Ladies and gentlemen, thank you for standing by. Welcome to the Covestro Investor Conference Call on the Q2 2019 results. The company is represented by Markus Steilemann, CEO, Thomas Toepfer, CFO, and Ronald Köhler, investor relations. During the presentation, all participants will be on 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 Köhler. Please go ahead, sir.
Good afternoon, and welcome to our second quarter conference call. For your information, we have posted our half-year financial report and the conference call presentation on our website, and we assume you have read our safe harbor statement. With that, I would now like to turn the conference over to Markus.
Good afternoon, everybody. The second quarter developed in line with our expectations. The year-on-year comparison continues to look weak. However, we see a stabilization of margins since Q4 2018 based on sequentially flat prices for the group overall. A strong achievement this quarter is certainly the positive core volume growth of 1.1%. It demonstrate our capability to compensate a very weak development of the automotive industry and even withstand weaker demand across industries overall. Our EBITDA decreased significantly in a year-on-year comparison, but stabilized nicely quarter-on-quarter. On the cash side, we took countermeasures to limit the seasonally higher working capital. Thus, we could achieve a solid operating cash flow under the given circumstances. Based on this set of results, and despite continuously challenging economic conditions, we confirm our full year 2019 guidance. Now moving to page number 3.
Let me provide some more insight into our core volumes development by regions and industries in the second quarter of 2019. NAFTA was the best growth region this quarter. We achieved a strong core volume growth of 6% despite declining auto production in the United States. Double-digit growth in construction, wood and furniture, medical, and other smaller customer industries was able to more than compensate the weak development in automotive and electronics. Asia-Pacific suffered from the economic slowdown. The weak demand led to negative core volume growth in automotive and construction. Still, strong volume growth rates in electronics and wood and furniture compensated the development and enabled us to post positive growth of 2%. Europe, Middle East, and Latin America suffered the most from the weak automotive industry. Additionally, a weaker industrial production in Germany led to volume declines across several industries.
This negative volume development could not be compensated by volume growth in construction and wood and furniture. Overall, we are satisfied to see that our diversification across industries and regions helps us 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.
Thank you, Markus, good afternoon also from my side. I'm on page four of the presentation where you have the sales bridge, and you see that we have posted a year-over-year decline of 16.9% in terms of sales. However, I think it's worth noting that sequentially, the sales increased by 1.1% relative to Q1 2019. If you look at the chart, you see that the main driver was the price effect, with declining and deteriorating prices in MDI, TDI, and also PCS, reducing our sales by a total of EUR 724 million. You see that there was a positive volume growth contribution of EUR 33 million, and the FX effect added some EUR 68 million, and that's mainly attributable to the US dollar. Finally, you see that there is a portfolio effect of negative EUR 29 million, and there's two things in this bucket.
First of all, it reflects the negative effect from the divested US polycarbonate sheets business, which we sold in Q3 2018, and there's a positive effect included from the stake increase from 50% to 80% in the Japan-based company, DIC Covestro Polymer Ltd. in Q2 2019, which we report in our CAS segment. With that, let's turn the page to page five, where you see the EBITDA bridge. As you can see on the right-hand side, we achieved an EBITDA of EUR 459 million for the second quarter, which is in line with our guidance. Also, as forecasted, the higher competitive pressure in polyurethanes and polycarbonates led to a continued decline in contribution margin, and therefore you see a negative pricing delta, which amounted to EUR 636 million in this bridge. The volume effect is almost negligible, and so is the FX effect.
If you look to the other items, you see a positive effect of EUR 94 million. The main contributors were the lower costs driven by lower bonus provisions, followed by a positive impact of EUR 31 million stemming from the adoption of IFRS 16, and also the one-time effect from the remeasurement gain of EUR 19 million in connection with the acquisition of DCP, which I just mentioned is in here. What we also had was a negative effect from restructuring costs related to our Perspective program, and that was in the same order of magnitude as the positive EUR 19 million from DCP. Overall, the macroeconomic environment has not improved compared to the fourth quarter of 2018. The strong price and margin pressure remains. However, we achieved a slight volume increase, which we believe was a good result.
