Aug 11, 2013
Executives
Oliver Stratmann - Head of IR Axel Heitmann - CEO Bernhard Duettmann - CFO
Analysts
James Knight - Exane BNP Paribas Paul Walsh - Morgan Stanley Christian Faitz - Macquarie Martin Roediger - Kepler Cheuvreux Thomas Gilbert - UBS Andreas Heine - Barclays Andrew Stott - BofA Merrill Lynch Rakesh Patel - Goldman Sachs Patrick Lambert - Nomura Dominik Frauendienst - Citigroup Jaideep Pandya - Berenberg Bank Peter Spengler - DZ Bank Danielle Ward - JPMorgan Stephan Kippe - Commerzbank
Oliver Stratmann
Leo, thanks a lot. My name is Oliver Strattmann, I'm head of investor relations and I'd like to give you all a welcome to our second quarter results conference call.
I have our CEO, Axel Heitmann and our CFO, Bernhard Duettmann with me, and as always we'd like to go through a brief presentation and afterwards we have enough time for an extensive Q&A, with that I'd like to hand over to Axel.
Axel Heitmann
Thank you Oliver, ladies and gentlemen good afternoon. Challenging market environment continues, on the positive side there is a slight sequential volume pick up in Q2, 2013.
On the good side of news also we have stability in Advanced Intermediates of very good performance and a strong agro business, also on the positive side our butyl plant ramp up is on track. First material is coming out and it's in fact first time, this is great achievement for the new technology and on the other side of the world.
Negative is business environment remains challenging for tire and OEM related to business and there is no meaningful recovery yet. Also negative is that we see price differences butadiene in the different regions in the world, Asia is substantially low and this causes us some headaches, I will come back to this in a minute.
Also item costs because we are using working capital and we had to do some planned maintenance shutdown, we take action, right now we are planning for efficiency in cost reduction program and I have more for you in September on our analysts on table. Flexible asset management is in place and will be continued and also cap ex is being substantially reduced, as you know we're coming from more than 700, we're now approaching 600.
I'd like to move on page five and I'd like to discuss the sequential development in particular, with special focus on Performance Polymers, the good news is price erosion as it appears as to come to a still stand, we have may have seen the worst. Volume is already picking slightly up and this is because of our different pricing.
I know a number of you want to know is price before volumes still in place and the answer is yes. Pricing is complex and pricing predominantly is a function, is an equation of at least four things maybe more, what's of utmost importance is our prices have always to be in line with raw materials.
As raw materials are sharply falling our prices are falling. As you know we don't want to have this in line effect we want to be the first moving up prices, and we want to be the latest bringing down prices, as we have done and shown particularly in Q1.
It’s also a functionality of market prices, we have to observe and we have to face reality that in the competitive landscape we have right now, market prices have been driven down substantially and this is because of the temporary weakness of our economy and also because all the players have increased capacity in anticipating a substantial volume growth for 2013, '14, and '15, so a slightly increased capacity is meeting temporary weakness. Pricing is also a consequence of product mix and right now we observe that customers being under pressure themselves, try to escape to go for lower priced material I mean for lower quality or they like to go for grades which are second best and this has a price effect.
We also observe that customers by far more price sensitive than they have been in the past, some customers even running the risk of having substantial product deviation but they have the advantage, the short term advantage going for lower prices. Advanced Intermediates and Performance Chemicals, I do not want to comment on the sequential page, let's move on page six please, year on year we have the substantial deviation in Performance Polymers and this is predominantly prices as I have discussed, this has a substantial effect on our margins.
We are coming from a very high level, we are comparing ourselves with a strong Q2 2012, in fact it was one of our strongest quarters ever since. You may remember at that time we had an 18% EBITDA margin in Performance Polymers, today we have around 9%, 8%.
It's predominantly rubber which is under pressure, HPM our highly sophisticated plastics material is doing well, it's pretty stable and this despite the challenging auto situation and this is because of our technology. Despite declining or challenging auto figures our plastics business is fairly stable at a good margin and this is because of our competency on light weight technology.
Advanced Intermediates pretty stable at the margin level of 19% as you all know it's less dynamic, it's driven by the growing population in the world but less dynamic than polymers, but it's very stable and it has evolved over the years as very important leg of our business, very important second leg, as I said high margin, very stable, robust business, Performance Chemicals, suffering a little bit but not too much, in total prices minus 9% volume minus 2%. I'd like to come back on Performance Polymers.
Profitability is so much down and Bernhard has more information on that. It is so much down because of, we had to absorb idle cost as you know we wanted to reduce working capital and we will reduce further, and we also had maintenance shutdowns, we also have to digest the cost for plant trials in Singapore.
The plant trials are all going well, but it cost money and we book risk in within the business units they're in charge of that. And we also had to digest as I mentioned a price decline of minus 2%.
On pricing as I said, we may have seen the worst. Moving on to page seven, I'd like to explain why we have, on a year-on-year comparison, such a big decline in Asia, Latin America and North America.
Two things, we are comparing ourselves with a very strong Q2 2012 number one, and number two is price. The question is why is this not an EMEA in Germany.
