Covestro AG

XETRA:1COV

Earnings Call Analysis

Covestro's Q2 2024 Performance and Future Outlook

Covestro saw a 9.3% year-on-year increase in global sales volumes in Q2 2024, driven by higher demand and improved internal reliability. Despite stable sales at EUR 3.7 billion, lower prices led to a 17% drop in EBITDA to EUR 320 million. The free operating cash flow was negative at EUR 147 million. Guidance for FY 2024 EBITDA has been narrowed to EUR 1 billion - EUR 1.4 billion. The company launched the STRONG transformation program, targeting annual savings of EUR 400 million by 2028. In Q3 2024, Covestro forecasts EBITDA between EUR 250 million and EUR 350 million, with high single-digit volume growth expected for the year. However, margins remain historically low.

Strong Volume Growth Amid Challenging Market

In the second quarter of 2024, Covestro experienced a 9.3% year-on-year increase in sales volume thanks to improved demand and resolution of reliability issues in Europe. Despite this, lower prices, which declined by 9.7%, and minor adverse currency effects kept sales stable at EUR 3.7 billion. The CEO, Markus Steilemann, emphasized that major growth was seen in sectors like construction, furniture, and electro, while the automotive sector exhibited flattened growth due to global trends affecting electric vehicle sales.

EBITDA Takes a Hit from Pricing Pressures

Covestro's EBITDA for Q2 2024 stood at EUR 320 million, a 17% decline from the previous year and at the midpoint of the Q2 guidance range of EUR 270 million to EUR 370 million. The decline in EBITDA was primarily caused by a negative pricing delta, where falling selling prices outpaced the reduction in raw material costs. Despite an increase in sales volume, the low margins and ongoing unfavorable industry supply-demand dynamics further strained the EBITDA. Segment-wise, Solutions & Specialties faced price declines and restructuring costs, leading to a decrease in EBITDA margin to 9.6%, while the Performance Materials segment saw a 35% year-over-year EBITDA reduction due to high base comparison from an internal insurance reimbursement booked in Q2 2023.

Guidance for FY 2024 Narrowed

Covestro has revised its full-year 2024 EBITDA guidance to a range of EUR 1 billion to EUR 1.4 billion, down from its earlier range. This adjustment reflects the company's conservative outlook on product margins and global demand. Specific guidance for the Performance Materials segment has also been narrowed to EUR 400 million to EUR 700 million in EBITDA. Christian Baier, CFO, highlighted that in Q3 2024, the EBITDA is expected to be between EUR 250 million and EUR 350 million. Additionally, the free operating cash flow for FY 2024 has been revised to be between minus EUR 100 million and plus EUR 100 million.

Impact of ADNOC Negotiations

On the potential transaction with ADNOC, Markus Steilemann indicated that Covestro has entered into concrete negotiations and opened its books for due diligence. Although no specifics were provided, the ongoing discussions are perceived to be constructive. This initiative is driven by a pursuit to enhance shareholder value and ensure corporate growth aligned with fiduciary duties.

Transformation Program ‘STRONG’ Launched

Covestro has embarked on a comprehensive transformation program, STRONG, aimed at generating annual savings of EUR 400 million by 2028. This program includes streamlining structures, optimizing the asset footprint, and leveraging AI for process efficiency. An expected mid-double-digit million euro positive impact from the STRONG initiative has been included in the 2024 EBITDA guidance, although these savings will be partly offset by restructuring costs estimated at EUR 300 million over the period.

Balancing Sheet and Operations Insights

Total net debt increased by EUR 308 million as of mid-2024 compared to the end of 2023, primarily due to negative free operating cash flow. The net debt-to-EBITDA ratio stands at 3.2x based on a four-quarter rolling EBITDA of EUR 1 billion. Covestro remains focused on maintaining a solid Baa2 rating confirmed by Moody’s in May 2024. Operationally, the company's core industries continue to show mixed results, with positive growth trends in Asia-Pacific and somewhat stable conditions in Europe and North America.

Looking Forward

Covestro is cautiously optimistic in its outlook, emphasizing the importance of resolving internal and external challenges to build resilience. The company anticipates stable growth in sales volumes, underlined by consistent demand across core industries. Executives stressed the importance of continuing negotiations and strategic initiatives to drive future profitability and sustainable growth.

