Ladies and gentlemen, thank you for standing by. Welcome to the Covestro earnings call on the Q3 2022 results. The company is represented by CEO Markus Steilemann, CFO Thomas Toepfer, and Investor Relations, Ronald Köhler. During the presentation, our participants will be in a listen-only mode. The presentation will be followed by a question and answer session. If any participants have difficulty hearing the conference, please press zero followed by the hash key on your phone for operator assistance. I would now like to turn the conference over to Ronald Köhler. Please go ahead.
Welcome to our third quarter conference call. The quarter report and the earnings call presentation is available at our webpage and I assume you have read the safe harbor statement. With that, I turn over to Markus.
Thank you, Ronald, and good afternoon. A warm welcome also from my side. The turmoil of the energy and raw materials market in combination with weakening demand for our products has affected Covestro in the last quarter. Despite this, Covestro sales in the third quarter of 2022 continued to be on the high level of EUR 4.6 billion. In this difficult environment, Covestro has reached an EBITDA of EUR 302 million, still in the targeted range of EUR 300-400 million. The free operating cash flow improved to EUR 33 million after 2- quarters. With only one quarter in front of us, we have narrowed our full year guidance range. In parallel to this call, one of the most influential trade fairs in the plastics industry is slowly starting to wind down.
We went out there to craft connections with our customers, suppliers and industry partners, and to join forces with the challenges of a quickly changing world. Let's turn to the next page. Let us now have a look into volume development. The global volume decreased by 5.7%, mainly driven by demand weakness in the region Europe, Middle East and Latin America. The region EMLA has seen significant decreases in almost all industries, with only automotive breaking the trend but starting from a low base. Only a slightly declining volume could be observed in the region North America. Furniture and electrics and electronics were down, but this was partly compensated by a good development in auto and construction. In Asia-Pacific, the volume increased on the back of a stimulus program of the Chinese government for automotive and positive trends in construction.
Looking closer into the different industries, the negative trend in furniture, wood and electrical is continuing in all regions, both industries being affected by a post-COVID decline after a hike during the peak of the coronavirus pandemic. Electronics being hit mostly in Asia-Pacific. The picture is, however, mixed for the construction industry. While volume in Asia-Pacific and North America are increasing, the situation in NEA was negatively affected by the raw material and energy price situation. The globally positive trend is the volume increase in the automotive industry. Here, the weakness of the electrical electronics industry might have had a significant impact on the availability of semiconductors, which was the main bottleneck in past quarters. With this overview of our market environment, let us have a look at the global demand situation across all industries on the next page.
If you look at the global demand picture, we can see the same trends that we have outlined in our sales volume overview on the previous slide. Revisiting the assumptions in the beginning of 2022, the global GDP has suffered from a dampening caused by the corona lockdown in China, the effect of the Russian invasion into Ukraine, and the resulting energy crisis in Europe. We now expect the global GDP to be around 3%, with the second half of 2022 clearly below this trend. The forecast for 2022 demand growth in global automotive industry was still above 2021, but the anticipated strong recovery has until now not happened. Also, the positive signs from Q3 can improve the overall picture, but not compensate for tough production losses, mainly caused by a shortage of semiconductors and the lockdowns in China.
Our external data provider, LMC, is now expecting a 7% growth in automotive. The subsection on battery electric vehicles and electric vehicles that is even more relevant for us, however, is still seeing a high growth rate. The outlook on construction is now also less optimistic and is strongly influenced by the European raw material and energy price situation. Demand growth 2022 has fallen behind 2021 growth and is expected to be little higher than 2%. As mentioned earlier, the extremely positive trend for furniture and electro in 2021 has now completely reversed, and we see both industries significantly falling behind the expected growth rates. Furniture is definitely a low light with a negative growth expectation of around - 1%, and for electro, we assume now a growth rate in the range of 1.5%.
With this overview of the global demand picture, I am now handing over to Thomas, who will guide you through the financials.
Well, thank you, Markus. Ladies and gentlemen, also from my side, a very warm welcome to our call. I'm on page five of the presentation, and as you can see, our quarterly sales came in at EUR 4.6 billion, which is still the third highest quarterly sales number in the Covestro history, and it's a continuation of our sales trend throughout 2022.
You can also see in the bridge that our Q3 sales were up 7.3% year-over-year, and that was pushed by a 5.4% price increases. Those price increases actually came from both segments. You have the details in the box on the right-hand side. In addition to that, we had a positive FX effect, which contributed significantly with 7.6%, while on the other hand, we were facing a volume decline of -5.7%. With that, let's turn the page to page six, where you have the EBITDA bridge. You can see that year-over-year, our EBITDA declined from EUR 862 million last year to EUR 302 million this year. You can also see that the negative volume impact was roughly EUR 100 million.
Now, the most important item obviously is the pricing delta in the middle. You can see that increasing raw material and energy prices impacted our EBITDA by -EUR 857 million, and they were only partially compensated by price increases of EUR 231 million, which is actually a 27% pass-on rate. That then led consequently to a negative pricing delta of -EUR 626 million. I can tell you that the pricing power actually declined, of course, due to the lower demand in our core segment, especially in Europe, as also because of the vacation season. We did see improvement again towards the end of Q3, and here we could also realize price increases, especially in the field of TDI in the European environment month-over-month, and I think that is a good sign.