And the main reason is you can see the mitigating effect of our Ag Chem business, which is - has a regional focus on EMEA and Germany. So mitigation of Ag Chem really works.
Let’s look at chart on the left hand side, all positioning the gross markets. Asia Pacific and Latin America is very well 37% and more to come as we build our asset base in Asia, and this will be very beneficial in the future.
It doesn’t help right now, because Asia and also Brazil is not doing well right now. China is in a big confirmation process as you know.
The new administration wants to reduce its dependency on export. China doesn’t want to be any longer the workbench of the world.
They want to develop their home markets and this is huge confirmation. I believe in that.
China will be the power of the world in the years to come. And the transition period we have to accept that GDPs coming down to 7.5% or even below.
And this is hurting us, but not long-term, even not mid-term. Ladies and gentlemen, I would like to hand over now to Bernhard.
He has more details on the various segments.
Bernhard Duettmann
Good afternoon ladies and gentlemen. Let me quickly guide you through the financials.
I would like to start with chart number nine. EBITDA came in with EUR198 million at a margin of 9.2%, slightly better than the numbers of Q1.
EPS however was down to 11 cents that is based on higher depreciation. Since Q2 we have full depreciation for our Singapore butyl plant.
And number two, we have exceptional of EUR38 million booked in Q2. We had announced these exceptionals up to EUR40 million coming in Q2 and that’s what we booked also in the quarter and we started the restructuring projects as we indicated in Q1 for some Performance Chemicals units.
Net financial debt at about EUR2 billion, very high. I think you are aware that Q2 was always our peak in net debts because in the second quarter we payout most of our interest for the bonds.
Secondly we payout our dividend and thirdly we pay out also our variable compensation. July, already we see net debt coming down again and that is in line also with our networking capital development.
I told you in the last quarter that we will have the key focus on inventory reduction and that will be did. We already reduced our inventories by EUR140 million and that helped already to bring the net debt development into the line of below the two billion levels.
Follow me please on chart number 10. The Singapore plant has been - is now in operation.
It is producing butyl, for that reason it has been handed over to the business unit. So although it is in operation it still provides lot more idle cost because we are still in the ramping up phase.
We have always told you that we plan to sell about 30 to 40 kilo tons in the second half. Secondly in the cost of sales number, there is an inventory devaluation of EUR10 million which we booked in the cost sales line in June.
That was mainly coming from the devaluation of some raw material decline of butadiene in the month of July. On the SG&A cost, you will see selling cost slightly increasing due to the fact that we have some external storage cost which increased.
Also with some more sales people being hired and on the other general administration cost you see a decline as well as on our R&D. In Q1 we already told you that we have some projects.
We have had some projects in Q1 which had come to an end and this one effect in the second one you see tight fix cost control, what we also told you already in Q1 that we will start this, and the impact you see on the cost development in these numbers. With that I would like to come to the chart number eleven, as you can see here on the overview of the business unit development, advanced intermediates is most robust in the current environment.
Then follow me please on page number 12 on the details for Performance Polymers. The price decline what we see in the sales development, and we have negative sales development of 17.4%, out of that 16% comes from negative pricing, the price declines comes mainly from raw material and mostly here from the raw material of butadiene.
But there is also, as Axel mentioned additional price flexibility across the other rubber BUs. Volume declines is a lot less.
We see it though in the rubber units, however, in the light weight plastics business we see a good increase of business, confirming our strategy to investing in the compounding facilities in the world and having the chemical plants as the base for these compounding facilities in Europe. EBITDA is no at 8% coming from 18%.
In that EBITDA number we have the raw material devaluation of 10 million in there we have also more added cost in there from the reduction of the inventory levels, creating more added across capacity utilization, and Q2 was below the capacity utilization of the first quarter. On the advent immediate, I would guide you eyes on half statement showing robust EBITDA performance of 145 million and a marginal of 17.6% for the half year close to 19% for the quarter.
The agro demand is strong and continues to be strong as well as the pre-products of the flavor and fragrance products. We still have the same issues as in previous quarter of lower demand from automotive and some from the paints industry.
The EBITDA is strong but slightly below the previous year because we’ve all had major the bottlenecking CapEx in Q2 which resulted also in some more idle cost in that unit. Performance chemical on page 14 is a mix picture.
I am comparing to the last quarter, we have seen uptick in volume and in business, in the business unit IPG in the Pigment business, as well as also in Material Protection business where the winter had come to an end and the demand did rise with increasing temperature. We also saw positive business in liquid purification technology.
And the business unit Leather; however, we saw a volume decline number one as I see issue of CO2 availability which had come to an end in Q3 because now the facility is ready for startup and number two we’re also downtime in our chrome ore mine. The EBIT number is also affected by the exceptional for the restructuring as a business unit Rubber Chemicals, number one in South Africa where we close down one facility, number two in Belgium where we reduced our site in Kallo.
EBIT decline comes also mainly from the business units leather and some tire related units Rubber Chemicals and a little bit on Functional Chemicals where in the Colorant and Plasticiser business mainly from over higher idle cost. With that, I would like to come our KPIs.