Overall, I would like to say at this point that, of course, we do pursue a price volume strategy that maximizes the absolute EBITDA of the company. With that, let's turn the page to number six, where you see the sequential development of the group results. I think the highlight of this page is the stable EBITDA margin of around 14%, which you see on the lower part of the page for the last two quarters. Again, just as a reminder, the strong price decline, which has reduced our margins, started in Q4 2018, with selling prices down by 9.3% year-on-year in Q4. Then in Q1 and Q2 2019, the selling prices declined by 18.3% and 18.7% respectively. However, sequentially, we saw only a minor selling price decline in the second quarter of 2019.
With that, I would like to hand it back to Markus for the segment details.
Thank you, Thomas. We are now going to chart number seven and talking first about polyurethane. In the second quarter, we recorded slightly increasing core volumes. Strong core volume growth in TDI compensated for weaker MDI performance, while polyols remained on prior year's level. The lower MDI volumes were driven by our limited availability due to a scheduled maintenance shutdown in China. In our view, the MDI market growth remained healthy. Overall, industry utilization stays at low level, driven by the additional capacities adding during the last 12 months. For MDI, prices were moving up and down in the last month, reacting to short-term effects, like for example, several maintenance shutdowns in China end of April, or destocking and restocking measures by customers.
Due to the current volatility in the industry and the low visibility on demand development, we stay cautious about the further development during the course of the year. Midterm, we expect that the current overcapacities will be absorbed by growing market demand. For TDI, the industry environment remains under pressure, also in the second quarter. Margins did not move away from their low point as a consequence of significant capacity additions in the industry. On the positive side, we see limited further downside risk as we believe that high-cost producers are currently operating at cash break-even levels. Finally, margin polyether polyols continue to be below the long-term average, mainly driven by a weak U.S. market. Overall, the EBITDA margin of 11.6% in PUR in the second quarter was clearly below last year's level, primarily driven by significantly lower MDI and TDI margins.
Taking a quarter-on-quarter perspective, we see a slight improvement driven by higher MDI margins and higher TDI volumes. Now let's turn to polycarbonates. In polycarbonates, we recorded a solid core volume growth of 4.4% in the second quarter. The demand drop in automotive could be compensated by strong volume increases in construction, electronics, medical, and other smaller industries. Prices were clearly below the level of previous year after continuous price drops in all regions, mainly in the commodity businesses. Consequently, net sales decreased by 15% 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 slightly decreased due to continuing price pressure.
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 short-term weakness in one industry. Turning the page to coatings, adhesives, and specialties on chart number nine. The impact from globally weaker demand became most visible in our coatings, adhesives specialty segment. Core volumes declined in almost all customer industries. Thus, we recorded a negative core volume growth of 4.7% in the second quarter. In consequence, net sales declined by 1.3% year-on-year, although prices stayed almost flat. Positive effects from currency and the portfolio impact from DCP could not fully compensate the volume loss. EBITDA increased by 7.9% versus second quarter 2018, mainly helped by the remeasurement effect of DCP. The underlying business suffered from the negative volume leverage.
For the full year 2019, we confirm our guidance on core volume growth based on an assumed catch-up in the second half. However, the risks are increasing given the weak start into the year and the current macroeconomic uncertainties. The segment should continue to deliver an EBITDA margin of above 20% and a strong free cash flow. Thomas will now explain more financial details.
Yes, I'm on page 10 of the presentation where you see the details of the free operating cash flow development. The first thing that I would like to state is if you look at the first half-year. The numbers were characterized by two phasing effects related to fiscal year 2018. First of all, the cash out of around EUR 350 million for the 2018 bonus payment, and secondly, roughly EUR 100 million for higher cash taxes compared to the P&L taxes. In addition, let me remind you that the end of the first half is obviously the seasonal peak in terms of the working capital. Talking about working capital, effective countermeasures reduced the working capital buildup, and therefore, we were able to generate a positive operating cash flow of EUR 274 million.
