Ladies and gentlemen, thank you for standing by. Welcome to the Covestro Investor Conference Call on the Q3 2019 results. The company is represented by Markus Steilemann, CEO, Thomas Toepfer, CFO, and Ronald Koehler, Investor Relations. During the presentation, all participants will be in a listen-only mode. The presentation will be followed by a question-and-answer session. If any participant has difficulty hearing the conference, please press the zero key followed by the hash on your telephone for operator assistance. I'd now like to turn the conference over to Ronald Koehler. Please go ahead, sir.
Yeah. Good afternoon, and welcome to our third 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 directly to turn it over to Markus.
Good afternoon to our European listeners, and good morning to all U.S. investors. Prior to presenting our third quarter results, I would like to share our highlights from the K Fair, which demonstrates very well our long-term aspirations. Every third year, the Düsseldorf Trade Fair opens its doors for the top global trade fair of the plastics industry. It took place just last week. Three topics formed the center of our booth. Circular economy, digitalization, and innovation. First, we commit to circular economy. Megatrends such as climate protection and population growth require a fundamental rethink in lifestyle and consumer behavior, as well as in global production. We need a complete transition from a throwaway to a circular economy in order to handle limited resources more responsibly and protect the climate. Covestro is committed to establishing new material cycles throughout the entire process chain over the next years and decades.
Second, digitalization. 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. Third, the dedication of Covestro to innovation. The highlight exhibit was an interior concept for future mobility that Covestro developed together with partners along the automotive value chain. Trends such as autonomous driving, electric drive systems, and car sharing turn the car into a multifunctional 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 seating concepts. Turning to page three. The third 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. Such growth demonstrates our capability to compensate the declining automotive industry and withstand a weak macroeconomic environment. Our EBITDA decreased significantly year on year. However, with EUR 425 million, 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 of EUR 243 million in Q3. With only November and December ahead of us, we are narrowing our full year 2019 guidance within the public ranges. If we now turn to page number four, 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 comparables, we managed to grow core volumes in every region. Asia-Pacific was the best growth region this quarter, posting 9% core 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. Europe, Middle East, Latin America too, and especially Germany, suffered from the continuous weak demand in automotive. Double-digit volume growth rate in wood furniture and electronics more than compensated the development and enabled us to achieve a positive growth of 4%. NAFTA and the U.S. in particular also suffered from a weak automotive industry on top of 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 counteract 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.
Yes. Thank you, Markus, and also a very warm welcome from my side. If you please go to page five, you see the sales bridge for the quarter. As you can see, we posted a sales decline of 14.6% in Q3. The main drivers were deteriorating prices in MDI, TDI, and PCS
Reducing our sales by a total of EUR 686 million. On the other hand, we deliver a positive volume growth contribution of EUR 80 million, also you can see in the bridge that FX effects added EUR 70 million, mainly attributable to the U.S. dollar and also to the Chinese yuan. With that, let's turn to page six for the EBITDA bridge. As you can see, we achieved an EBITDA of EUR 425 million for Q3, in line with our guidance. Also as forecasted, the higher competitive pressure in polyurethanes and polycarbonates led to a continued decline in contribution margin, so that the negative pricing delta amounted to a negative EUR 537 million, and you can find this also in the bridge.
On the other hand, the positive volume development was translated into an EBITDA contribution of EUR 42 million, thanks to a volume leverage of 53%. 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 the lower costs driven by lower bonus provisions and the progress that we made with our prospective cost-cutting program. On top, we benefited from a positive effect of EUR 29 million, 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. With that, let's turn to page seven. 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 price and margin pressure 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. With that, I would like to hand it back to Markus 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 4%-5%. 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 overcapacities will be absorbed by growing market demand.