Equity ratio is close to stable at 30%. Net working capital came down so did the ratios of DSI and DSO.
We will continue to reduce our inventories in Q# to bring our working capital further down which will help also our net financial debt. Cash flow on page 16 shows that we have improved our cash flow and achieved an operational positive cash flow of 19 million compared to minus 160 million in the first quarter mainly coming here again from the changes in working capital.
With that I would like to hand back over Axel for the guidance.
Axel Heitmann
Bernhard, thank you very much. Ladies and gentleman, we do not expect an improvement in second half of this year.
Only three months, customers, our intelligence and other sources made us believe that there would be a pickup in the second half by its latest evidence show us there won’t be a pickup in second half, so the total year will be tough. We do that much to mitigate cost, effective asset management, cost cutting wherever possible, additional measures are in preparation, and also we look at certain products noncore businesses for strategy update and we will publish this in September as I said.
For the whole year given the fact that there is no improvement, we expect an EBITDA pretty exceptional in the bandwidth 700 million to 800 million and this includes that there won’t be any onetime burden as we have seen in the first half what we will see some kind of seasonality, it won’t be the normal seasonality but there will be a seasonality, so in total 700 to 800. You asked me how does Q3 compared with Q4 and vice versa, we see both quarters as much of destocking, particularly in Europe, will be down so we won’t see an end rally at the end Q4, so we will Q3 and Q4 at similar levels in terms of EBIDTA.
Given the fact that there is no pickup in Q4 and Q4 and the temporary weakness will also spillover into next year, it’s not realistic any longer and this is really painful for us to stick with the 1.4 target for 2013. As you all know, only a year ago we have been very bullish and we had specific plan and initiatives and new project to achieve 1.4 instead of 2015 already in 2014 but as we’ve said at that we expected normal development of the global economy.
This is definitely not the case so we had to skip the 1.4 for 2013. Of course, we would do that next to keep our ambitious growth plan to stay focus and to do the utmost to go for 1.8 in 2018.
It will be more challenging this for sure, but we strongly believe that the population driven megatrend are intact in fact permeability will become more important. We have a strong foothold in the emerging market in fact we increase our presence out there and our technology driven pricing we always wanted to achieve a premium price and we do have even having given some room on pricing we still have and we will maintain that and defend that price premium with most of our product.
So Ladies and gentleman that's all from my side at this point of time.
Operator
Ladies and gentleman at this time we'll begin the question and answer session. (Operator Instructions).
The first question is from Mr. James Knight of Exane.
Please go ahead sir.
James Knight - Exane BNP Paribas
I'll start with three or so questions. Firstly, around the strategic update, actually, just mentioned looking at certain non-core businesses.
Is the scope of that maybe up to a business unit level, if I may try that one? And also, there are a few assets offered in the M&A market at the moment.
Should we infer from that that you're unlikely to be an acquirer within that market, at least in the short to mid-term? The second question is around Butadiene Rubbers.
You compete there with some Japanese players. Have you seen them use the yen devaluation in order to gain market share?
And then the final question, I guess for Bernhard. I noticed in the current provisions that there was around a 100 million swing Q2, Q1, 100 million lower in the second quarter.
Could you just talk around what was behind the move in that number?
Axel Heitmann
On the update, it's not a new strategy definitely not, it’s an update. We have started this product; we have started with applications with certain customers regions.
So all the products are overhaul, this has been still over the planned assets, so eventually we end up with a business unit but I cannot say anything else right now. As I said it’s a strategy update, it's not a new strategy.
It is adjusting to what has to be adjusted given the light (the) temporary weakness will be in place longer than initially expected. In terms acquisitions as you know James acquisition is part of our growth strategy, but right now we’re even more careful and even more cautious on any kind of cash out.
Yen is our Japanese friend using the yen going forward, yes we see material in China for example and also here and there. So we do see this the good thing is the quality the technology of the Japanese friend is high, so at the end of the day it helps in the markets.
Bernhard Duettmann
James on the provision, we're talking here about variable compensation that is the biggest part of the amount, and basically there is a shift from long term provisions into short term provision and on the short term provisions you see the decrease that's coming from the payout of the compensation.
Operator
Your next question is from Mr. Paul Walsh of Morgan Stanley.
Please go ahead.
Paul Walsh - Morgan Stanley
My question, Axel, really focuses on the pricing dynamics in the business. I think I calculate maybe wrongly, I don't know gross margin declines of about 400 basis points, down to the price decreases that you've had to put through beyond raw material deflation.
I wonder if you can just flesh that out a bit more for us, because clearly your view is there is a temporary nature to what's been going on here and the recovery prospects of the business hinge firmly, I suspect, on your ability to get structurally pricing back up in a volume environment that is a little bit stronger as we move through the remaining quarters. So could you just do a bit of a deep dive on that front for me, and help me understand how we can get gross margins back up to levels that would see a decent recovery in EBITDA, please?
Axel Heitmann
Paul pricing is always very sensitive, I think at this point of time we are all observing what competitors are doing or what customers expect and they really look, everybody is looking what Lanxess is doing. We have adjusted our prices very late and that's the reason why we have this big decline in volume in Q1.