Broadly speaking, and disregarding the mentioned two phasing effects, we were on a comparable free operating cash flow level as we had seen it in the first half of 2016. What I would also like to mention is that in our Q1 conference call, we guided for a significantly more negative free operating cash flow in the second quarter compared to Q1. Thanks to the working capital improvement measures, we managed to come out better than expected. If you look at the chart, you see a negative EUR 98 million for working capital buildup, which is significantly less than the buildup in the first six months of 2018. More importantly, if you look at our quarterly report, you will see that in Q2 itself, we actually released working capital and generated a positive effect from a reduction of working capital of EUR 159 million.
With those measures, the working capital to sales ratio was reduced to 18.4% at the end of H1. This is a lower level compared to the first quarter of 2019. It is also a lower level relative to the first half of 2018. For the full year of 2019, we assume that we can continue to reduce our working capital with a beneficial effect on free operating cash flow. We expect to finish the year in the targeted working capital to sales range of 15%-17%. Talking about the full year, obviously, lower EBITDA and higher CapEx will continue to influence our free operating cash flow.
However, after having digested the cash phasing effects that I mentioned, which are related to 2018 in the first half, we should be able to generate a solid free operating cash flow in the second half of 2019. Overall, we see ourselves on track to deliver on our guidance of a free operating cash flow between EUR 300 million and EUR 700 million. With that, let's turn the page to page 11, where you see the net debt development. On June 30th, our total net debt level increased to EUR 3.3 billion, and you see the key effects in the bridge. First of all, the dividend payment of EUR 438 million. Secondly, the effect from the adoption of IFRS 16 with EUR 642 million. Finally, you see that the pension provisions increased again by EUR 259 million, and that's mainly due to lower discount rates in Germany.
In combination with a lower EBITDA, these developments led to an increased ratio of total net debt to EBITDA to 1.6 times at the end of June 2019, compared to 0.6 times at the end of 2018. In this context, I would briefly like to mention that on July 2nd, Moody's confirmed our Baa1 rating with a stable outlook. Likewise, ourselves, we do continue to regard our balance sheet as being very solid because the main increase in the total net debt has been triggered by accounting changes since the beginning of the year. That leads me to our full-year guidance on page number 12. We reiterate our guidance of a low to mid-single digit percentage year-on-year increase in core volumes. In the first half of the year, we posted a small decline of negative 0.4%.
We continue to assume a catch-up in the next two quarters, helped by a lower comparison basis and more available capacities after we have digested the peak of our maintenance shutdowns in the first half of 2019. We confirm the EBITDA expectation of between EUR 1.5 billion and EUR 2.0 billion for 2019. The mark-to-market analysis at current price levels indicates an EBITDA of EUR 1.6 billion-EUR 1.7 billion, the reduction compared to our last mark-to-market calculation of EUR 1.8 billion is driven by both somewhat slightly lower margins and also slightly reduced volume assumptions for the full year. At this point, I would like to remind you, the mark-to-market analysis is a snapshot at today's prices. It is not a specific guidance for the year, which is our range of EUR 1.5 billion-EUR 2 billion.
As explained on the previous chart, we also confirmed the free operating cash flow guidance, delivering between EUR 300 million and EUR 700 million. For Q3 2019, we assume an EBITDA of around EUR 410 million. That means that sequentially, we assume further declining margins, which cannot be fully counterbalanced by somewhat higher volumes. Please note in this context that around implies a single-digit % deviation, both potentially upward or downward. With this, back to Markus for the summary.
Thanks, Thomas. The second quarter developed in line with our expectations. We achieved positive volumes 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 stabilized quarter-on-quarter based on a broadly flat selling price. We demonstrated in the second quarter how we manage our working capital with efficient countermeasures to alleviate the seasonal peak and compensate the negative phasing effects. Our Perspective program is fully on track. Additionally, our continuous focus on innovation and sustainability lays the foundation to defend our industry and cost leadership for the long term. In light of the first half year results, we fully confirm our guidance for the full year.
It might be too early to call it the bottom of earnings now, but at least earnings have stabilized quarter on quarter. We also expect only a slight further decline of earnings in Q3 compared to Q2 thanks to our strict cost discipline. Overall, we currently operate in very challenging markets characterized by oversupply due to increased capacities and simultaneously weakened demand. As a consequence, our earnings in 2019 remain below mid-cycle levels, but still meaningful above our cost of capital. We continue to assume that under mid-cycle conditions, we generate a return on capital employed after tax of 15%. In between, we will work on all internal levers to counterbalance the market-given circumstances. Creating long-term shareholder value remains at the core of any decision, especially with regards to the use of cash.