Finally, you see in the bridge there's a positive FX item of EUR 49 million, and you see + EUR 115 million in the other items bucket. That includes EUR 202 million from lower provisions for variable compensation. Against that, there are some cost increases, especially in the field of freight logistics and also some wage inflation. With that, let's turn to page seven and look into the breakdown into our segments. We start with Performance Materials. As you can see on the upper half of the page, Q3 year-on-year sales growth was 6.6%, despite sales volume decline of 6.2% year-on-year. The decline came from the reduced demand in our customer industries, particularly in Europe, due to the energy crisis situation.
On the other hand, we had a positive effect in price increases, and that was 5.2% year-on-year. If you look at the EBITDA development on the lower side of the page, you can see both Q-on-Q and year-on-year were down, and the impact comes from the negative pricing delta, particularly from the energy and raw material prices in Europe, which have so far peaked in Q3. As I said, we could not compensate the price increases, but we managed some price increases month-over-month in September. As I said, that mainly took place in Europe, particularly in TDI. With that, let's turn to page 8, where you have the same set of numbers for our Solutions & Specialties segment.
On the upper half, again, for the sales, you see that in Q3, there's a 6.1% sales growth year-on-year, and we benefited from our resilient pricing here. On the lower side of the page, you can see that actually our EBITDA for the segment increased significantly in the third quarter, and that is both year-on-year and quarter-on-quarter. What, of course, had a positive impact is the lower in-internal feedstock, which we charge at market prices, specifically for standard polycarbonate markets. Together with our resilient pricing for the end product, you can see that the segment actually posted a very resilient and positive result. With that, let us turn to page nine, where you have the free operating cash flow development.
You can see in the graph that after nine months, we still stand at -EUR 412 million. I would like to emphasize that in Q3, free operating cash flow turned positive with EUR 33 million. You have that in the first bullet on the right-hand side. In addition to that, let me just pick a couple of items from the table below the chart. First of all, you see that the impact on working capital is negative with EUR 571 million. That corresponds to a working capital to sales ratio of 20.6%.
I would like to reiterate what I said earlier, or what I said in earlier calls, that of course, that with the increasing 12-month rolling sales, plus also our initiative to optimize our working capital, the working capital to sales ratio should further decline until the year end. You also see in the table our CapEx was EUR 533 million. I would like to emphasize that this is fully in line with our reduced guidance for the full year. That now is EUR 900 million. I'll come to that a little later when we talk about the guidance. You can see income tax payment of EUR 436. That is due to tax payments which relates to our high result of last year. Secondly, it's also due to the unfavorable geographic mix.
Lastly, you see under other effects, we have a - 507. That mainly relates to the bonus payment of EUR 475 million in 2022 for the successful year, 2021. With that, let's go to page 10 and have a look at the net debt situation and the balance sheet items. As you can see, our total net debt increased by EUR 552 million to EUR 3.152 billion at the end of September, while the net financial debt increased by EUR 1.4 billion to EUR 2.861 billion. Of course, the key items, you can find them in the bridge.
First of all, the record dividend of EUR 3.40 that we paid after the resolution of the AGM, and that translated into a EUR 653 million payout. Secondly, we see the share buyback. We repurchase shares of EUR 150 million between March and June, and that represents already a 30% execution of the share buyback which we have announced. Finally, we also see that there's a significant decrease in net pension liability by EUR 904 million. Non-surprisingly, this is driven by the increase in the pension discount rates both in Germany and in the United States, resulting in a EUR 291 net pension liability.
If you want to decompose that to track it back to the balance sheet, that consists of pension provisions of EUR 420 million, which are then partly offset by a net benefit assets of EUR 129 million. If you look at that in relation to our EBITDA, the net debt to EBITDA ratio stands at 1.4 times. One thing obviously has not changed, and that is that Covestro is absolutely committed to a solid investment-grade rating. Let's go to page 11 and look at the outlook. For 2022, with only one quarter to go, we have narrowed our EBITDA guidance to now between EUR 1.7-EUR 1.8 billion, and that implies around EUR 50-EUR 150 million EBITDA in Q4.
That means we do expect a rather weak Q4 due to the continued de-stocking by our customers and also additional idle costs as we also plan to reduce our own inventories by reducing the operating rate at our plants. Now, of course, for 2023, it is way too early for any guidance, particularly in this current very volatile environment. The only thing that I can give you is more of a technical statement. If you were to assume the September 2022 margins flat forward, and we are going to apply that to 2023, then this would give you an EBITDA of roughly EUR 0.9 billion. You can see that we have indicated this as Mark to Market in the chart.
I would like to reiterate again, this is a purely technical assessment and not a guidance. Our long-term competitive position, our view therefore has not changed, and therefore we remain the regional low-cost producer, and we also confirm our mid-cycle EBITDA, which we think sits at EUR 2.5 billion in 2022, and it should be rising to EUR 2.8 billion in 2024. Let's look at the other KPIs on page 12. In line with our narrow EBITDA guidance for the full year, we have also accordingly narrowed the guidance for our free operating cash flow. We're now expecting between EUR 0 and EUR 100 million. We are expecting a ROCE above WACC, and we're now guiding between -2 to -1 percentage point.
For the greenhouse gas emissions, considering the lower production volumes, we're now guiding between 5.0-5.4 million tons. You have some further KPIs in the table, for example, the P&L effective tax rate. Normally here we guide between 24%-26%, and that remains generally valid. However, for this year, we foresee around 26%, and that mainly stems from the current distribution of our earnings. For CapEx, I already mentioned that we have reduced the guidance to around EUR 900 million, and that is of course the outcome of our agility assessment in light of the current situation around us. With that, I would like to hand it back to Markus.