So as I said I think we have seen the worse, we have to change, we have to do some structural changes on our pricing as we have discussed before, raw materials is very much in line, but we have to give in on some of our price premium and this is because of the temporary weakness in the markets. But we still maintain a price premium because we do have premium product and standard products, we do not have that on our premium products, we do have a price premium.
And we will defend and maintain that. And when supply demand will be more balanced we will be the first comparing our prices, so Paul I am sure the price sensitivity (then) of the customers because they have better end markets will be less severe, so this will help.
But for the time being I think we have seen the worse.
Paul Walsh - Morgan Stanley
And, Axel, just following up on that, in terms of the progression though the third quarter, if we look at the raw material prices year on year, actually, the delta is somewhat larger in Q3. You're saying you've seen the worst.
Is that a comment relating to today, or should we expect similar price mix declines in Q3 versus Q2?
Axel Heitmann
Okay Q3 is not done yet, but my answer to this is we go for no further structure price changes. Product mix is not in our hands as I said a number of customers try to escape and going for different kind of products, different quality of products and this also has an effect.
Paul Walsh - Morgan Stanley
Okay. And just to end up on that, so the conclusion I should take away is that you absolutely don't see any of these price decreases as being structural rather than cyclical?
Axel Heitmann
I didn't get your question what you mean?
Paul Walsh - Morgan Stanley
Sorry. Just to make myself clearer, the price decreases you've had to put through beyond deflation in raw materials, you don't see that as being a structural issue driven by permanent changes in the competitive landscape?
Axel Heitmann
I don't think that is permanent, what we have done, Lanxess has done we have really pushed our prices over the years quarter-by-quarter. And then with this temporary weakness we have to be more flexible on that and this is what we have done.
But I think we have seen the worse on this kind of development. I don’t believe this temporary situation will stay for too long of the reason is demand eventually will pick up again because mobility in particular green mobility more resource efficiency mobility will kick in and then we are back in on stream.
So I don’t think this will be structural and permanent.
Paul Walsh - Morgan Stanley
Thank you very much. Excellent, thanks.
Operator
The next question is from Mr. Stephan Kippe of Commerzbank.
Mr. Kippe, please go ahead.
Stephan Kippe - Commerzbank
Thank you. Yes, a few questions, if I may.
Unfortunately, coming back to pricing a bit more on a short-term granular level, you thankfully provided the sequential pricing and volume in Polymers. If we would put that against the sequential raw material development, I would like to get a feeling for, I mean, you obviously lost ground in pricing on a year-over-year basis, both in Q1 and Q2.
Has there also been a sequential ground loss? So, to be clear, the 2% price reduction, was that more or less than you gained from a possible reduction in raw material prices on a sequential basis?
Second question, your remark that you've seen the worst in prices, combining that with butadiene prices continuing to collapse in July and only just recently coming up a slight bit, is that remark driven by first signs of positive mix effect, is that driven by potential better demand on the volume side? And maybe with another thing going forward, in terms of your CapEx projects and specifically the larger CapEx projects.
If we look at some of the bigger ones, so let's say Nd-PBR in Singapore or the switch from E-SBR to S-SBR in Brazil. How flexible are you at this moment in time with regard to timing of these new capacities and feeding them into the markets?
I mean, you always… in the past you were pretty flexible with Singapore one during the financial crisis. Are the new ones too close already or would you still be flexible should the market take longer to bounce back?
Axel Heitmann
Stephan, thank you very much. On pricing as I said there is component, one component is raw material another component is the market price itself.
Then another component is our price premium, another component is product mix and the general thing is the price sensitivity of our customers. On raw materials, this is very much in line, so there is no need to discuss it any further.
What we have changed is we have adapted our prices to a small to a market price we have to do this, number one. Number two, on the big premium, on certain products we have been more flexible in recent months to in order to recovery on the volume.
We have to do this. We were under some pressure in Q1 and that’s the reason why we have adjusted to that.
And as I said the last chunk, the big chunk of adaptation we have seen already. On the third question on CapEx projects Stephan, there is always… you have to balance so many things than you evaluate that.
So, for the time being we stick to our plans on the Nd facility, the Nd facility is a very, very great importance because this provides us a presence in the market at very type of weather conditions, good technology proximity to China and also we want to benefit from the regional Bd prices. So we want to keep this going, but you should say never.
But for the time being we keep it going this is not a like flexibility it is just because the strategic relevance is more broader than short term savings on that. The same should apply for our Brazilian activities and also other activities.
Stephan why not allow me some more time to discuss in more detail in September, I think this is better than do it right off the cuff now. In principle, we have taken out 100 million.
This is not easy, it’s painful to take out more at this point of time we are reluctant because there is no business case for us if the cost would be higher than the savings. Your second question on DD, Stephan, I am not 100% sure if I got your question, may I ask you to repeat your question please?
Axel Heitmann
Yes. You said that you have indication that you've seen the worst in terms of, let's say, pricing environment.