The recent cancellation of one new 400 KT U.S. project for 2021 contributes to this view. For 2020, the only announced startup is our MDI facility in Brunsbüttel, Germany, with a 200 KT nameplate capacity. In TDI, the latest ramp-ups of three 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 round about one million tons of additional capacity expected between 2018 and 2023, 800,000 tons have already been started up and 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 break-even 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 PUR in the 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 undisrupted operations. Let's turn to page number 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-term weakness in one industry. Prices were clearly below previous year 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 and roughly one-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%-6% this year. More than 10% additional capacities have been announced for next year. This is expected to lead to a further decline in industry utilization. We assume an ongoing mix deterioration. 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 adhesives specialty segment. Core volumes declined in almost all customer industries. Thus, we recorded a negative core volume growth of 4.0% in the third quarter. In consequence, net sales declined by 3.0% year-on-year. Positive effects from currency and the portfolio impact from the DSM 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 first nine 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 and adhesives 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 million cash out for our financial year 2018 bonus payment continue to be the main influencers 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 effect already in the first half of 2019. Additionally, effective countermeasures reduced our working capital. Thus, we were able to generate a positive free operating cash flow of EUR 243 million in Q3, leading to EUR 143 million free operating cash flow for the first nine months of this year. Beginning of this year, we initiated a working capital optimization program, which yields the expected benefits.
Already during the first nine months of the year, we were able to limit the seasonal increase of the working capital so that for the full year 2019, we expect a triple-digit million EUR positive contribution from changes in working capital to our free operating cash flow. Overall, we see ourselves on track to deliver a free operating cash flow within our guidance range. Based on the narrowed EBITDA guidance, we are also narrowing the free operating cash flow guidance to a range between EUR 300 million and EUR 500 million for the year. With that, let's turn the page to page 12, where you can see the net debt development. As you can see, our total net debt level increased to EUR 3.4 billion at the end of September of this year.
The main increases are attributable to the payment of the dividends, as you can see in the chart, which we did end of April. You see the adoption of IFRS 16 accounting standards, which had an effect of EUR 649 million. Obviously, there was an increase in our pension provisions of EUR 574 million, and you all see these items in the bridge. The increase in pension provisions came because of the decrease of a discount rate in Germany. In combination with the lower EBITDA, these developments led to an increased ratio of total net debt to EBITDA of 2.1 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. With that, let's come to the guidance, which you have on chart 13.
Overall, let me say that we confirm our guidance for 2019, but we narrow the guidance for our key KPIs within the published ranges. Although we recorded a solid volume catch-up in quarter three, we continue to face weak overall demand on the back of an uncertain macroeconomic environment, therefore, we now assume a low single-digit core volume growth for the full year. As explained on the previous chart, we are also narrowing the initial free operating cash flow guidance, expecting to deliver between EUR 300 million and EUR 500 million. Accordingly, we also narrow the range for the expected ROCE to 8%-10% for the full year. Furthermore, as you can see on the page, we expect an increase of D&A to around EUR 770 million, triggered by an additional EUR 21 million impairment linked to the disposal of the European polycarbonate sheets business in Q3.
We expect an improving financial result of EUR -80 million to EUR -100 million on the back of less negative hedging effects, and we are increasing our guidance for the tax rate to between 26% and 28%. The main reason for this increase is a one-time taxation of an internal dividend payment from our Chinese legal entity, so that we assume that the previously guided tax range of between 24% and 26% is still a valid assumption for the coming years. With respect to EBITDA, we also confirm the initial EBITDA guidance for the full year, and we narrow the expected range to EUR 1.57 billion to EUR 1.65 billion for 2019. This full year guidance implies an EBITDA range of between EUR 244 million and EUR 324 million for Q4 2019. 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. 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. From today's perspective, and based on a mark-to-market assessment, we would expect a low triple-digit million EUR burden from a negative pricing delta for 2020. As a consequence, we are preparing for another challenging year next year, which will be ahead of us. With that, back to Markus for the summary.
Yeah. Thanks, Thomas. 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 of 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 effect from first half and ensured that we could remain on track to deliver on the full year guidance. In light of the first nine months results, we have narrowed our guidance for the full year within the published ranges.
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 in innovation to drive growth. With that, we would like to thank you for your attention and are happy to take your questions.