Thank you a lot, Thomas, and we are now continuing on page number 13. Coming now to a topic that occupies us almost daily, energy prices and the effect on Covestro as an energy-intensive company. The good news is that despite the peak of the energy price in August and the still very nervous market, our full-year energy bill is now expected to be EUR 2.1 billion, even slightly lower than previously assumed. However, this reduction is driven by the assumption of significantly lower production volumes in the fourth quarter and therefore less kilowatt hours consumed. In recent weeks, we have seen a downward gas price trend as storages were approaching their maximum and temperatures in Germany were seasonally unusually high. There was an abundance of gas available.
Taking the gas price of October first to October eighteenth flat forward, our energy bill would come out in a range of EUR 2.1 billion. Based on the most recent energy prices, we assume an energy bill of around EUR 600 million for the fourth quarter. Please note that the volatility is still extremely high. Having said this, a range of EUR 550 million-EUR 650 million is built into our guidance. Let's turn to the next page. Here I would like to come back to one of the recent events and fairs that we had. The world is facing unprecedented problems, the war, the global tensions, energy crisis, and famine. Many things that go beyond the horizon of a few weeks and months are being overlooked.
The triple crisis of long-term issues, climate change, resource depletion, and environmental destruction allows no further blocking and requires a strong industry to master all the challenges the world are facing. On the K in Düsseldorf, Covestro is showcasing that plastics will play a dominant role in overcoming these challenges, from the thermal insulation of buildings, to enabling vehicles to run without fuel consumptions, to the preservation of food stuffs. When meeting our customers, we often feel their pains in finding real circular product solutions as linear consumption comes to an end. Products need to come back, and materials need to stay in the loop. We intend to offer more products made from biomass and recycled plastics to our customers, as they are looking for ways to reduce their Scope three emissions.
To make the choice for more sustainable products easier compared to fossil-based ones, we are creating a new circular intelligence CQ label to demonstrate our competence in making products more sustainable. In line with this, we are developing innovative recycling technologies as Covestro's commitment to a circular economy and climate neutrality. We have also included this innovative process technologies in the CQ label as Evocycle CQ. One first example is a chemical recycling of mattresses to 100% reuse, making new mattresses foam. To put this into place on an industrial scale, collaboration along the value chain is essential, and Covestro is crafting these connections along the value chain to have an industrial process developed by the 2030s. Achieving climate neutrality in production by 2035 is an ambitious target we've set ourselves.
We do this to support our customers also in their target to reduce carbon dioxide emissions. We are continuously pushing in this direction by implementing energy-saving measures in our plants and enlarging our base of power purchase agreements for renewable energy further. To support our customers in their ambition to achieve their sustainability goals and reduce Scope three emissions, we want to offer all our products in a climate neutral version by purchasing of alternative recycled raw materials, but also mass-balanced and ISCC Plus certified raw materials. Additionally, we are investing in efficient recycling of polycarbonates. Our aim is to announce targets for the reduction of such Scope three emissions within the next year.
As you can see, we have ambitious plans for Covestro, but the extremely positive and motivating discussions I personally had on the K fair with customers, suppliers, and partners confirm that we are on the right track and will continue on that path. Allow me on page 15 to quickly summarize. We saw continuously high sales of EUR 4.6 billion in the third quarter 2022, which was driven by price increases despite lower volumes. The EBITDA came in within guidance range in the third quarter 2022, despite recessionary environment and high energy and raw material prices. We also achieved a positive free operating cash flow of EUR 33 million in the third quarter 2022, improving the first nine months free operating cash flow now to - EUR 412 million.
The full-year guidance was narrowed now to an EBITDA guidance within the range of EUR 1.7 billion-1.8 billion. We continue with our ambitious sustainability as well as circularity vision, as presented on the world-leading plastics fair, K 2022. For questions that remained open, Thomas, Ronald, and myself are now here to answer them. With that, I hand it back to Ronald.
Thank you very much. We are now open for your questions, and we will answer them in the order we receive them.
Ladies and gentlemen, if you would like to raise a question, please press nine followed by a star key on your telephone keypad. If you would like to withdraw your question, press nine star again. We have received the first question. The first one is Charlie Webb of Morgan Stanley. Please go ahead.
Afternoon, everyone. Thank you for taking my questions. Maybe first, just on the mark-to-market, I know it's just an indication of how you're looking at next year, and it's just a, you know, point-in-time measure. When you look at obviously end of September versus end of October, where we find ourselves now, I guess quite a lot has changed in terms of energy prices, gas prices, as well as some of your product prices in MDI, TDI, in different regions. You know, things have moved on. Is there any sense you can give us an indication what it is as of end of October? Just so we understand that.
Also within that mark-to-market, just understanding the, I guess, bonus provision assumption that we should be kinda thinking within that or not within that would be super helpful. Just some clarity there. Just one on CapEx looking into next year. Can you just help us understand the various building blocks, maintenance as well as some of the bigger growth projects within your kind of EUR 1 billion-EUR 1.1 billion that you have set out for next year in CapEx? Just wondering if there's any flexibility there, given you know where we find ourselves in the cycle to perhaps you know reduce spend looking through next year as well.
Yeah.
Charlie, this is Thomas. Yeah. I mean, let me try to help you a little bit. I would agree that the September mark-to-market probably is the low point. I would say if you were to push it into October, that number would go slightly up. It would only go slightly up because there is a four-week delay before the reduced energy prices really hit our P&L. Therefore, I think the energy prices that you see today of whatever, below 100 EUR per megawatt hour, they will also only come in with some delay. I would definitely say that the September number is, as far as we can see from today, a low point, and things are moving up since then.