With that, we would like to thank you for your attention and are glad 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 reached the first question. The first question comes from Mr. Christian Faitz calling from Kepler Cheuvreux. Please go ahead with your question.
Yes, good afternoon, gentlemen. Couple of questions from my side, please. I am fully aware, and I'm actually glad that you don't run your business on a quarterly basis. Still, what is behind the observation that CAS has seen the weakest growth in Europe ever since your stock market listing in Q2? That is question number one. Second, it seems to be a long way from your H1 free cash flow generation as good as it might have been on a comparable basis to your fiscal year-end target of EUR 300 million-EUR 700 million. Can you give us a sort of bridge how to get there in the second half? Thank you very much.
Yeah, Christian, this is Markus speaking. I give it a shot on the first question. The so-called historical weak quarter that you have mentioned for our coatings, adhesives, and specialty business is primarily driven by the demand patterns that we see on a broad-based industrial weakness, and here in particular, the coatings market, and here in particular, the exposure to the automotive business. If you take, for example, PPG, which reported minus 5% and always volume-based on business development, and if you also take AkzoNobel as another industry player here with a minus seven, I think with our core volume development in the coatings, adhesives, and specialty business, we are somewhere in the middle, let's say, of the quarterly development in the respective industries.
That's why I would see this more, let's say, in line with what the broader industry development shows rather than a very specific topic for our business only. Again, as I said, basically driven by general industry demand and here particularly automotive industry demand. For the second question on, let's say H1 cash flow, I would like to hand over to Thomas.
Yes, Christian, I think, two things that I would mention. First of all, the phasing effects obviously for the second half of the year will fall away. As I said, EUR 350 million bonus payment for 2018, which don't belong into 2019, and also EUR 100 million cash payment above the P&L tax rate obviously will not repeat themselves in the second half of the year. Secondly, the working capital will be a contributor to our cash flow. Let me just remind you, in the second half of 2018, we had working capital savings or a positive contribution from working capital of more than EUR 400 million. We're assuming less than that in the second half of 2019, but still a, let's say, sizable positive effect. If you take those things together, we feel comfortable that we will achieve the range of EUR 300-700.
Okay. Very clear. Thanks, Markus and Thomas.
The next question comes from Thomas Swoboda, calling from Société Générale. Please go ahead with your question.
Yes. Good afternoon, gentlemen. I have two questions, if I may please. Firstly, on the potential drought in Europe this year again, do you see a risk there to face the low Rhine water levels this year again? If so, is there anything you can do to prepare? The second question is on CapEx. You have quite a sizable CapEx problem going forward. It does not seem that the economy is bouncing back again very soon. My question is, what would make you reconsider the speed or/and the amount of the CapEx you want to spend over the next three years? Thank you.
Hi, Thomas. This is Markus speaking. On your first question, and also growth patterns in Europe, and here, particularly Rhine River levels. If you look at our growth rates in Europe in the first half of the year, we still think that this overall situation will not significantly change in the second half, but that is also included in our guidance that we have given. If you now particularly look at the Rhine River levels, as of last year in Q4, you could say that in 2018, we had an effect in terms of EBITDA of roughly EUR 50 million, plus, minus. For sure, we have taken the experience of last year into consideration. What does that mean? You have four major modes of transportation. One is pipeline, and we're talking about railway, we're talking about trucks, and we're talking about ships.
The Rhine River level for sure affected the ship transportation. For this year, we prepare ourself as good as we can to compensate as much as we can potential impacts of lower Rhine River levels. However, we could never, ever fully compensate if all ships would not be able to ship the Rhine River and if this would take on for longer. However, we have opportunities here in pipeline, in trucks, and also in railway cars to partially compensate that, in particular, if it's just a short-term topic. Also on very short term, we could also do something on, let's say, inventory levels on the raw material side and also on the finished goods side, but that is also limited in terms of how long we can do that, and that is actually what we are preparing for.
