of be able to track and trace them in our overall group numbers. And therefore, I would say this is existing, but definitely a minor item overall. The next question comes from Thomas Wrigglesworth calling from Citi. Please go ahead with your question. Thanks very much, Marcus and Thomas. Two questions from me. Firstly, on polyurethanes and polycarbonates. When we look at that volume, is that all market share or is actually the market share taking that you've executed larger than that because your these end markets actually declined. So I wanted to get a sense of how much net market share you've taken in those two businesses? 2nd question is, I think we've been talking now for two quarters about MDI prices being into the cost curve. Is it surprising you how long it's taking competitors to adjust production. Do you think something's changed in the competitive landscape with in this cycle versus previous cycles? And any comments there would be very helpful. Let me maybe start with the second question. So I would say the answer is no, we're not surprised. I think we've been saying is we cited some industry journals, which said that in MDI and also TDI, we were moving into the unhealthy space so that the high cost producers were probably or probably losing cash with every ton that they produce, we think this is true and this has led to at least what we see a stabilization in the MBI TDI prices. So, it looks like we have reached more or less a button here. But on the other hand, I think what we also said is this does not change the picture from how long does it take the market to really grow into the capacity before prices start again? And also we know that it takes a long time before a longer time before competitors finally drop out of the market all completely. And therefore, I would say the development that we have seen is in line with our expectations, which is a kind of sideways movement in terms of prices for those two products? Yes, Geoff, this is Marcus speaking. So on your second question, in terms of market share, if you really look at the number for the 1st 9 months and it's always very difficult quarter on quarter, you know, inventory levels or, turnarounds unplanned shutdowns, whatever. So there's a lot of, let's say, additional complexity in this, why quarter on quarter comparisons are really difficult if not misleading. So Let's take the 1st 9 months as an indication. We still see that the polyurethane market is growing quite well that is also reflected in some stabilization in the respective prices. And we still, again, absorbing additional capacity from last year, which makes progress. So the market is growing at 4% to 5%. And I would say for the 1st 9 months in PUR, we even slightly grew below market. If you look at the growth rates for polyurethane and for polycarbonates, there is still 2% to 3% market growth. Which means that we are more or less at or slightly above market in terms of polycarbonate. So, this is the picture how we look at it. So again, I would say we are developing within the market range, right? So Okay. Does it help? Thank you, Bruce. Yes. That's very helpful. Thank you. The next question comes from chetan Udeshi calling from JP Morgan. Please go ahead with your question. Yes, hi. Two questions. First on, just midterm CapEx, which I'm assuming hasn't been changed. So can you maybe help us understand the bridge from the $350,000,000 or so of maintenance CapEx that you have per year to over $1,000,000,000 CapEx that you guys have talked about in the past for 2020 and beyond? Like what are the different buckets that you are spending the money? And it will be useful to know how much is going into different buckets as well. The second question was, and I'm just reminding myself of the key KPIs that you guys had presented short term incentive planning, if I'm not wrong, the 2 out of the 3 KPIs were one on free cash flow over 400, the other was ROCE about WACPA by 8% to get to 100%. Now clearly this year, based on your guidance, those to and probably even the volume part might not be achieved next year. You are not ruling out a potential of decline in volumes. So like what is the, like, flexibility here to change any of these parameters? Or going to be the case that at some point this short term incentive program will be changed to reflect the challenging environment. So you to reduce the thresholds. Is that going to be the next sort of outcome? Chita, let me start with your last question. First of all, maybe this is a misunderstanding here. We didn't say that we were expecting volumes to decline next year. To the contrary, I said, you guys should expect a positive volume effect in your EBITDA bridge what we said is there might be a negative pricing delta in the EBITDA bridge, if you take the expected starting point, December 2019 and kind of use this as a mark to market into 2020. So again, just to be crystal clear, we're expecting volumes to be up and we're also expecting that this should have a positive effect on our EBITDA. Now with respect to your question, the, our bonus system usually is set up for 3 years. You