Earnings Call Transcript 2024-Q2

[Ronald Kohler, executive]

Welcome to the Covestro earnings call on the second quarter results. The company is represented by Markus Steilemann, CEO; and Christian Baier, CFO. [Operator Instructions] You will find the quarterly statement and earnings call presentation on our IR website. I assume you have read the safe harbor statement.

With that, I would now like to turn the conference over to Markus.

[Markus Steilemann, executive]

Thank you, Ronald, and hello and a warm welcome to our second quarter call. The highlights of the second quarter were continued strong volume increase of 9.3% year-on-year. With this, we are fully on track to our target of a high single-digit percentage volume increase in the full year 2024.

However, lower prices are still affecting sales, which came in at EUR 3.7 billion. We achieved an EBITDA of EUR 320 million, landing on midpoint of our guidance range. Free operating cash flow was minus EUR 147 million, in line with our expectations. And we are narrowing our EBITDA guidance to EUR 1 billion to EUR 1.4 billion.

Let me take the opportunity and give you a brief update on ADNOC. As we stated on June 24, we believe that ADNOC and Covestro can generally reach a common understanding regarding core aspects of a possible transaction. Therefore, we have decided to open our books for a confirmatory due diligence and to start concrete negotiations regarding a potential transaction, including the potential conclusion of an investment agreement.

This phase is ongoing in a constructive manner. We pursued the negotiations in accordance with our fiduciary duties in good faith, open-minded and in the interest of our shareholders, our company, our employees and all other stakeholders. This said, we ask for your understanding that we will not make any further statements at this stage and do not intend to comment further on this issue, unless legally required.

Let's turn pages to Page #3. Turning back to the business and the volume development in the second quarter of 2024, year-on-year, the global sales volume continued to increase by 9.3%. This is driven by an improving demand, but also by fixing our reliability issues in Europe.

Going through the different industries, construction showed the highest growth rates with a low-teens percentage increase. Furniture and electro follow with a high single-digit increase. Auto exhibited flattish development.

Looking into the different regions. EMLA continued to benefit significantly from the resolved internal availability issues. Drilling it down into the different industries, we see a mixed picture. Construction and furniture are exhibiting strong growth, mostly associated with better availability of our core products, MDI and TDI. Electro and auto, however, are showing a strong decline.

Overall, sales volumes in North America increased slightly, driven by strong growth in furniture and a slight increase in the construction industry. Electro developed rather flattish, while auto shows significant decline.

Asia Pacific continues with positive growth across all industries that Covestro is focused on. Furniture, auto and construction exhibited significant growth, while electro showed a slight increase.

With this summary of the demand development, I'm now handing over to Christian, who will guide you through the financials.

[Christian Baier, executive]

Thank you, Markus, and a warm welcome also from my side.

We are on Page 4 of the presentation. Sales for Q2 2024 are stable at EUR 3.7 billion. The strong increase in volume was offset by negative pricing and FX. Prices declined by 9.7%, counterbalancing the volume increase of 9.3%. The negative FX effect of minus 0.4% was neglectable and mainly driven by the weaker Chinese renminbi.

With that, let's turn to the next page where we are showing the Q2 2024 EBITDA bridge. Year-on-year, we have a decrease in EBITDA of 17% to EUR 320 million. This is at the midpoint of our Q2 guidance range of EUR 270 million to EUR 370 million.

Selling prices declined stronger than raw material costs due to the ongoing unfavorable industry supply-demand ratio. As a consequence, EBITDA was impacted with minus EUR 186 million from a negative pricing delta. The volume increase only partially compensated the negative pricing delta, and the volume leverage was clearly below the long-term average due to the historically low margins. FX and other items also contributed to the negative development to a minor extent.

Just to provide full transparency on the EBITDA bridge, other items were impacted by EUR 23 million of restructuring costs in the S&S segment as part of the transformation program, STRONG.

On Slide 6, we are breaking down the details for the different segments and are, as usual, starting with Solutions & Specialties. In S&S, the year-over-year price decline of 7.7% was leading to a sales decline of 3.3%, despite increasing volumes of 4.8%. FX negative impact was neglectable. Sequentially, sales growth was recorded in APAC and North America, while EMLA was declining.