We currently do not have, as anyone, any idea how the Rhine River levels will develop. However, if it gets as worse as last year, we, I think, will be better prepared. With that, I would like to hand over to Thomas for your second question.
Yes, Thomas. With respect to CapEx, let me say a little bit bluntly. Of course, we're not stubborn and just stick to our CapEx numbers without looking left and right what is happening in the economy. We monitor this very closely and therefore we have a very, I would say, clear review of all the CapEx projects and check whether they make sense strategically and whether they add value. We do this review in autumn in connection also with the business planning. However, on the other hand, I think it's fair to say we do have seven-year CapEx cycles. We cannot steer the business on a short-term notice for those kind of projects. Therefore, in terms of flexibility, I would say the EUR 900 million that we've indicated for this year are pretty much fixed.
In the outer years, of course, we do have flexibility, and I think we've proven this in the past that if really we should face a prolonged and deep recession, we can, of course, stretch projects or take projects out, especially in the outer years. Again, I think we have to balance the strategic ambition because the CapEx is the foundation for future growth. In the long term, we do see that the markets that we serve, especially with MDI, but also with the other products, have a solid and secular growth rate above GDP, and therefore that justifies also a CapEx program.
This is perfectly clear. Thank you so much.
The next question comes from Mr. Neil Tyler calling from Redburn. Please go ahead.
Yeah. Hi, good afternoon. A few from me, please. Firstly, within the restructuring or in the topic of restructuring, you mentioned that the additional costs year-on-year broadly offset the revaluation gains, so around about EUR 19 million. Can you talk through what you saw as the year-on-year benefit of the savings achieved in the second quarter, and also how you expect both of those figures to develop in the second half of this year? That's the first one. Secondly, probably more briefly, I think I missed your earlier comments on the contribution margin and why that remains very low. I wonder if you could help me with that, please. The final question. In your mark-to-market, I think you said that you assume lower volume assumptions. You also mentioned that you assume a volume catch-up in the second half.
I guess my question there is within the guidance as opposed to mark-to-market, if volumes don't recover, can you still achieve the low end of that guidance? Thank you.
Yeah, let me maybe start with the Perspective program. To put it into context, we said with Perspective, we want to save EUR 350 million cumulative cost savings up until the year 2021. We're on a good track to achieve cumulative savings of EUR 140 million in 2019, which is 92 more than what we had in 2018. On the restructuring cost side, we're expecting roughly EUR 50 million for Perspective to be incurred in 2019. In terms of what is the ramp-up of the 92 that I just mentioned, it's somewhat back-end loaded because a lot of it is related to personnel. We're releasing personnel, but it takes a little while before it really flows through as a full year effect in our P&L. In terms of the trajectory, I would say we're fully on track to deliver the numbers that I just cited.
Okay. Is it fair to say that the cost is more front-end loaded, therefore?
Yeah, I think that's fair to say.
Yeah. Okay, thanks.
What was the second question?
Contribution margin.
Sorry, Neil, can you repeat your second question? We're just scratching our heads a little bit. Can you say that again?
Yeah, sorry. It was a simple one. In terms of the contribution margin, the drop-through into EBITDA from the volumes seem to be relatively low. I think you made some comment as to why that was. I apologize, I think I missed it.
Yeah. I think, in general, we say that we have a relatively clear volume drop-through of some 40% in terms of EBITDA. What we're looking at here is very small numbers. I think it's a little bit erratic because of these small number effects. Remember, in Q1, our EBITDA effect was 100% of the volume, and this time it's a bit lower simply because there's a mix effect playing into it. Simply, it is really due to the low, the small absolute numbers. In general, our drop-through is unchanged from what we've seen last year.
Okay, thank you.
Maybe, Neil, on your third question, you asked about the mark-to-market and also that we have clearly said that our volume assumptions still within the guidance are a bit lower. If you take everything, let's say, as we look at it today, we would need something like 6% volume growth in the second half year-on-year. Please consider in this context, that we have also a lower starting base, in particular, looking at the fourth quarter of last year.
Yeah.