In addition to that, it does include, as you pointed out, also a bonus provision. We've not assumed bonus to be zero of around EUR 100-150 million. We can always ask the question whether it would be paid out or not because you may know our bonus regime. If we don't earn the cost of capital, there is cost and flexibility to further reduce the bonus. At 0.9, I think there's no discussion that cost of capital would not be earned. I think those two data points may help you to gauge where that stands. As I said, in my view, it's a low point. CapEx, you know that we have this maintenance CapEx of roughly EUR 400-450 million.
That means, of course, there is some other projects which are in the middle of the execution, and they are very difficult to stop. For example, the Aniline plant in Antwerp. There are some other major CapEx plants where I think stopping or delaying them would cause significant friction costs. Of course, there is some other things which would only be started or could be delayed. I would definitely say that in the order of magnitude of EUR 200 million, we do have some flexibility to manage CapEx. We are, of course, currently looking into that number as we prepare for 2022.
That's really helpful. Squeeze one more in. It's just that, could you share what you see in terms of the MDI landscape in terms of supply and demand? A lot of your competitors talking about restructuring European MDI businesses and you know, containing capacity. I presume chlorine and the energy price has been a bit of an issue there. Just understanding what you're seeing on the supply and demand side for MDI in Europe today.
Yeah. Charlie, this is Markus speaking. Maybe from my side. We have learned at least from, let's say, publicly available sources that, for example, Huntsman is discussing it. We also see that there is, at current point in time, plenty of supply in Europe available. We in this context try to raise prices, but there is some, if not, some difficulty, to put it mildly, out there.
Long story short, it remains to be seen where midterm the energy prices are going because we have witnessed that in other industries for numerous reasons, take the polycarbonates, I mean, the base polycarbonate industry a couple of years ago, where, let's say, on very short notice, many competitors were out there and saying, "I'm shutting down here, I'm shutting down there." Now we have similar, let's say, quite short term, let's say drastic reactions with one or the other public statements. Over time, when things are panning out, you saw that many of those announcements to shut down plants have either never been executed or have been executed, at a significant delay. When we thought where the plants will remain on stream, all of a sudden they were closed.
Just to name one example, the Singapore Jurong operations of polycarbonate. Long story short, the normalized view, let's say when we are through this turmoil, it is pretty clear that the capacity of European production assets is needed, and that there is also plenty of demand that will be also in the future being sourced from Europe. One key reason for that is the, let's say, disrupted supply chains, which in the last 1.5years -two years have taught many market players a significant lesson. If we just oversimplify it and say, well, because of, for example, landed costs from Asia Pacific or the United States or European assets will be uncompetitive, I do not believe that this is, let's say, the main reason.
There are other reasons, for example, the geopolitical turmoil, the overall development that we currently see with regard to, may I call it new world order, developing that might also bring back a lot of assets into competitiveness again. Let's not forget, we have a lot of, let's say, regional nature of those supply chains. Long story short, no matter what you currently read, and no matter, let's say, how short term the reactions are, I tend to say that some of those reactions are a little bit of an overreaction. Under normalized conditions, we will also see that European assets, and particularly MDI assets, will be back on track and will be also sought after by European customers of MDI.
Very helpful. Thank you very much.
Next, we have Mr. Christian Faitz of Kepler Cheuvreux. Please go ahead.
Yes. Thank you. Good afternoon, everybody. Couple of questions, please. First of all, speaking of MDI, Markus, is there any update on the decision for your MDI project in Texas or China? Because I believe you wanted to communicate that during Q4. Second question, I understand the mark-to-market on the cost side. But, would you mind sharing your volume assumptions slash potential recession assumptions for your mark-to-market EUR 900 million EBITDA view for 2023?
Thank you.
Now, Christian Faitz, good to hear you again and to still remembering that you visit on K here last week, much appreciated. Christian Faitz, on MDI, the short answer would be no update these days because, as we announced already in earlier, let's say, interaction opportunities, we are still thoroughly investigating, let's say, that investment, and we will come up with a decision in the fourth quarter, but not today, not now. Please bear with me, that here we still take some time to really take a detailed thorough assessment of the overall situation of the overall, let's say, investment and also of the overall, let's say, framework conditions.
On the mark-to-market, the assumptions we have taken, and Thomas alluded to that, the September margins flat forward times the planned volumes flat forward as an assumption for 2023. Also then the planned costs that we take into consideration in the first attempt for 2023. This is how we came to the mark-to-market based on September margins. With particular regard to your volume assumptions, we assume that volumes will be relatively flat compared to the 2022 expected volumes.
Thank you. Very helpful.
This is Thomas. Just if you wanna play around with that assumption, be aware that the volume sensitivity, of course, is much lower in 2023 than in a normal year. Remember, we usually state that there are some EUR 60-70 million. I think for next year, I would rather expect a volume sensitivity between EUR 20-30 million per one percentage point of growth. Therefore, I think that's also important to keep in mind if you wanna play around with that assumption.
Very helpful. Thank you both. It was indeed fun visiting the site, Markus.
Next questioner is Mr. Jaideep Pandya of ONField Investment Research. Please go ahead.