Thank you. Ladies and gentlemen, at this time, we will begin the question and answer session. If you have a question, please press nine followed by the star on your telephone. If you wish to cancel your request, please press nine followed by the star again. Your questions will be answered in the order that they are received. Please ensure that the mute function on your telephone is switched off to allow your signal to reach our equipment. Please stand by until we have received the first question. The first question comes from Mr. Christian Faitz, calling from Kepler Cheuvreux. Please go ahead with your question.
Yes. Good afternoon. Thank you, Markus, Thomas, and Ronald. Couple of questions if I may. First of all, standard 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? Thanks.
Hi, Christian. This is Markus speaking. Looking at, let's say, the Q4 order books/the October order books, and we're almost through to October, I think we are, with regard to the order books, in line what we would expect with the given guidance, let's say, for the full year. That's how I would comment that. 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 fourth quarter. With regard to the second question you asked, you spoke about companies relocating outside of China. Is this completed now? I would say we just see 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. One company loses business, other company's taking it up. If companies really relocating, that is a longer-term process. 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 mid-term. My personal opinion is also maybe not even long term. I think this will be a continued trend. Do we benefit from it? 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.
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. 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, Markus.
The next question comes from Thomas Swoboda. He's calling from Societe Generale. Over to you.
Yes. Hi there. Thank you for taking my questions. I have three. Firstly, on capacity utilization at Covestro, 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? That was the first question. The second question is on the margin development in polyurethanes compared to polycarbonates. You have said in your prepared remarks, you expect polycarbonates margin to further deteriorate. Historically, polycarbonate was less profitable than polyurethanes. However, it was vice versa the last couple of years. Are we going back to the historic ranges where polyurethanes are more profitable than polycarbonate? Lastly, the third question, on supply-demand in polycarbonates. My question is, have you seen your competitors actively reducing capacity, canceling build-out plans, or strategically delaying startup dates and so on? Thank you.
Thomas, thanks for the question. This is Markus speaking. On capacity utilization, very short and briefly, I would say we, as Covestro, should have better capacity utilization than what you see on average of the industry. The main reason for that is not only, I think, our very strong market access and customer centricity, but particularly the cost leadership in the commodity area. 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. 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% and 6% additional capacity, while at the same time, one major outlet for polycarbonate, which is the automotive industry into, let's say, downturn with regard to overall demand. That shifts also volumes into the commodity segment, which even further increases the pricing pressure.
We do not expect that this pricing pressure, in particular in the commodity segment, will end soon, simply due to the fact that first, there is no additional demand short-term, maybe even mid-term from the automotive industry foreseeable. 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, but that is what we see. On polyurethane, I think, and we have tried to explain that a little bit earlier, that on TDI, we see limited further opportunities for prices 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.
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? That 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 one. We have significantly worked on our cost position. Thirdly, the last time when you have seen margins deteriorating that much, we also were not fully loading our assets. All these three factors, from my perspective, would possibly support, let's say, a margin development even under very difficult circumstances for polycarbonate.
On your last third question, particularly polycarbonate supply-demand and competitors canceling capacities or 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 reviews, including all options from some larger players. For example, a larger European player who has put all options on the plate for its German-based asset. 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. If you look at the overall capacity addition in 2019, the announcement for overall capacity addition was way higher than what we have practically seen. I think it was 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%-6%. That gives you maybe also a completer 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.
Yeah, good afternoon, gentlemen. Three 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. My second question is, you have already indicated on the EBITDA guidance for next year, or at least on the pricing delta. If you would do a free operating cash flow bridge, the net working capital inflow, I suppose, should be year-over-year lower in 2020, but CapEx spending is higher and also earnings are at least from this pricing delta indicate be lower. Is it fair to assume that the 2020 free operating cash flow should be most likely lower year-over-year? 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 start of this automotive weakness? Thank you so much.
Markus, this is Markus 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. The third one, we're still sorting it out. No, joke aside, that will also be done by Thomas. On the first one, I think the order book visibility in principle is as usual. We have limited visibility about six to eight weeks, but we have to, let's say, take into consideration some special effects. As I said, general direction, there is no significant difference. However, there is 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 reasons and to load our assets a little bit more into the commodity area. There you have normally different buying patterns compared to the more specialized area. 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.