The places that we really compare and, let's say, for the midpoint, again, to reiterate that in terms of the guidance that we have given, 6% is what we have assumed. If you then go now, and that was what your question was about, would touch under these assumptions, let's say the low point of the guidance, we would talk about 3% volume growth. Again, based on the mark-to-market snapshot, so to say. Anything that would be positive on prices would then give also further, let's say, room to maneuver on the volume side.
Understood. Thank you.
based on July prices, 3% would be more point towards the low point.
Yeah. Okay.
Again, even that would be still covered by the EUR 1.5 billion-EUR 2 billion range to be very clear.
Got it. That's helpful. Thank you very much.
Thank you. The next question comes from Geoff Haire, calling from UBS London. Please go ahead with your question.
Hi, it's Geoff Haire here. Just wanted to ask a couple of questions. Just on the volume drop-through in the bridge. It fell to 15% in the quarter. I appreciate it's small numbers, but does that imply that you were selling a lot more commodity product than a specialty product through the quarter? Is that the reason for the low volume drop-through? Secondly, just I don't know if you could comment on how you left the second quarter from a volume or demand point of view to enter the Q3. Finally, just on the cash flow, if the free cash flow you generate is below the dividend payments, can you borrow to pay the dividend?
Yeah. First question. The question was did we sell somewhat lower or more commodity-type products? I think the answer is yes. What is happening obviously is that, especially in PCS, the automotive industry is weak, and we're shifting volumes into other industries. In automotive we have highly specialized products co-engineered with the OEMs, et cetera, where we have very nice prices and also very resilient margins. Obviously the volume is going down and we're shifting this to some extent into, let's say, lower margin applications. That is also what you see in the volume bridge here.
Maybe, Geoff, this is Markus speaking. On your second question, can you just repeat it? I think we had somehow difficulties with the line, so we're not sure whether we fully caught what you tried to express.
Sorry. It's probably my accent. Just on how you'd entered Q3, leaving from Q2 from a demand point of view. Was it higher or lower than you started Q2?
Well, generally speaking, flat. That's what you could see. There is some slight nuances here and there, but I would say, generally speaking, we started flat. Let me also maybe help you to build a bridge in terms of the volume demand also in Q3. We were, in our businesses, sold out in second quarter, and if we're now entering into third quarter, what gives us the additional push is not that we see an increase in demand, but we are able to deliver more because we have less shutdowns. Because the first half of the year and also second quarter can be still described by maintenance shutdowns. We have higher availability of volumes, and that's why we also are positive about that we can sell more because the demand side for us in the second quarter was not the limitation, but the supply side.
That's why we are with more supply availability on our side, also given our positions in the market with customers, we believe that we also can sell more, and that is, from our perspective, also helping us in the third quarter.
Then to your last question, in terms of the relation between free operating cash flow and dividend. What I would say is we have made a very clear commitment that we want to keep our dividend at least stable. If you look at the free operating cash flow, I'd say the midpoint of our guidance should therefore also fully cover a respective dividend payment. Even if that was not exactly the case, then I would say we would not have stamped the free operating cash flow in the way of our dividend commitment, especially as in 2019, it is driven by several one-time effects that I mentioned, which belong to 2018. We will probably, in one way or the other, bridge that gap.
Okay, thank you.
The next question comes from Chetan Udeshi, calling from JP Morgan. Please go ahead with your question.
Thanks. Just a couple of questions. Just on Q3 guidance, can you maybe give some color by the three key product segments or maybe even CAS, if you want, so TDI, MDI, polycarbonate, CAS, how do you see the development there for each of those businesses? I had a question on the comment made previously during the opening remarks that the climate is challenging and you guys will take whatever it needs to improve the business. Frankly, when I look at the pricing development, it's only been weak across the board or it's been incrementally weakening since the end of last year. Now you're talking about volume growth slowing down. I'm just wondering what is sort of internal strategy to cope with this current environment?
You also said at the same time that you don't want to change something on CapEx in the short run as well.
Yeah, let me maybe take your first question, Chetan. Just roughly speaking, I would say if you go through the segments in CAS, obviously you have to strip out the EUR 19 million revaluation effect, which will not repeat itself. If you project CAS into Q3, otherwise, I think it's a pretty stable development in terms of EBITDA. I would say our PUR segment also, we expect it to be broadly stable and maybe a slight decline in PCS due to ongoing pricing pressure that we see, especially in Asia. This is, broadly speaking, the development that leads you from the result in Q2 to the around EUR 410 that we indicated for Q3.