Yes. Thank you. The first question is really around your energy and gas bill. So you've given us the volume number for usage of last year. If because you're running such lower utilization in MDI and TDI has been offline, what is the actual energy usage for 2022? And then if you were to just use spot prices for 2022, well, current prices rather, what sort of would be the energy bill for next year? That's my first question. The second question is really around what you see with regards to the polyurethane landscape in Europe. I mean, at what point do you think that the customers are going to panic? 'Cause in TDI, we have seen a very sharp reaction with the gas prices in China, but we haven't seen that with MDI.
What explains, in your opinion, this difference in reaction? The final question really is just around polycarbonate. Do you see energy prices as well as raw material availability having an impact on polycarbonate supply chain also in Europe? 'Cause there have been a couple of announcements here and there. What do you see with regards to polycarbonate spreads and profitability? Thanks a lot.
Okay. JD Pandya, this is Markus Steilemann speaking. Let me just start with the last question maybe on the European polycarbonate situation. Let me also put it into context about, let's say, some of the other questions that you have asked. If you compare our three large volume products in the portfolio, TDI, MDI, as well as, polycarbonates, and if you put the overall energy demand of the products for TDI at 100, so to say, polycarbonate only consumes about, let's say, one-third because the energy intensity is much lower, compared to TDI, and MDI is somewhere in the middle. Just to give you an idea which product group is hit the most by the current overall, let's say, energy bill increases and gas price increases. What does that mean?
We have seen still some temporary closures of some European assets in polycarbonate. The main reason is that there's numerous technologies out there, and some technologies are simply no longer cost competitive despite the fact that they are not so much energy consumptive, like, for example, TDI. We feel in this context, very well-positioned with our polycarbonate plants to achieve economies of scale as well as the opportunity, therefore, to, let's say, continue to produce also under very challenging conditions. That's why we also did not face any, let's say, raw material availability issues with regards to what we need to produce polycarbonate. Also, as we produce quite a bit for captive use in our own, let's say, further compounding, let's say, plants for our engineering plastics businesses, we also did not face any raw material shortages, in that regard.
There have been smaller, let's say, shortages with regard to some additives, but we could so far always find second or third supplier options, and did not, let's say, have significant, let's say, loss of business due to some of those smaller additives. That is a hopefully quite comprehensive picture about how we look at the polycarbonate situation. Now let's talk a little bit on question number two. Here is a significant difference in terms of asset size, and I mean individual plant size compared to total market size. TDI in Europe is down, in that sense, two major production sites are down to 600,000 tons. Those 600,000 tons is just represented by two major world-scale plants, one in Ludwigshafen, one, let's say, in Dormagen, that is our plant.
This is 600,000 tons out of 700,000. That means, like for like, you have taken out more than 80% of European production capacity. Having this in mind, even demand was significantly down for TDI, 85% of, let's say, supply shortage, after a couple of weeks has led to the situation that you can currently observe, that customers simply saying, "Wait a moment, I need TDI. I have lived out of my inventories and looked through my inventories, and now I need to buy," and all of a sudden recognizing that 85% of capacity is out in Europe.
At the same time, you see that there have been lots of exports from Asia Pacific arriving in Europe, but also here, there is, due to logistics reason and other reasons, and also capacity constraints in Asia Pacific and in U.S., because we're talking about global capacity in total, simply not sufficient TDI. That all of a sudden then, as usual, with such a, let's say, highly volatile product, has led to this significant reaction across customers. For MDI, and now comparing to TDI, the situation is different because we maybe see around 5%-10% of curtailment only. That is given the market size compared to total plant size, plus a little bit more flexibility on how you steer an MDI plant.
That means, you could much more adjust in more, let's say, smaller doses, to the market demand as well as, to potential, supply issues. That is why you have not yet seen, similar strong reactions of TDI, compared to MDI. That's, let's say, from, polycarbonate, MDI, TDI, and for the energy topic, if you don't mind, I would like to hand back to Thomas.
Hey, JD, this is Thomas. I hope that I got your question correctly because there was a little bit of a background noise in the line. I would say if you assume volumes going up or down, you can essentially assume that our energy consumption goes up and down with the same percentage, unless you would assume that the product mix changes. Markus has just alluded that TDI has a much higher energy intensity. If you were to take the same mix, essentially very proportionate. Second, your question was what would be the energy cost with the prices as of today? I can only give you a rough indication.
If you look at page 13 of the presentation, we would be somewhere between the EUR 623 million per quarter that we have in Q3 and the EUR 450 million that we have in Q2. Let's give or take, it would be a EUR 300 million saving per year relative to where we stand in 2022 with the same amount of volume. I think as a rough indication, this would be the number that I can give you.
Sorry, just to clarify.
Sorry, just to clarify.
This would be as of the current, like literally as of the current, so EUR 100 gas price, or sub EUR 100 gas price, or this is still you working with the first two weeks in October assumption that you have?
Yeah. I mean, the EUR 100 is now the price for Europe. Yes. It's probably true that in Q2, we also had prices which were only slightly higher than the EUR 100. I think you're not far off if you take the average between the two quarters, JD.
Okay. Perfect. Thanks a lot for the clarity. Thank you.
The next questioner is Mr. Markus Mayer of Baader- Bank. Your line is open.
Good afternoon, gentlemen. I have three questions as well. Maybe sticking to the energy topic, maybe you can shed some light what do you think about the German gas price cap, how much this could help you? Also, if you think that taking these positive effects from this measurement would force you to change dividend policy. That would be my first question. Coming back to the announcement of where the world-scale MDI project might be. Is there also a third option that you might further delay the project? That would be my second question.
Lastly, on this EUR 100 million lower CapEx guidance for this year, just to be clear, sir, has the spending been just delayed into next year or has there been a cut of CapEx projects?