The EBITDA in Q2 2024 was lower year-over-year, mainly due to a negative pricing delta and the already mentioned restructuring cost. The positive volume development could partly compensate the negative effects from pricing delta and other items. The quarter-over-quarter EBITDA decrease was driven by a negative pricing delta and the aforementioned restructuring cost being booked in Q2 2024. With that, the EBITDA margin decreased to 9.6%.

We are now expecting S&S EBITDA to contribute around the 2023 level. This adjustment compares to the previous guidance of a significant improvement is driven by the assumed mid-double-digit million euro restructuring cost and pressure from higher raw material costs.

After Solutions & Specialties, we are now looking at the segment Performance Materials. Year-over-year sales increased by 2.5%, driven by 15% from volumes and minus 12% from pricing and minus 1% from FX. Quarter-over-quarter sales increased across all regions. North America and APAC also showed sequential volume growth, whereas EMLA was stable.

Q2 '24 EBITDA of EUR 196 million is 35% below last year. The year-over-year decline is mainly driven by the high comparison base. Please remember that in Q2 2023, we booked an internal insurance reimbursement of EUR 75 million, which, at the same time, burdened the segment Others.

Nevertheless, also, the underlying business was down due to a negative pricing delta, which could not be fully compensated by the volume increase. However, sequentially, the EBITDA in Q2 2024 increased, benefiting from a positive pricing delta and positive volumes.

In line with the overall narrowing of our FY '24 guidance, we are also narrowing our EBITDA guidance for Performance Materials to now EUR 400 million to EUR 700 million, instead of EUR 400 million to EUR 800 million.

The next topic is the free operating cash flow development. As you can see from the graph, the free operating cash flow in H1 2024 was negative EUR 276 million, with the Q2 FOCF contributing negative EUR 147 million. The free operating cash flow declined year-on-year driven by lower EBITDA and the bonus payout for FY 2023 in Q2 2024.

Changes in working capital of minus EUR 350 million in H1 2024 were mainly resulting from the seasonal buildup of inventories. Given the sharp reduction of inventories at the end of last year, we would not exclude a rebuild in 2024, leading to a negative working capital cash out for the full year 2024.

H1 '24 CapEx of EUR 272 million is stable year-over-year. We increased the CapEx into maintenance to reduce the risk for any major reliability issues like we have seen in '23. The growth CapEx focuses on a few selected expansion projects.

Income tax paid of EUR 80 million was slightly below previous year. The minus EUR 167 million other effects are mainly comprised of the bonus payout. All in all, the Q2 '24 free operating cash flow is seasonally depressed. Our planning still assumes a negative free op in Q3, but a strongly positive free operating cash flow in Q4 2024.

Let's now look at our balance sheet on Page 9. Our total net debt slightly increased by EUR 308 million compared to end of 2023. The increase was mainly caused by the seasonally negative free operating cash flow of EUR 276 million and negative Others.

The decrease in the net pension liability of EUR 133 million was driven by an increase of the pension discount rates in the U.S. and Germany. This comprises pension provisions of EUR 265 million and a net defined benefit asset of EUR 98 million.

Summarizing our net debt position. The total net debt to EBITDA ratio is at 3.2x based on a 4-quarter rolling EBITDA of EUR 1 billion. However, based on our mid-cycle EBITDA, the ratio would be only around 1.1x. Covestro remains committed to a solid Baa2 investment-grade rating that was confirmed by Moody's in May 2024.

Back over to you, Markus.

[Markus Steilemann, executive]

Yes. Thanks, Christian.

And let's turn to Page #10, and also let's turn now the focus to the future. On June 25, we launched our new transformation program, STRONG. With STRONG, we are shaping the sustained competitiveness of Covestro with effective structures and efficient processes and supported by a broad AI implementation.

After ramp-up phase, beginning 2028, STRONG targets to generate annual savings of EUR 400 million. This is slightly below 10% of our global fixed cost base. In order to make this happen, we are expecting cumulated EUR 300 million restructuring cost.

Our updated 2024 EBITDA guidance assumes a mid-double-digit million euro positive impact from STRONG, as savings will be partly counterbalanced by restructuring costs.

What are we doing content-wise with STRONG? We have an underlying set of measures that leads to these savings, onetime costs and potential impairments. For example, we are streamlining our structures and our asset footprint, and we are pushing forward our near and offshoring activities.