Chetan Udeshi, maybe on your second part, I hope that I hit the nail here on the head because I was not absolutely clear whether you're referring to short or mid-term topics on, let's say, climate challenging. I think what we have observed and what we're currently striving for is in the third quarter, we are able to deliver more, particularly because we have more volume available. Secondly, you could say that we somehow see first signs of things bottoming out. As we also stated earlier in our presentation, some of the high-cost producers are now really reaching the point where they would burn cash if they would continue. That is also helping a little bit, and that is slightly differently pronounced in the different product groups. Let me also give you here some ideas.
On MDI, I think we could observe that we are kind of bottoming out in terms of pricing. On TDI, yes, there is still some room that prices might be lowered a little bit, but here I would again reiterate that we have a leading cost position and many producers are really hitting now the point of where they would be cash negative. On the polycarbonate, we see still that prices might further decline. Also here, some producers are hitting already cash costs. From that perspective, also here, limited downturn. If you look at our product portfolio, we have taken a quite strong hit on the higher specialized rates. We're still able to shift due to our cost leadership volume growth towards the higher commoditized arenas and areas. That is currently the overall situation.
Bottom line is we feel very well prepared to deal with this challenging climate, and we also feel very well prepared to deliver volume growth and with that, also deliver the best option of volume and price to deliver absolute EBITDA, and that is exactly what we're striving for. Here I believe that we are better positioned than many other players due to the strong and broad geographical footprint, but also industry footprint that we are having.
Thank you.
Ladies and gentlemen, if you would like to ask a question, please press nine followed by the star on your telephone at any time. As a reminder, please ensure that the mute function on your telephone is switched off to allow your signal to reach our equipment. Please press nine followed by the star on your telephone at any time. The next question comes from Tom Wrigglesworth calling from Citi. Please go ahead with your question.
Thanks very much. Couple of questions, if I may. Small ones, hopefully. Just with regards to the comments, just following up there on your comments by product. Can we take it that your sense is that tons are now leaving the market in the three major product classes? I guess in that context, you obviously gave Capital Markets Day a kind of supply outlook. Have you seen any major project deferrals across any of the major three products, just the supply response? Any color there would be helpful. The second question on CAS, a small one. I think you called out HMDA outages as a challenge in the first quarter. Is that now behind us and we're looking at CAS margins and top line without any HMDA back under normal conditions? Thank you.
Tom, this is Markus speaking. On your first question, we can at least assume, because we have strong hints that there is a lower utilization rate, as earlier stated by high-cost producers, as they are now hitting really their cash cost margins. We have no signs of any complete shutdown, neither temporarily or forever. You might, however, have seen that there was an announcement by, for example, Trinseo, that they would do a complete review considering all strategic options of their polycarbonate plant here in Europe. Also another sign is that different from past years, China has taken off polycarbonates of their so-called incentive list of materials that they encourage industry to invest in. We also see a slower ramp-up of new capacities. The initial estimate based on announcement of 11% may be now down to only 5%.
Just to give you a hint here also on polycarbonates. There is a lot of things going on, but there's definitely no signs of complete shutdowns in the respective industry.
Sorry, Markus.
Yeah.
The 11%, sorry, just for clarity, the 11% to the 5% number, that's the supply growth for 2019. Is that?
Global supply-
I'm sorry.
Global supply growth in 2019 for polycarbonates. Correct.
Okay. Thank you.
Again, that's rough numbers because it is extremely difficult to really judge on that. All we have in terms of market intelligence indicates more towards the 5% rather than towards the announced 11%. As you know, there's always some challenges. Bringing things up on stream, running the plants technically, delivering in spec, and so on and so forth. On your second question. A bit more complicated. I try to make it as simple as possible. Less auto demand means less demand on nylon- 6,6. That means there is, due to that less demand on nylon- 6,6, more HMDA available. However, there will be a bigger maintenance shutdown from a company called Butachimie , a maintenance shutdown in September. That is absolutely critical because that could lead to an additional shortage in the market. Keep fingers crossed that this works well.