Markus, this is Markus speaking. Thanks for your question. Maybe let me start, let's say, with the gas price cap and the related question on dividends. We currently only have a suggestion by the so-called German Gas Price Commission on the table. That means we have not yet seen any legislation that would indicate any details about how this gas price cap would, in the end of the day, be offered to companies. The unfortunate bit in that context is that we do not know whether the gas price cap will be applied as intended. Secondly, the Gas Price Commission in itself has not indicated anything with regard to potential bonus or dividend caps. Thirdly,
It is also, let's say not particularly clear, therefore, what the gas price is against which we have to measure those potential benefits, yeah. As the gas price, we just discussed it, based on Jaideep Pandya's question, quite a bit. We simply don't know where the gas price will be. Long story short, it is a huge challenge to give you any indication about how that will work out for the company and what potential benefits that would mean. With that also with regard to potential impact on the dividend, honestly speaking, we don't know.
To be very clear, particularly as we have seen in other contexts and potential, let's say, support measures by the German government, that the respective additional interpretation of the respective governmental supporting organizations, for example, the BAFA, have an own interpretation of the respective legislation and put that forward. Honestly speaking for us, it is impossible today to give any statement about how that would potentially look like, based on all the reasons I have provided, and if that at all would impact our dividend policy. Maybe Thomas later can allude to that. I will continue, let's say with MDI-500. The base case is that we will build it. However, given the current circumstances, I believe that there's also an opportunity to postpone it.
Yeah, we are still assessing the situation very carefully and very thoroughly to make the right, let's say, decision here in this context. On CapEx, okay, sorry. Thomas, you take over then on CapEx. Okay.
No, I think on CapEx, it's a very simple answer. Roughly 50% of the EUR 100 million is a cut, and the other 50% is a postponement. That does not mean that necessarily 2023 will go up. You can imagine that the earlier you look at the CapEx plan for a year, the more optionality you have then also, and therefore, I think nevertheless, what I said earlier for 2023 still applies with respect to our flexibility.
Okay. Thank you so much.
Thank you.
We have a couple of more questions left, and the next questioner is Chetan Udeshi of JP Morgan. Please go ahead.
Yeah. Hi, thanks. Yeah, I was just coming back to the mark-to-market number, and thanks for providing it. I'm just curious, why did you decide to give us, like 2023 mark-to-market so early in the. Let's say so far before we actually talk about 2023 outlook, which will be more in February. Are you trying to sort of steer us to that sort of numbers, you know, closer to EUR 1 billion rather than EUR 1.6 billion? I think. I'm just curious why talk about 2023 so far ahead of time, let's put it this way. Second question, Markus, it's more related to your point on, you know, TDI peak capacity curtailment. What's stopping that on the MDI side, you think?
Is it more the fact that there are more players to, you know, maybe the market is not as, let's say, consolidated in nature, and hence you don't see the same sort of response so far on the MDI side? Because though MDI might be faring better than TDI, it doesn't feel like any of the European MDI producers are really earning cost of capital, at least not in Q3 based on the high energy costs. Last question is, can you confirm between Europe as a whole, did Covestro had breakeven EBITDA in Q3, or was it below breakeven?
Chetan, let me start with your first question, the mark-to-market. You know what, there was no particular thought behind it or any guidance or anything that we wanted to scare somebody away. It's just that I think it's a good tradition that we have that in Q3, as a technical indication, we give you the mark-to-market for the following year, because mark-to-market for the current year for the last, let's say, two and a half months would not make a lot of sense. Therefore, I think there was no particular thought behind it other than we've always done it and people gave us the feedback that they find it helpful.
Of course, it does show that the consensus for 2023 still has, I mean, I would say some ambition, which we think can be achieved if the economy is turning. Of course, the assumption must be that you cannot put four crisis quarters in a row and then achieve the current consensus. I think it just gives you a little bit of guardrail to judge what has to happen in order to give you the 2023 result. I think that's all.
Maybe.
Okay, maybe I'll take the other EBITDA question. Q3 EBITDA for Europe, I think not surprisingly, was not breakeven. We were loss-making with respect to our EBITDA numbers in Europe.
Yeah, Chetan Udeshi, this is Markus Steilemann. Thanks for your question, and as you kindly addressed it as a kind of a follow-up to my previous statement. There are numerous factors for TDI being different. We have a similarly, let's say, consolidated market structure in terms of the suppliers. That's not too much different from MDI, but what is particularly different is two reasons. Number one is TDI, as alluded to, is much higher energy intensive than MDI. Number two is the respective TDI players have much fewer plants in total, and each plant is representing a much higher share of the total market.
Those two factors together, that means the high energy consumption as well as the even higher concentration within an anyhow consolidated market, has a much stronger impact if one plant, so to say, is not in operation between 8%-10%, I assume in a world-scale plant, between 8%-10% of the global market is out. Yeah. That's why those two plants that were out in Europe represented 80%-85% of the European market and almost 20% of the global market. You cannot just easily restart it because it needs to run at around 50%+ output rate.
You don't have the decision like in MDI, more or less with the overall, let's say number of plants being out there that an individual competitor can say, "Okay, we run not one line, but two lines or three lines." In that particular context, therefore, not so many plants have been taken out or capacity. At the same time, you have much higher flexibility to steer, let's say, and being therefore also a little bit closer to market demand. It's not a jumping of capacity in or out, but more gradual adjustment.