We also skipped already our 2024 non-tariff salary increases. Further content, we will share with you based on the implementation of further steps and after having informed the respective employees.

On the next page, we are now coming to the outlook for Covestro for 2024. We are narrowing our EBITDA guidance for full year 2024. We're now expecting the EBITDA for full year 2024 to come out between EUR 1 billion and EUR 1.4 billion. The mark-to-market EBITDA is calculated at around EUR 1.2 billion based on June 2024 margins flat forward and our current budget assumptions for 2024.

The updated guidance now assumes only limited changes in our product margins per ton. A more pronounced rebound from the historical low levels is getting rather unlikely in the second half of 2024. As there has been no significant change in the global demand picture and the industry outlook, we are skipping the comprehensive discussion and the slide here.

Let me just highlight the overall trend. The market outlook on global GDP is now around 2.6%, and the outlook for our core industries is mostly unchanged versus the Q1 call.

And with this, I quickly hand over to Christian for the full set of KPIs.

[Christian Baier, executive]

Let me now focus on the additional guidance elements for FY 2024. In line with EBITDA, also ROCE above WACC has been narrowed to minus 7 to minus 4 percentage points. The free operating cash flow has been adjusted to now come out at minus EUR 100 million to plus EUR 100 million. The greenhouse gas emissions in Scope 1 and 2 are estimated stable between 4.4 million and 5.0 million tons.

In Q3 2024, we expect an EBITDA between EUR 250 million and EUR 350 million. We are on track for the forecasted high single-digit volume growth for Q3 and also for fiscal year 2024. However, margins remain on the historically low level, which is expected to lead to a continued negative year-on-year pricing delta in Q3. All other KPIs remain stable.

And with that, back to Markus.

[Markus Steilemann, executive]

Yes. Thanks, Christian, and allow me to quickly summarize.

We have seen a rebounding of volumes in a challenging environment in the second quarter. And this continued strong volume growth was driven by globally higher demand and improved internal availability.

Sales were stable at EUR 3.7 billion, continued strong volumes increase, while lower prices and unfavorable currency effects were the main root causes for this development.

EBITDA in the second quarter of 2024 came in at EUR 320 million, at the midpoint of our guidance range, and that was burdened by the already mentioned negative pricing delta. Full year 2024 guidance has been narrowed with now an expected EBITDA of between EUR 1 billion and EUR 1.4 billion.

And the transformation program, STRONG, has been launched with intended savings of annually EUR 400 million by 2028.

And now Christian and myself are happy to answer any questions that remain open. With that, I hand over to Carsten, who will guide us through the Q&A session. Thank you.

[Carsten Intveen, executive]

[Operator Instructions] And the first question comes from Christian Faitz from Kepler Cheuvreux.

[Christian Faitz, analyst]

Yes. Two questions, please. First of all, your cost of goods sold for the first time in 5 quarters are increasing again year-on-year, but also sequentially. Can you please explain why?

And second question also a nitty-bitty question, sorry for that. What's the reason for the relatively high tax expense at present? And what kind of tax payment should be modeled for the remainder of this year?

[Markus Steilemann, executive]

Christian, I just take the volume question and then Christian, so our Christian here, is maybe then talking about the tax topics.

Cost of goods sold, Christian, is mainly due to higher volumes, but also slightly higher raw materials. And here, to mention just as an example, benzene, and that's the simple answer. So higher sales in terms of higher volumes and slightly increasing benzene costs as an expensive and as a large commodity raw material that we buy.

[Christian Faitz, analyst]

All right. Understood.

[Christian Baier, executive]

Yes. On the tax perspective, yes, in Q2, there has been a bit higher expense. But overall, for the full year, you should be expecting the EUR 250 million to EUR 350 million. We are on track with that for the full year. Q2 is a little bit of an outlier in that respect.

[Christian Faitz, analyst]

Okay. And why is that outlier? Any particular reason?

[Christian Baier, executive]

There's a bit of more topics with respect to deferred tax assets from that perspective on the German tax group, which is causing a little bit of a higher expense at that stage, noncash, and therefore, relevant is the EUR 250 million to EUR 350 million for the entire year.

[Carsten Intveen, executive]

And the next question comes from Sebastian Bray from Berenberg.