Currently, the overall short-term situation is less stressed than it looked at the beginning of the year.
Okay. Great. Thank you very much.
The next question comes from Sebastian Bray, calling from Berenberg. Please go ahead with your question.
Hello. Thank you for taking my questions. I just have a quick factual one. Could you please give us a reminder of the relative auto exposure across CAS polycarbonate and polyurethanes? Thank you.
Well, just briefly. The auto exposure for the entire group is just below 20% of our sales. For PCS, it's one-third of their sales. I think the others, and CASs, I would say, with improved average, so that PUR is a little less.
Thank you very much.
The last question for today comes from Isha Sharma, calling from MainFirst. Please go ahead.
Hi. Thank you for taking my questions. Quickly, please correct me if I'm wrong, but you said that you have seen higher margins in MDI quarter-over-quarter, I'm guessing. Could you please put some color as to why that is it because of the shutdowns that you have seen and therefore limited availability for just a quarter? Or is it something that you see as a trend going forward? If you could please talk about the end market trends region-wise, especially for North America, if you see any weakness there, or are the prices still sticking? Thank you very much.
Isha, maybe on your first question. If you took the full quarter view, we had higher MDI prices in April and here, in particular, in China. That was also somehow coming together with what we would call the peak of the maintenance shutdown, and therefore also some restocking. Prices came down again. That was just a short peak, and that was predominantly what has driven the quarterly margins higher than we have seen them in the first quarter. From that perspective, we would not see this as a long-term trend now already, but rather a peak in the second quarter. Now, we are back to the levels that we more or less have seen beginning. Having said that, I would like to turn to the second question.
What was very strong actually in the quarter to date, we have seen strong construction in North America at development. We have seen strong wood and furniture, whereas automotive, as globally, you have seen the picture was a negative. Just to give you an indication, in construction, double-digit growth, in wood and furniture, double-digit growth, and in automotive and transportation, from our perspective, a higher single-digit negative growth, just to put some flavor on that. We do currently not see to those numbers a significant change moving forward into the third quarter.
Thank you very much. Sorry about the background noises.
We have one more question from Sebastian Satz, who's calling from Barclays. Please go ahead.
Hi, good afternoon. Just two quick ones, both on volumes. In polycarbonates, you saw a big swing in terms of the volume growth. It was -6 in the first quarter, +4 in the second, even though I don't think the end markets have changed a great deal. Could you just elaborate, please, what happened there? The second question is a follow-up. Did I understand you correctly that you need to deliver 6% core volume growth to come out at EUR 1.5 billion-EUR 1.6 billion EBITDA for the full year? If so, could you just give us a little bit of an idea what gives you confidence you can achieve that? I don't think you have delivered that kind of growth over the past two years. Thank you.
Okay, maybe on your first question. It is simply not always so easy to immediately shift, let's say, between different industries when you are reacting to respective drop in demand. That's why it took us a little bit of time to shift from the significant decline in the automotive industry to industries like construction or industries like electro and electronics, which in the end of the day have more than compensated the decline in the automotive industry. Just take a little bit of transition time, and that is exactly what you have seen in the first quarter to shift significant volumes from the automotive industry into the respective other industries. In the end of the day, we managed this successfully, and so far we do not have any indication that we will not continue to manage this successfully.
On the second question, I will hand over to Thomas.
Yep. Sebastian, maybe just to put the numbers into perspective. The 6%, as a pure mathematical exercise, if you take 6% for the second half of the year, that brings you roughly 3% for the entire year. We've just named this number because 3% would be the mid-range or the midpoint of our guidance that we have given for core volume growth, which is low to mid single digit, and therefore that is the only reference how it is related. It's not directly related to the guidance of the EBITDA, and it's not directly related to the mark-to-market that we've given.
Okay, thank you. I'm not sure I fully had it, but I can follow up on that. Thank you.
Mr. Köhler, there are no further questions at this time. Please continue with any of the points you wish to raise.
Good. Thank you very much for your participation and for all your interesting questions. As usual, the IR team is ready for any more questions you might have, and then we are happy to talk to you later with the Q3 results. 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.
The conference is no longer being recorded.