And the pricing power you had to give away in the second quarter was the worst and you've seen first signs of an improvement. And I just wanted to know if, while you were still… and raw material is one big factor in terms of pricing, while butadiene prices have still accelerated in some areas even the collapse in July at least where does that increased optimism come from?
If that comes from maybe a shift back towards higher value products or if you are seeing the first start of maybe a bit more volume demand or where that optimism is coming from?
Bernhard Duettmann
Stephan, it is very difficult to give guidance on that. So, it’s correct.
We’ve seen some spots increases on butadiene but there is such a big volatility in the business it’s very difficult to give any guidance for the quarter ahead, very difficult and really don’t want to do that and that’s the reason why any potential butadiene devaluation is not included in our 700 to 800 bandwidth. On demand pick up as I said we don’t see the second half.
I know that some customers say that. I don’t know why they do that.
Maybe they have their own reasons for that, maybe it is they do have. They do see something.
Maybe they sell more units. But this doesn’t mean they make more units because they have to the stop that finished goods.
And even if they have to make more they may have still sitting on big stocks of our products, so more tire unit sales doesn't translate immediately into more tire units production and this does not translate one to one in more raw materials being ordered, so the pipeline is still in the visibility of low, so we have to be a little bit patient, but in principle demand should pick up in the foreseeable time.
Operator
The next question is from Mr. Christian Faitz of Macquarie
Christian Faitz - Macquarie
Yes. Good afternoon, gentlemen.
Just a very quick question on your Asia-Pacific sales. Would you be able to split the minus 14% up in a decline in volumes and prices, please?
Thank you.
Axel Heitmann
Say it again please.
Christian Faitz - Macquarie
I believe your Q2 sales were down 14%. Could you…
Axel Heitmann
You mean Asia?
Christian Faitz - Macquarie
In Asia I guess, do you mind sharing the volume and the price component within the 14%? Thank you.
Axel Heitmann
We do not do this on a regional base because we do not run our business on regional pricing and regional volume, we do have global businesses so this not how we run our business. So sorry I cannot do that.
What I can say this 14% is comparing ourselves with a strong base, China was really booming a year ago. And we cannot mitigate this decline only marginally by our Ag Chem, strong Ag Chem business, but what I can say the biggest chunk of it is price as you can see in the chart on page six in polymers.
I hope this was helpful to you.
Christian Faitz - Macquarie
Yes. Thank you.
And maybe a second question on top. You mentioned, Axel, that going into Q3 I believe you also saw strong Agro Chemical sales.
Can you confirm that, and where you see that regionally? Is it mainly Brazil or is it in general your, let's say, European customers?
Thank you.
Axel Heitmann
North is very stable and strong business, our order books are full, in fact we do have to expand our business we do have some capacity expansion on the menthol business and other businesses we also have, we're going for new projects on our Saltigo business so we're pleased with this business and we will see more to come. So it's very good and important business to us, really booming, at a good margin.
Operator
The next question is from Mr. Martin Roediger of Kepler Cheuvreux, Mr.
Roediger please go ahead.
Martin Roediger - Kepler Cheuvreux
Thank you. Three questions.
First, on inventory write-downs, assuming the butadiene price in the beginning of August in the individual regions remains in place, what magnitude of total write-downs this year we should factor in? Is it similar to the (15 million) write-downs you had in 2011 or is it less?
The second question is on dividend. I know it's quite early at this point in time, but given your low cash flow, do you consider to cut your dividend for 2013 substantially, as your priority is more on the CapEx rather than the dividend side?
And the third question is you mentioned already some actions you want to do. In case the weakness in your end markets for synthetic rubber remain in place for still several months, do you consider to close synthetic rubber plants for ever, to take out costs and thus improve your profitability?
Axel Heitmann
A number of questions, Martin. Let me start with the third question.
As I said right now we're looking into various options for various products definitely not in our core businesses in our very profitable business, just look at just the margin on polymers, a year ago it was 18% so these are very healthy business. Of course every business is aging or new to the competitive landscape or the customer base is changing and this is why we are adapting for that.
So at the moment on our, we're building new capacity in Asia and we're planning a closure forever, but I have more on this in September. On dividend policy, the dividend policy is in place and we talk about dividends in spring next year when we have the yearend results.
On the inventory, Bernhard has a comment. Inventory write down is very easy I mean we always look at the inventory prices at the quarterly end, and the development into the next month because that is basically important for our inventory evaluation.
Everything else, this is pure guesswork and not really relevant because we have seen volatility in these markets are substantial. For that reason we don't make any prognosis on just on a one month pricing level of butadiene because it can be completely wrong and off.
Operator
The next one, is from Mr. Thomas Gilbert of UBS, please go ahead Mr.
Gilbert.
Thomas Gilbert - UBS
Good afternoon. Four questions.
I'll try to be brief. First one, coming back to Christian Faitz's question, can we ask it the other way around, why North America has seen the weakest reported sales growth, although obviously that's the economy doing best?
Is that because you had most shutdowns there or because the Ag business had the cold weather, or whether pricing was worse there, or is the underlying volume in North America really the worst in the Lanxess universe? That's the first question.