[Sebastian Bray, analyst]

I have two, please. The first is related to the operations in Germany, and I think you touched on it already in response to Christian's question. But has there been -- how close to net income breakeven are the operations in Germany currently? And has there been a sequential improvement? Or is it roughly stable between Q1 and Q2?

My second question is on trading by geography. The -- could you give us a feel for how China is developing and if you expect any bigger recovery moving into '25? And likewise, any comments on Europe and the U.S. are welcome.

[Christian Baier, executive]

Yes, very happy, Sebastian, to take the first one, and then Markus will go on the second one.

With respect to operations in Germany, between the quarters, it's broadly the same development that we see here. Operationally, we are reasonably close without any special items, if you will, to the 0 line. If you take into account the German tax group, it obviously also includes relevant parts of administrative functions, which are then trending in that context.

So operationally stable, reasonably close to the 0 line from the bottom and then further burden, if you will, from an administrative perspective, which is then driving also the tax losses that we do have sitting in Germany that can be used indefinitely.

Markus, please?

[Markus Steilemann, executive]

Yes. Thanks, Sebastian. Well, Asia Pacific, and that is mainly China, continues with positive growth actually across all industries that we are serving. Particularly strong has been auto as well as electro. And currently, let's say, we see this trend ongoing for us also in the third quarter.

For Europe, the picture is different. We have seen also here a good second quarter. But if you now look at the base in Q3 2023, that base was already increasing because we started to fix the reliability issues exactly from the third quarter 2023 onwards, gradually continuing into the fourth quarter then. And that means that also the base for comparison is therefore increasing.

That would then lead to lower, let's say, comparable year-over-year growth rates, which doesn't indicate a weakness in the market, just a different comparison basis, to be clear. And for the U.S., we see and expect that the third quarter should be relatively stable and steady with regard to the growth rates. Helpful?

[Sebastian Bray, analyst]

Yes, that's helpful.

[Markus Steilemann, executive]

Thank you.

[Carsten Intveen, executive]

And the next question comes from Jaideep Pandya from On Field Research.

[Jaideep Pandya, analyst]

The first question is on the different products in the portfolio of Performance Materials. Could you give us some color where are we with regards to margin development for MDI, TDI, PC and polyols? What do you see sort of in the market?

And sort of a related question, I think your utilization has now jumped to around mid-80s. So maybe you have another 5%, 7% to go, but spreads are really not piping in the market. So when -- could you give us a reference point to last time when utilization was 85%, what was the sort of mark-to-market you were looking at back in the day?

Because I'm just trying to understand what is the leverage Covestro has internally versus, let's say, improvement in external factors to get out of this EUR 1.2 billion, EUR 1.3 billion EBITDA ZIP code.

And then, sorry, my last question, and apologies, I'll stick to the party line, but I just want to understand from the ADNOC situation, is there any sort of scope for the deal to break? Because, obviously, you have made considerable progress in terms of even reporting or communication, and I understand there is a 3-month window. But is there any reason why we should be worried? Or is that completely off the table now and it is really merely a question of a price and a timing point of view?

[Markus Steilemann, executive]

Jaideep, so on the different commodities in our portfolio, let's start with MDI, we perceive the current situation compared to the previous situation that we have talked about to be at a stable margin situation.

TDI as well as polyols, going slightly down from our expectation and also what we currently see in the first couple of weeks in Q3. And the polycarbonate business is also stable.

But more importantly, in this context is getting by the day, basically, the respective downstream business because we're selling the minority of polycarbonates in the, let's say, commodity area. This has now only be about 1/5 of the entire polycarbonate we're selling externally, whereas 4/5 is in the more stable downstream business.

And that EP part of our Solutions & Specialties has shown to be, from my perspective, at least, very resilient in the overall context.

So shall I continue then with the second part? Or -- yes.

[Jaideep Pandya, analyst]

Yes, please.

[Markus Steilemann, executive]

Okay. So I can also dwell further, let's say, on MDI. But with regard -- let's talk about ADNOC. So from my perspective, the situation and also the information we can provide has been provided.

It has been, from my perspective, as you said, a significant step forward on 24th of June, where we opened the books, where we entered into clear and official negotiations. And I can only reiterate what I have said today numerous times. I think in this phase, the ongoing process is, how shall I put it, going well, yes, to be very clear.