Last but not least, I think what is important, the TDI plant of us in Dormagen and Leverkusen, in Germany was out not due to, let's say, cost reasons in the first place, but due to force majeure, in the upstream value chain for chlorine production. Because the chlorine production was out due to technical issue, and that technical issue has led to a TDI plant shutdown. Yeah, that's the situation.
That's clear. Thank you.
The next question comes from Mr. Thomas Swoboda of Société Générale. Please go ahead.
Yes. Good afternoon, everyone. I have two quick questions. Firstly, on idle costs. Could you share with us what were the idle costs in Q3? And you were talking about additional idle costs in Q4. Could you put that in relation, please? And the second question is on benzene. I mean, I remember on the last quarterly call, there was a lot of talk on the-
Thomas, we are breaking up. We can't hear you anymore.
Yeah. Mr. Swoboda unfortunately has dropped out of the line. Mr. Swoboda, please press star nine to raise your question again. Okay. I believe I will continue with the next questioner. Mr. Swoboda, if you can hear me, please later on press star nine. Meanwhile, we have another questioner. This is Ms. Isha Sharma of Stifel. Please go ahead.
Hi. Good afternoon. Thank you for the presentation. I just have two left, please. You mentioned that you would need to reduce also your inventory levels in the current circumstances. How long would it take for you to be at a level where you feel comfortable? Will it be one quarter or two quarters? The other question is you have reiterated your mid-cycle earnings level. My question is, if you think that you should revisit it given the structurally higher energy costs in Europe, and how should we think about it in the next five years? Thank you.
Isha, this is Thomas speaking. To your first question, I think we can achieve the desired inventory level within Q4. We have some, I mean, ambitious but achievable plan to then also achieve our cash flow guidance for the year. We think we can do it until the year end. On the second question, I would say, no, we do reconfirm our mid-cycle EBITDA assessment and assumptions that we have, because we do think that the LNG arbitrage will bring energy costs clearly below 100 EUR once LNG is fully available. I think already today we do see that energy prices are around that level.
That will then mean that it becomes, again, a regional market and we are the technology and the cost leader in every regional market. Therefore, we think that the competitive dynamics of the industry in that scenario, which we think is our base case, should not change.
Thank you very much.
We have a couple of more questions left, and the next question comes from Mr. Geoffery Haire of UBS. Your line is open.
Yes. Good afternoon. Can you hear me? Hello?
Yes, we can hear you.
Yes. Okay. Can you hear me? Sorry. Yeah, I just want to ask a quick question around impairments of assets. I'm not an accountant, so this may be a fairly simplistic question. I just wonder at what point, given the closures you've got in TDI and obviously running MDI at lower capacity utilization, will you have to consider impairing some of the assets?
I think, Jeff, I mean, very simple. We follow the rules of IFRS here. Clearly the current economic environment is a triggering event to have a look at our values in terms of goodwill, but also in terms of asset values. I think it shouldn't be a surprise or you know that some of our SBEs are at the brink of such a test. We have also in the last annual report noted that S&PS with a 10% sensitivity would run into a need for impairment. Therefore, I think with that indication, we're running into that test, and I would clearly not exclude that it will lead to an impairment need, which I think in a crisis is in general not a surprise.
Okay. Thank you.
Thank you.
We have one more question. It comes from Mr. Oliver Schwarz of Warburg Research. Please go ahead.
Thank you for taking my questions. There were only a few ones that are left. Firstly, I'd like to pick up on the question of Mr. Swoboda, who was cut short by his technical problem, I guess. Can you spell out the expected idle costs for 2022+ the ones for Q3, please? As your guidance for... not guidance, but as your indication for 2023 based on September numbers is EUR 900 million. You said the volumes will mirror those of 2022. Do you expect additional idle costs for 2023 as well, or does that imply just a lower overall, let's say, capacity utilization in all regions?
Is that the base assumption that you're making in that EUR 900 million EBITDA indication that you gave? That would be my first question. Second question is, obviously, unions are currently negotiating with the chemical industry for higher wages. What have you penciled in for the increase in wage costs for 2023 when coming to this EUR 900 million assumption? Is it a coincidence that your, let's say, indication of a negative net result for 2023, which is implied by the EUR 900 million EBITDA indication, comes just in time for the start of the negotiations with the unions in Germany? Thank you.
Oliver, let me try to answer those questions and start with the first one from Thomas Swoboda. I would assess the idle cost for Q3 to be roughly in the mid-double-digit million range. For Q4, I would probably pencil in a high double-digit number as a rough indication of the order of magnitude. Now, for 2023, the assumption is, as Markus said, that the volumes would be flat over the course of the year. We would see a volume decline in the first half and then a growth in the second half. That I would not assume any higher idle costs because the stock level at the end of 2023 will be higher than what we had at the end of 2022.
That should be taken into account. To your second question, I mean, the collective bargaining agreement in Germany has been done. The agreement was 3.25% as of January first, if I'm not mistaken, + 50% of the 3,000 EUR tax-free one-time payment. That is fully consistent with our plans for the cost development next year.
Okay. We are taking the 3.2% that you just mentioned as basis for calculations, I guess. Just a quick one. Your competitor up the Rhine has initiated a cost savings program that it feels is necessary to ramp up profitability in the midterm, given that costs are going to increase both on the energy and on other variable costs. You seem to be reluctant to do the same or announce something like that. Your midterm guidance is, I think bereft, or that's at least my assessment, bereft of any, let's say, future, let's say major cost reduction program. Would that be a fair assessment?