I think your question was how is free operating cash flow developing? Let me maybe start with EBITDA first and give a little bit more structure to the building blocks that I think you guys should consider. 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. 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 should plug in here. We always said that on the volume side, we would expect a positive effect on EBITDA from the volume.
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. Then, on the other bucket, I would 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. I think that if you take this together, again, too early to give a guidance, but two 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 CapEx, we're expecting a higher number.
The working capital positive contribution is probably lower simply because we have already significantly or 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 EUR 350 million from 2018 as a cash-out this year. The same is true for the tax, where we had some higher cash tax payment this year, which will obviously not reoccur next year. Again, two positives, two 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.
Maybe on your last question in terms of customer inventories levels, in particular, I assume, or no, I recall you were referring to automotive. Destocking from our perspective might continue into the fourth quarter. We expect that it will be a little bit better in Q1, but there's still 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 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 purposes. Even though there might be inventories, you still might need to order special grades.
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.
Okay.
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.
Good afternoon. Thank you for taking my questions. I would have two, please. The first is on the assumed negative pricing delta of a low digit million EUR 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 the competitive outlook in the CAS? I know we don't usually talk about utilization for this segment. Is the competitive situation becoming tougher? That's my first question. My second question is on the impact of higher pension provisions on the P&L for next year. It looks as if by the end of the year, you'll have EUR 600 million-EUR 700 million of pension liability. Could you please remind us of the implied additional P&L cost that you have to foot as a result of this? Thank you.
Yes. With respect to the first one, we said we are expecting a negative, but low triple-digit negative pricing delta for 2020 relative to 2019. If you take what we expect as the starting point in terms of prices end of this year. Your question was how to split this. I would say it will mainly come from PCS and to some extent also from CAS, but the major portion is PCS, which is reflected in here. Your second question, yes, we have higher pension provisions on the balance sheet because of the lower discount rate. The impact on our P&L for next year is negligible, I would say. I would also remind you that the cash effect of this is negligible.
We're paying a very constant cash out on pensions of roughly EUR 25 million every year. That is pretty much independent, at least in the short term, of how big the provision on the balance sheet is. 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 is calling from Bank of America Merrill Lynch. Please go ahead with your question.
Good afternoon, Markus, 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 terms of capacity additions for the years beyond? How much do you also expect for growth in polycarbonate demand in 2020? A subsecond question to that is, when you say that you believe that the midterm outlook for polycarbonate remains sound, how long do you think midterm is, really? Thank you.
Jean-Baptiste, this is Markus speaking. Thanks for your question. 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 addition and real capacity addition must not necessarily be the same number. Normally, they are a little bit lower. However, 10% is what we take as a planning assumption. If you now would, let's say, move ahead in the next couple of years, currently what has been announced is for 2021, 11%, and for 2022, something around 14%. To put this into perspective, all of those capacity additions are currently announced for China, and all of those capacity additions coming from Chinese players.
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. We also have to be clear in this context that this encouragement and respective policies have been withdrawn meanwhile. Also this is part of the overall picture in this context. Midterm remains sound for PCS. How long will this be, you asked. We normally plan for five years. If we talk about five years, between 4% and 5% growth of polycarbonate is what we assume. I hope that helps.
Yes, it does. Thank you very much.
The next question comes from Georgina Iwamoto, calling from Goldman Sachs. Over to you.
Hi, good afternoon, Thomas and Markus. Thanks for taking my questions. I've got two. The first one is on kind of the volume outlook for next year. You've got a clear strategy to fully utilize your plants 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. 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 that 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 Markus speaking. Thanks for your question. The volume outlook should be around 4% also on the average that we plan for. For example, 200,000 tons of capacity in MDI coming on stream next year. 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. Considering this, 4% is what we would think would be achievable within next year. Coming to the second question, polycarbonates. We still intend strategically to grow the share of the resilient portfolio. 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 technically within this year. 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 is a few trends that would continue to help. Recovery of the automotive industry, 5G, medical applications.