The second question is again on the mix in Performance Polymers. You kindly gave us an indication that High Performance Materials' Semi-Crystalline Products is doing better than Rubber.
Can you also add the third piece to the jigsaw, which is Caprolactam? How is that contributing to the operating earnings of the division in the first half?
The third question is on corporate costs, quite a bit lower in the quarter. Can you reiterate your EUR200m guidance for the year?
And was the lower corporate cost due to lower bonuses or the lower share price in the quarter, just clarifying that? And the final question is on the guidance.
The range for this point in the year is quite wide. Without you telling us, what is the parameter you're playing around with when you set the low and the high end of the guidance?
Is that the volume development? Is that butadiene inventory write-offs?
What are you playing around with in your models when you set such a wide range for the guidance by the half-year? Thank you.
Axel Heitmann
Thomas, I'll start with your last question guidance, seven with the given visibility 700 to 800, I think it’s not a wide range. Visibility is very low and volatility is very high, so we believe this is already narrow.
What is definitely not included, as Bernhard just said, BD, any potential or hypothetical whatsoever BD fluctuation not included, it cannot be included at this point of time. Moving on the other questions, on Capro.
Capro business is bad. And that's the reason why we started a year as already, to prolong our value chain and to reduce the commercial Capro volume and to have more captive; in other words to expand on our capacity for compounding and utilize the expanded capacities, and this is going well.
We have a very good position in the markets. We have a good position with the car makers, also with other important suppliers.
So it is going strong despite the trouble in the auto industry. This business is doing well and this is a good indicator of our technology position.
North America, it is comparable with China. Very strong basis, fact number one, and number two is predominantly, pricing.
And price is again influenced predominantly by raw materials. I hope this helps you Thomas.
Bernhard Duettmann
Thomas, your question in regard to corporate cost, I think for your modeling purpose you should continue to use the 200 for the full year on corporate cost.
Thomas Gilbert - UBS
Thank you very much. Can I just try; is Capro the merchant position or what is the long position?
Is that EBITDA breakeven, positive or loss making at the moment?
Axel Heitmann
We do not comment on individual business units and definitely we cannot comment on fractions of a business line under business units.
Operator
The next question comes from the line of Andreas Heine with Barclays, Mr. Heine please go ahead.
Andreas Heine - Barclays
Only two questions left, and the first is could you quantify how much the idle costs have been in the second quarter, so that we get a flavor of what the progression from Q1 to Q2 is without this effect? And secondly, back on the guidance, I'd like to understand a little bit more on the seasonality what you expect from the first half to the second half?
If I basically double what you have earned in the first half, then I end up in the mid-range of your guidance. But in the first half you had the startup costs in the Singapore plant, you had write-offs of butadiene and the idle facility costs.
So is what I have mentioned as, let's say, some special effects in the first half as big as the seasonality you expect, or how do I have to read into this? Thanks.
Axel Heitmann
Very good analysis as always, so you spot on, If you double, it appears you're on the right side but you have to take into account as you rightly did, we had these burdens, one-time burdens in the first half and there will be these burdens in the second half, but we will have, this is what we anticipate assuming effect on the seasonality Q3 to Q4. There was a questions earlier, this afternoon, 700 to 800, I think you all guys are on the - you are on the safe side if you go somewhat in the middle of it, 700 to 800 backwards.
Bernhard, on the idle cost?
Bernhard Duettmann
On the idle cost, we had idle cost. The cost capacity utilization was lower.
On top, the idle costs now incorporate also part of the Singapore plant which is still in the ramping up phase. For that reason idle costs were higher than the first quarter, but we do not quantify it to real amount.
Operator
The next question is from Andrew Stott of BofA Merrill Lynch, Mr. Stott please go ahead.
Andrew Stott - BofA Merrill Lynch
Yes. Good afternoon, Axel.
The first question was on pensions. Sorry.
Headset dodgy. So, on pensions, you're one of the few companies to show an increase in the half, at least relative to where you were.
I know it's a small increase, but it's obviously important for your BBB rating. So why hasn't your provision gone down, given discount rates?
That's the first question. The second question is on volumes in Performance Polymers.
I'm still at loss to really explain easily the minus 1% for Q2. If you look at all tire shipment data coming out of most of the big producers, and if I lean particularly on Pirelli and Michelin data, you're getting very, very different numbers.
So is it really that inventories are still in the system or are we looking at market share loss?
Axel Heitmann
Andrew, I thought on the volumes indeed, visibility is difficult. Customers don't give us the full picture.
They publish fractions of the full picture, it’s difficult. They do not tell us how much -- how many tires they make.
They tell us how many tires they’ve sold in some regions, so it is not easy. So you cannot translate tire sales into tire manufacturing into raw material orders.
It is very difficult as I pointed out before. There are inventories at the pipeline, particularly in Asia, so this weighs heavy.
But even if more tire units being sold and this translates in more tires being made, doesn't mean that more raw materials being ordered because there’s still inventory for us. Sorry you have a follow on question.
Andrew Stott - BofA Merrill Lynch
Just to come back to Axel on that point, does that mean to say that natural rubber is just at the edges, substituting synthetic rubber? Is that your point?