And I know that Christian and I have used numerous ways to say today. But from that perspective, I would take it, as we have said it in numerous ways today, not as a, let's say, indication that something is going right or something is going wrong, but rather as the best thing that we can say in terms of how we currently perceive the situation, yes?

Because anything we would say in terms of, well, likelihood has increased, likelihoods has decreased, would maybe not express where we currently are. I can only say that everything that I have experienced so far personally is that the phase in which we are currently in is going on constructively. And yes, I could say it in different ways, but that's really what it is.

You could now start to speculate and say, "Well, could this be faster? Could that be slower? Is there anything that we should worry about?" But I think given the very confidential environment in which we have worked so far has served us well, even though I can also fully understand that, at times, you, for sure, have more desire to get even closer to the matter, and maybe your desire is there to earlier get more information than we're currently providing it.

But rest assured, we are continuing to negotiating in good faith, open-minded and in full alignment with our fiduciary duties. And secondly, I also would like to reiterate once again that we need to balance, on the one hand, time and, on the other hand, quality of the outcome. And really, we balance this each and every day to the best extent possible also in your interest.

[Christian Baier, executive]

And maybe, Jaideep, I'd just also add on top of the topic with respect to mark-to-market when we look at the utilization rates. First of all, it's important to see that for us, we have grown in the first half our volumes by broadly 10%. That brings us up on the personal Covestro utilization rate in order to see market development.

Certainly, that does require also the overall global market utilization rate also seeing further growth. We would expect there is a mid- to high single-digit volume growth in the overall market that is required to really get into a balanced supply-demand situation, which then would be leading to pricing power.

And from our perspective, this should be happening over time, driven by the demand growth that is continuously ongoing, although sometimes masked by overarching topics these days. But there is still relevant demand growth that is also expected structurally down the road or helped by unplanned outages as we have also seen historically.

But the one piece that we can bank on certainly is the structural demand pattern that needs to grow supply-demand into a slightly better shape than where we are right now in order to see pricing power and a higher mark-to-market EBITDA.

[Jaideep Pandya, analyst]

If I may just follow up, Markus, with the point about your balance of the outcome versus the time. Yes, we are closing in on like a year anniversary, I think, in a couple of months' time. So should we -- is there any time frame, i.e., over the next 3 months, where we should see an outcome given now that you're, let's say, opened the books and talked second circuit? Or again, is there still no time line to the matter?

[Markus Steilemann, executive]

Jaideep, it is a very challenging situation, obviously, not in terms of the negotiations, but in terms of, let's say, communicating in the right way in this context.

Let me put some flavor on it. As far as we are concerned, we've deemed a normal DD to run usually for roughly 3 months, a normal DD, yes? We intend to be faster.

[Carsten Intveen, executive]

And the next question comes from Chetan Udeshi from JPMorgan.

[Chetan Udeshi, analyst]

Yes. I was just curious, is there any short-term disruption that you see in the market for any of your products in terms of supply? I'm not aware if Covestro has any issues, but we know we've heard about some chlorine outages in Europe, which might be impacting one of your competitors. Is that something you've actually seen in the market?

The second question was just looking at your third quarter guidance, which is slightly down versus what you've delivered in Q2, at the midpoint of the range. I'm just curious, your Q2 actually included about EUR 25 million of restructuring provisions. So that's implying almost assuming there are no further restructuring provisions in the numbers.

But it feels like your EBITDA is down EUR 40 million or so at the midpoint of the range, underlying like-for-like. So maybe just help us understand how do you see the dynamics from Q2 to Q3. And within that, how does the -- at least there is some concern on auto slowdown fit in that respect.

[Markus Steilemann, executive]

Yes. Chetan, this is Markus speaking. Let me take the first question. Overall, for us, supply runs steady, and that is also the picture that we currently have from an overall industry supply perspective. We know that there are some small disruptions, but these are not meaningful/not material enough to really change the supply-demand balance. So in that context, yes, few disruptions and not material enough to change the big picture.

And looking at Christian, he is happy to answer your second question.

[Christian Baier, executive]

Yes, exactly. I think if we take the midpoint, we are about EUR 20 million down quarter-on-quarter. There is volumes slightly up in the expectations there. Margins are probably slightly down when we also look at the quarter-to-quarter sequential, basically, pricing delta development that we see in Others. And EBITDA, we see some slightly negative value. And therefore, in sum, we expect to be slightly down.