There's a couple of things that we have on 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 the portfolio, that we will go back to the 60% plus and beyond for the polycarbonates portfolio. I hope that helps.
Yeah, it does help, but I do have one follow-up on that.
Sure.
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 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. 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 long markets, where we see also for the next quarters that there is more pressure coming on the polycarbonates commodity area, and that will also have some impact on the specialized rates.
Midterm, 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.
You're welcome.
The next question comes from Isha Sharma, who's calling from MainFirst. Please go ahead with your question.
Hi. Thank you for taking my question. I have three, please. You mentioned that the high group volumes were helped by better availability. Is it also the case for polycarbonates with such a sharp increase that we have seen in Q3? 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 CAS? 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 CAS, how should we imagine this for polyurethanes? Do you expect a significant recovery or more like a flattish development? Thank you.
Isha, thanks for the question. This is Markus speaking. Looking into your first question, the story is similar actually for polycarbonates. Also in 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 our portfolio. That means it's not demand driven, but simply our own supply capabilities that have improved due to the major turnarounds, plant turnarounds have been finished in the first half. Since Q3, we were able to continue, let's say, to fully push volumes out of the plants, which we then did.
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 we're talking about, it's particularly automotive, but also the industrial coatings area. These are the two major end users where we saw a decline in the respective applications. 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, adhesives, and specialty areas.
The good thing about the specialty business is that it is special, and the bad thing about it is that it's a special business. It is very difficult to switch from one application and push one materials into others. Like we, for example, do it for polycarbonates. On the pricing guidance, I would like to hand over to Thomas.
Yes, Isha. Just to be very clear, what we said is, if we take the expected pricing level for December, which we expect as of today, 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. That negative pricing delta will mainly concern PCS, to some extent CAS, and to a lesser extent PUR.
Thank you very much.
The next question comes from Geoffrey Haire, who's calling from UBS. Please go ahead with your question.
Hi, Markus and Thomas and Ronald. Thank you for being able to ask a question. I've just got one left. Can you just help us understand, will you have any startup costs relating to the Brunsbüttel plant in either Q4 or the first few quarters of next year? If you do, could you just maybe give us some guidance as to what those would be?
I would say, we're expecting Brunsbüttel to start up at the beginning of next year, if everything goes well. I would say there is no specific high cost attached to the startup and to the ramp-up, or at least not to a degree that you would be able to track and trace them in our overall group numbers. Therefore, I would say this is existing, but definitely a minor item overall.
Okay. Thank you.
The next question comes from Thomas Wrigglesworth, calling from Citi. Please go ahead with your question.
Thanks very much, Markus and Thomas. Two questions from me. Firstly, on polyurethanes and polycarbonates, when we look at that volume, is that all market share? Is actually the market share taking that you've executed larger than that because these end markets actually declined? I wanted to get a sense of how much net market share you've taken in those two businesses. Second 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 in this cycle versus previous cycles? Any comments there would be very helpful.
Let me maybe start with the second question. I would say the answer is no, we're not surprised. I think what we've been saying is, and 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 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 MDI and TDI prices. It looks like we have reached more or less the bottom here. 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.
Also, we know that it takes a longer time before competitors finally drop out of the market all completely. 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.
Yeah, Geoff, this is Markus speaking. On your second question, in terms of market share, if you really look at the numbers for the first nine months, it's always very difficult quarter-on-quarter, inventory levels or turnarounds, unplanned shutdowns, whatever. There's a lot of, let's say, additional complexity in this, why quarter-on-quarter comparisons are really difficult, if not misleading. Let's take the first nine 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, we still, again, absorbing additional capacity from last year, which makes progress. The market is growing at 4%-5%, and I would say for the first nine months in PUR, we even slightly grew below the market, if you look at the growth rates for polyurethane.
For polycarbonates, there is still 2%-3% market growth, which means that we are more or less at or slightly above market in terms of polycarbonate. This is the picture, how we look at it. Again, I would say we are developing within the market range. Right.