I would say, Oliver, yes, BASF has announced specifically a program. I would say we've been on it already since a longer time. You may know that we have given the company a new structure, and we call this the LEAP program at the middle of 2021. The guiding thought of that was, of course, that from that structure, we wanted to tap into efficiencies and cost reductions. Therefore, the program to realize exactly those savings essentially has been ongoing since the middle of last year. What is true though is that in light of the current situation, we have pressed even harder for the quick implementation of exactly those savings.
Therefore, I would think, they would come and help to compensate for exactly those wage increases and some other cost inflation that you just mentioned. In addition to that, we maybe don't talk about it so publicly. Yes, we're also of course pulling the usual levers that you do in such a situation with respect to the usual suspects, so travel, entertainment, et cetera. We do that, but we didn't feel the need to make it a public announcement because the organization is on it since already several quarters.
Very clear. Thank you for that.
Thank you.
We have Mr. Thomas Swoboda back on the line. Mr. Svoboda, your line is open.
Yeah. Sorry for the technical issue, and thank you for taking me back on. I will still try two quick questions. Benzene costs were very high in Q3. I remember we discussed that broadly in the call. My question is, was that a bigger headwind in Q3, and is this already digested or is it still going to bug you in Q4? Very quickly on TDI. I mean, we have been recurringly hearing from you and from your peers that MDI and TDI do not travel that well. Apparently, you are serving your clients from other plants importing into Europe. I mean, how long are you comfortable doing that?
Is this just a short-term fix, or is it something that could last for longer? Thank you.
Yeah, Thomas, maybe benzene has seen quite some peaks. Yes, you're right. Currently, we're talking about benzene prices of about EUR 900 per ton. The peak, just in comparison, has been at EUR 1,700+ . We believe that we could mainly digest this in the third quarter. It will also last a little bit into the fourth quarter because we're still selling off inventories that have been produced, let's say, with those higher costs. Long story short, it takes due to the slightly subdued demand, in particular in Europe, some time to digest those costs. On the second question, yeah, once again, you've got the most complex questions. You're right. On the one hand, MDI and TDI are not traveling very well.
That's true, and that's why in particular in MDI, you see only a part of the market segments being supplied with imported MDI simply, where lower activity after long transportation is still acceptable for the particular application of the customer. That means serving an MDI market from outside Europe, given all the complexities, import, cooling, and so on and so forth, as I said earlier, will be difficult in the mid to long run. That's number one. Even in short run to further increase MDI import into Europe is a challenge because as we see with TDI, there's simply not sufficient capacity available to cover up for the entire European overall production capacity. That's number one. TDI, same topic.
We're just currently seeing from recent price development, in particular in China, going through the roof, that also this, let's say, rather, that this is a rather short-term solution because once TDI prices are back to a level, where it pays off to restart, European TDI plants, they will be restarted, you know. That's why I do not think that there will be, let's say, a mid- to long-term opportunity to really continue to supply from the outside world. Once again, let me reiterate one other topic. This is a market where you supply in the region for the region. We have seen no geopolitical disruptions currently going on and manifesting itself, and we have seen over the last 2.5 years -three years significant supply chain disruptions.
Many customers are concerned about being able to only bank on long-distance imported goods. That's why I believe next to all, let's say, the spreadsheet calculations that might lead to different assumptions, I truly believe that there will be demand for European-based TDI production. There will be demand for European-based MDI production as well as respective consumptions.
Thank you, Mr. Swoboda. We have one more follow-up question from Mr. Jaideep Pandya. Please go ahead.
Thank you. Just a couple, actually. Firstly, just on your net debt levels right now. I mean, even if I adjust for your 900 mark-to-market, you're sort of running roughly 3x net debt to EBITDA. I mean, assuming you do the MDI CapEx next year, does it concern you at all that you're sort of not in a world, you know, a couple of quarters or years ago where you were subject to 2x. Is the net debt to EBITDA at all a concern? You can remind us if there are any covenants or anything around your debt. The second question is more of a philosophical.
I mean, you know, your shares obviously have taken a beating this year and, you know, you could easily get somebody walking in the room with EUR 50 and people jumping on it. Are you at all worried about having a defense strategy right now? Or because the market is so negative, you don't really think nobody's gonna be interested, so you're not really bothered about that topic.
Hey, Jamie, this is Thomas. I'm not sure whether I got your first question completely correctly because the line was breaking up in the middle. What I would say is, we're absolutely committed to a solid investment-grade rating, and therefore the rating considerations always play a role when we look into future decisions. I do think that if we are above 3x net debt to EBITDA for a single year, that would probably be accepted by Moody's, because if you look at their rating report, they have clearly understood the nature of the business. They have also understood the commitment of the management, and therefore I do think that they would accept that.
Let me reiterate, in all the decisions that we take, of course, we do wanna make sure that the company is not risking its solid investment grade rating. On your second question, I just had the slide. We have no covenants, I should mention that. We're not risking, of course, the existing indebtedness of the company because it is covenant free, so that's not a topic. On the second question, yes, the share price is where it is. We always take the defense topic serious. I think, on the day we don't take it serious, we commit the first mistake.
It's of course also a fact that, if somebody were to come, I think it would be our fiduciary duty to look at the proposal if it is a good one. We would of course, kind of be compliant to that fiduciary duty. I think that would be my statement on this one. Thank you so much.
Thank you so much.
Thank you very much. There seems to be no further questions in the line.
Good. Thank you all for listening in and for all your interesting questions. If you have more questions, don't hesitate to come back to the IR team. Yeah, wish you all a good day then. Thank you, and bye.