Axel Heitmann
No no.
Andrew Stott - BofA Merrill Lynch
What was your -- so what was -- sorry. I didn't understand the point, therefore, because I think you were suggesting you can't compare shipments with production.
Axel Heitmann
No. We expect that tire makers are sitting on still too high inventories of our raw materials, our synthetic rubber.
So even if they - they have to destock. Even if they make more tire units, they still are in the process of destocking of the raw materials they have bought from us before.
I also have a feeling that some tire makers are sitting on large piles of tires. So the good news is some want to sell more in the next six months.
But as I said it does not translate one to one in more tires being made and this does not if so translate into more raw material being ordered.
Andrew Stott - BofA Merrill Lynch
Okay. Got it.
Thanks.
Bernhard Duettmann
Pension, Andrew, we have used exactly the same discount rates as for the year end as for first quarter number. There is no change yet.
Operator
The next question is from Mr. Rakesh Patel of Goldman Sachs.
Mr. Patel, please go head.
Rakesh Patel - Goldman Sachs
Hi there. Just a couple of questions, if I may, slightly following on from Andrew's on where inventories lie and the timing of destocking.
As I understand it, what you're trying to tell us is that tire manufacturers not only have tires that they need to sell but they also have a large amount of inventory of the raw material which you supply. Do you have any view on how long it might take to run that inventory down?
Intuitively, it sounds as though it should take longer than six months, but any thoughts on that would be much appreciated. And then, finally, you talked, just to go back to the pricing, I just wondered if you could talk a little bit about what proportion of your products in Performance Polymers do you think can command premium pricing and which we should see as being relatively resilient.
That would be really helpful. Thanks very much.
Axel Heitmann
Rakesh on Destocking we do not know how long it will take. I think we have seen the worst, but there is still some pockets I Europe.
In Asia maybe we have a big issue but it’s possible for me to quantify given the fact that customers do not specific. On premium pricing, it depends by the various units at least we strive for premium products and ultimately when we have upgraded all our facilities and the new top-notch facilities on place we would like to have at least 50% maybe two third in the premium category.
Rakesh Patel - Goldman Sachs
And you see no risk of those facilities not being upgraded?
Axel Heitmann
I don’t understand now as I said indeed we go ahead for throttle as we have started we go now and we have already done the lot, we go for full throttle and we want to have the facility in Asia because of we want to take advantage of the stable BD prices in Asia and we want to have the proximity to the market and as you know it will the first facility of this kind in the region.
Rakesh Patel - Goldman Sachs
That's helpful. Thank you very much.
Operator
The next question is from Mr. Patrick Lambert of Nomura.
Mr. Lambert, please go ahead.
Patrick Lambert - Nomura
Good afternoon, Axel, Bernhard and Oliver. I have, I think, two questions left.
I think, Axel, you mentioned down-trading from customers that affects your pricing. Could you comment a little bit on the regional aspects of it?
Do we see that also in Europe? I would have assumed that with the labeling it's more difficult to switch from one product to another.
If you could comment on that, that would be great. The second question is on HPM.
Good volumes. Just having a notion of how broad based that volume growth is.
Is it driven by a certain brand, German brand, or is it more broad based, so that we are more confident about the outlook for that business?
Axel Heitmann
Labeling, labeling is very important and it will be helpful to try customer as long as and consumers are going for the label and some regions particularly in Southern European region or let me say Europe outside Germany, and customers are really suffering and what they first did, they do not change tires. They really wear down their tires.
They take grip. They don’t want to have any cash out then they go and they have ultimately to replace them.
They go for to a corner shop and go for real bargain just to save on cost, so in this region labeling will be ultimately and because it will become low and ultimately will be beneficial but for the time being and uses, they try to make savings everywhere. So, this I think covers you question on the regional aspect.
We do have global pricing but we will factor in the regional differences on butadiene, so we do have different prices but as I said we have the same price regime, mechanism around the globe. On HBP, of course, the big car guys in particular the German car guys so technology driven they are good friends of ours and we’d like to see them, we like to present our new products and it’s fun.
Patrick Lambert - Nomura
So it's driven by the German automotive industry?
Axel Heitmann
Yes.
Patrick Lambert - Nomura
Can I get, sorry, a follow-on again on idle costs, because I'm still trying to find the underlying EBITDA margin. 8% in Q2, that's the lowest since Q1 2009.
I know there’s plenty of idle costs, the startup of Singapore. Could you help us, though, to your best estimate, what would be the underlying EBITDA margin without those?
Axel Heitmann
No, Patrick we cannot do business, so I need to leave it in your good hands to make good estimates.
Patrick Lambert - Nomura
Okay, that’s right.
Operator
The next question is from Mr. Dominik Frauendienst of Citigroup.
Please go head, sir.
Dominik Frauendienst - Citigroup
Yes. Thanks very much.
I have got two sets of questions. One, on the competitive environment, could you comment on the pricing dynamics you're seeing out there in the market in the high-end part of your Performance Polymers segment and the low end, or the standard part, and also the supply additions?
You mentioned before that there are supply additions. Are you surprised by the level of supply additions this year?