Your specific one with respect to volume perspectives, yes, on auto, you have also seen in our report, we are slightly softer in the overall growth. EV plays some role in that context. However, if we look at electro-electronics, we see a slightly better development also in our order books and, from that perspective, confidence to have the overall high single-digit volume increase in Q3, but also for the remainder of the year.

[Carsten Intveen, executive]

And the next question comes from Sebastian Satz from Citi.

[Sebastian Satz, analyst]

Yes. I've got a couple as well. And first, I want to dive in, in Specialties & Solutions, where I saw your margins declined quarter-on-quarter and year-on-year, even adjusted for the restructuring charges. So I was just wondering, what was driving that net pricing turned negative? Could you just let me know what's the reason behind it and how we should think about that for the coming quarters, please?

And second question was on autos. You just mentioned a bit of weaker development. Just wondering what you're seeing there. Flat in the second quarter. I assume adjusted for your availability issues, it was probably down. Again, wondering what the outlook -- I mean, your view is for autos in the second half.

And then lastly, I was interested in your free cash flow guidance, the change there that you lowered it. I was wondering, again, what has changed there? I assume your outlook had always been a little bit back-end loaded anyway. So again, wondering what led you to lower the outlook for free cash flow.

[Markus Steilemann, executive]

Yes. Sebastian, so on the Solutions & Specialties margins down even under adjusted conditions that you rightfully mentioned, that negative pricing delta that remains is driven by the earlier mentioned higher raw material costs. And you might wonder why is that.

Just go up the value chain. So commodity prices were slightly up for standard polycarbonate, and that was, recalling what I said earlier, due to the higher benzene prices. So input costs for Solutions & Specialties are higher.

At the same time, yes, it is a Solutions & Specialties business. That's why we need time to pass these higher raw material costs simply on to our customers. So therefore, Q3 from today's perspective looks slightly stronger quarter-on-quarter as we were and are able to increase selectively the prices in that segment.

And not to forget, Engineering and Plastics is amongst the 2 largest segments in the Solutions & Specialties area, and that's why these developments have a significant influence on the overall performance of this segment.

Christian, would you like to say something on free operating cash flow?

[Christian Baier, executive]

Happy to take this one, and then there is still that auto question somewhat related. When we look at the free operating cash flow, yes, we have slightly reduced that to minus EUR 100 million to plus EUR 100 million from EUR 0 to EUR 300 million. I think that's especially driven when we look at the working capital development, where we want to absolutely ensure the continuous operational setup that we have at any point of time, the good availability which is in focus, as mentioned in the speech.

And therefore, it might be that we basically put the prime on that when we go into the later part of the year given that last year, we have basically gone down reasonably strong on the inventory levels and, therefore, that slight adjustment on the free operating cash flow side.

And back to Markus then on the auto one.

[Markus Steilemann, executive]

Yes. Thanks, Christian. So coming back on auto. If you look at the full year, we anyhow expected that we would see a flattish -- sorry, just the technology is dropping down the table here, but we just continue.

So we have just seen or expect for the full year 2023 that we will see a flat development. So actually, no growth in the overall light vehicle production from a global perspective. As we have seen it in the first quarter year-over-year, we have grown in auto by roughly 5%. In the second quarter, auto was year-on-year flat.

And from that perspective, this slightly weaker global development, and you might have read the news in particular on electric vehicles that are globally not selling as well as expected. That has an impact. Yet at the same time, we still see strong development on EVs as well as still combustions in China, but in Europe and U.S., a weaker trend.

So what we try to do to counterbalance that -- or what is counterbalancing that is currently developments in other industries, and here particularly to be mentioned, the electro-electronics sector. So yes, auto is a bit weaker than we might have expected it, but there is counterbalance opportunities in other industries.

[Carsten Intveen, executive]

So there are no further questions at this time. So with that, handing back to Ronald.

[Ronald Kohler, executive]

Thank you very much, Carsten. Yes. Thanks for your participation and your interest. I know it was a busy day for you, so I can understand there are less questions. And I know some of the questions we couldn't answer completely, but as time will tell, we're obviously moving on. So let's see.

Thank you, and we will see you then on our normal roadshow activities coming up mainly for September. Thanks, and bye.