just said it in order to achieve 100% the thresholds are 4% core volume growth, 800,000,000 free operating cash flow and 8 percentage points over WACC. And, I think currently there is no intention to change that system. So think your first question, with respect to CapEx, yes, I mean, our guidance for 2020 is CHF 1,000,000,000 maintenance CapEx, we always had a EUR 300,000,000 to EUR 400,000,000. The major projects in there is our MDI 500,000,000 in the U. S, which is slowly, getting costly because we're moving into the planning phase. And especially the European Activities in terms of our chlorine factory, our aniline factory in Antwerp and the related projects to this one. So I think, Spain and, and Antwerp are the major projects that you find in the 2020 number. So are you saying 2020 already includes a sizable CapEx from MDI in the U. S? No, it's not a sizable CapEx. Because most of it, I mean, sorry, I mean, let me just correct myself. 2020 already includes costs for MDI500, but you will find them in the OpEx line mostly not in the CapEx line because we cannot yet expense it because we have not yet achieve the relevant milestone in terms of the pure CapEx, which is capitalized, the major number 2020 will come from the European activities that I just made. The last question for today comes from Jadeep Panja calling from Millennia. Please go ahead with your question. Just on the U. S. MDI market, could you just explain me in very simple terms why the profitability in the U. S. Remains to be very high compared to the other regions? And what is the sustainability of this when we think of the next 2, 3, 4 years when pretty much everyone wants to increase capacity in the U. S. And then the second question really is on China or other what you're seeing in China where capacity increases, as you point out, are being pushed out into 2021, 2022. So do we think really here that, even the big players are suffering and therefore doing this? Or is it just, the balancing act between volumes, as you were saying, they need to grow into and utilization. Maybe on the first question you ask, 1st and foremost days, wrong numbers quoted by some consultants, to be very clear, because we do currently not see significant capacity decisions in particular on the next 2 to 3 years. And you might have seen that even one major announcement has been that there is at least the withdrawal of a plan to invest and major investments. So, and in particular, the U. S, MDI prices, yeah, really wrongly quoted by some consultants. So that is very important that there is an indication maybe on some trends, but the absolute levels are, in most cases, simply not correct. So that is, I think, very important, to keep this into consideration. And, then, then the there's also some cost issues. If you look, for example, on tariffs for some of the raw material goods, take ethylene that you need to import from China into the U. S. There have been additional tariffs on these. So from that perspective, you might also consider that some of the supply chains that have been built and have been calculated into respective investments may simply, lead to different calculations after the tariffs have been imposed and may not, make the overall investments, including other factors that you have to consider as profitably looking as before, but that speculation because for sure, we have no idea, let's say, how the cost calculation look like, but it's just an assumption that I would make And, therefore, the cancellation of the respective MDI capacities from our perspective are not demand driven, but more driven by the respective cost developments. Does that help? Yes. So in this nutshell, current U. S. Profitability is better than the other regions. Is that a right? Is that what I was trying to understand really, to be honest? Yes, I would say, Yes, you could say so, but, you know, it's not a major topic. You know, so they're slightly better, really slightly better. So to be very clear. For sure, you have an advantage when you're sitting in the country, because the cost to serve cost to deliver are lower than for local producers. But in general terms, I would say they're still imports in the U. S. However, they have, recently declined all due to the tariffs that have been imposed. They are so yes, there is some margins, but again, the whole picture is short term. There is no and short to mid term, there is no significant supply addition in the U. S. For CFO, also due to the fact that somebody has withdrawn. And again, the margins, even if you would, like, say, take the published numbers are only slightly higher than in other regions, also due to the fact that some of the MDI prices are simply misstated. Okay. Thank you so much. Mr. Kerla, there are no further questions at this time. Please continue with any If you have additional questions, don't hesitate and call the IR department or we will see you during the quarter with our activities. See you then. Bye bye. Ladies and gentlemen, this concludes the investor conference call of Covestro. Thank you for your participation. You may now disconnect.