Okay.
Does it help?
Thank you both. Yes. It's very helpful. Thank you.
The next question comes from Chetan Udeshi, calling from JP Morgan. Please go ahead with your question.
Yeah. Hi. Two questions. First on just midterm CapEx, which I'm assuming hasn't been changed. Can you maybe help us understand the bridge from the EUR 350 million or so of maintenance CapEx that you have per year to over a EUR 1 billion CapEx that you guys have talked about in the past, for 2020 and beyond? What are the different buckets that you are spending the money in? It will be useful to know how much is going into different buckets as well. The second question was, I'm just reminding myself of the key KPIs that you guys had presented for short-term incentive planning. If I'm not wrong, the two out of the three KPIs were one on free cash flow over EUR 400. The other was roughly about WACC by 8% to get to 100%.
Clearly this year, based on your guidance, those two and probably even the volume part might not be achieved. Next year you are not ruling out a potential of decline in volume. What is the flexibility here to change any of these parameters? Is it going to be the case that, at some point this short-term incentive program will be changed to reflect the challenging environment so you reduce the thresholds? Is that going to be the next sort of outcome?
Chetan, let me start with your last question. 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. 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. With respect to your question, our bonus system usually is set up for three years. You just said it.
In order to achieve 100%, the thresholds are 4% core volume growth, EUR 800 million free operating cash flow and 8 percentage points over WACC. I think currently there is no intention to change that system. I think your first question, with respect to CapEx, yes, I mean our guidance for 2020 is EUR 1 billion-1.1 billion. Maintenance CapEx, we always said is EUR 300 million-400 million. The major project in there is our MDI-500 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. I think Spain and Antwerp are the major projects that you'll find in the 2020 numbers.
Are you saying 2020 already includes a sizable CapEx from MDI in the U.S.?
No, it's not a sizable CapEx. Sorry. Let me just correct myself. 2020 already includes costs for MDI-500. 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 achieved the relevant milestone. In terms of the pure CapEx, which is capitalized, the major numbers in 2020 will come from the European activities that I just named.
Thank you.
The last question for today comes from Jaideep Pandya, calling from Millennium. Please go ahead with your question.
Hi. Thank you. Just on the U.S. MDI market, can 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? What is the sustainability of this when we think of the next two, three, four years when pretty much everyone wants to increase capacity in the U.S.? The second question really is on China or rather what you're seeing in China, where capacity increases, as you point out, are being pushed out into 2021, 2022. 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? Thank you.
Maybe on the first question you ask. First and foremost, there is wrong numbers quoted by some consultants to be very clear, because we do currently not see significant capacity decisions in particular on the next 2-3 years. You might have seen that even one major announcement has been that there is at least a withdrawal of a planned investment and a major investment.
In particular, the U.S. MDI prices here are really wrongly quoted by some consultants. That is very important that there is an indication maybe on some trends, but the absolute levels are, in most cases, simply not correct. That is, I think, very important to keep this into consideration. Then there is also some cost issues. If you look, for example, on tariffs for some of the raw material goods, take aniline that you need to import from China into the U.S. There have been additional tariffs on these. 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.
That is 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. 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?
Yeah. In a nutshell, current U.S. profitability is better than the other regions. Is that right? That's what I was trying to understand really, to be honest.
Yeah, you could say so, but it's not a major topic. They're slightly better, really slightly better, to be very clear. For sure, you have an advantage when you're sitting in a country because the cost to serve, cost to deliver are lower than for local producers. In general terms, I would say they still import in the U.S. However, they have recently declined also due to the tariffs that have been imposed. Yes, there is some margins. Short to midterm, there is no significant supply addition in the U.S. foreseeable, also due to the fact that some others has drawn. Again, the margins, even if you would, let's 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. Köhler, there are no further questions at this time. Please continue with any other points that you wish to raise.
Okay, thank you very much for listening and all your interesting questions. If you have additional question, don't hesitate and call the IR department, or we will see you during the quarter with our activities. See you then. Bye-bye.