And lastly, on market share, do you think you have lost market share? You mentioned that Japanese players use the weaker yen, especially in China.
So what do you think about your market share? How's that developed?
And then secondly, on the balance sheet, especially on the net debt, do you have a target for yearend '13? And should we expect a net debt level similar to the level of 2012?
And if you could remind us, in that context, of your covenants as well, because at this point in time, net debt to EBITDA, if I take the midpoint of your guidance, is over 2 times, close to 2.4 times.
Axel Heitmann
Dominik I would like to start on your third question on market share. Yes the answer is yes, we have lost market share.
We have brought down prices late, late as late as possible. But as I said we have seen the worst on that.
Pricing is, standard products have more standard prices, high end products have more high end prices.
Bernhard Duettmann
On the balance sheet, number one on the net debt; we don't give clear net debt guidance for year, but I can give you the directions that the net debt will be lower than the current net debt at the half year level. On that we'll come also from further inventory reductions which we're working.
And then in addition from the operational cash flow from the business. The second question was in regard to our covenants, we're absolutely covenant free in our financings.
Dominik Frauendienst
Just a follow-on, then, on working capital to sales. I believe at the end of last year it was about 20%.
You are currently in the mid-20s. Should we expect something around the 20% level, then?
Axel Heitmann
That depends very much on our ordering pattern on the payables. I mean we can certainly plan how we can bring down our inventory levels, and we certainly can plan, already it's more difficult to plan your receivables because they are also very much based on raw material pricing and selling prices.
It's even more difficult to plan for the payables, for that reason we don't give clear guidance on the working capital except on the direction.
Operator
Your next question is from Jaideep Pandya of Berenberg Bank. Please go ahead,
Jaideep Pandya - Berenberg Bank
I have a few questions. To start with, if we look at your guidance for the year, you're not expecting any recovery in H2.
So can you tell us how will you introduce a 30 kiloton extra butyl supply in the market? Are you going to sacrifice utilization in Antwerp or Sarnia for that?
That's the first question. The second question comes back to your product mix.
Could you give us a feeling, in PBR and in butyl, if you have sold more butyl versus halobutyl this year and if you have sold more lower grades of PBR versus higher grades of PBR this year, just to square off this down-trading argument? The third question is more related to if there is any relationship between HPM starting to do well versus EPDM.
Should we think that EPDM volumes should also start to pick up, eventually, because you are starting to see some good dynamic in HPM? And the final question comes back to butyl.
If I think about one of your big competitors adding capacity in normal butyl in India, if it comes down to a situation in Asia, could you compete with them in just selling butyl on a cost curve point of view from your Singapore plant, i.e. is your cost curve similar to selling butyl versus butyl and not halobutyl in Asia?
Axel Heitmann
Jaideep very interesting ideas, but as you butyl only few players in the market, I cannot comment on our strategy. I definitely cannot and I will not do that.
So third question was HPM, EPDM; its correct EPDM a lot of business is under the bonnet in car industry, but there is no relationship between HPM sales and EPDM. HPM is driven very much by our light; our technology by our competencies for light weight technology EPDM is completely different.
On product mix, price before is in place. We do not go for market share.
We want to go for value; we had to adjust our prices to be not outside the market, this is done. Hopefully what we have seen, but we will not go for, no change in strategy to go for more standard products the other way around.
We want to introduce hi-tech products into markets because in this area we have more pricing power, more fun and there is more growth long term. Guidance, I never said we will bring 30 to 40 kilotons extra supply to the markets.
What we did is we want to utilize the facility by 30 to 40 tons. I never specified them as extra supply and I cannot go any further in that.
Operator
The next question is from Mr. Peter Spengler of DZ Bank.
Mr. Spengler please go ahead.
Peter Spengler - DZ Bank
Actually, I'm interested what changed from September 2012 up to now. You mentioned that the tire manufacturers have high inventories and problems with their stock levels.
And so is it more additional capacities of your clients or the mobility, that there were overstatements in terms of the mobility development in the coming years?
Axel Heitmann
We all have been very bullish from September year from now, September 2012. Reality has shown us that we are facing a temporary global weakness very much driven by Europe, and China is also involved now and we have less growth in mobility around the global.
And this less growth in demand is facing a slightly increase of capacity because all supplier prepare for the anticipated additional growth. So we have a gap between supply and demand and this gap has to close.
We believe it’s a temporary effect. There will be growth that’s coming in particular for the premium products and here we are then we are back in business.
Hope this answers your question.
Peter Spengler - DZ Bank
Yes, thank you very much.
Operator
Your next question is from Ms. Stephanie (inaudible) of JPMorgan.
Please go ahead.
Danielle Ward - JPMorgan
Hi. This is Danielle Ward actually on Stephanie's line.
I just had one question on your credit rating. I just wondered how you're thinking about this in the context of the EBITDA guidance downgrade and whether there are any measures that you'd consider taking to protect the rating.
Axel Heitmann
I think you’re aware that we have got an new rating from SMP they confirmed the BBB rating however with the negative outlook that was in Moody’s evaluation in Autumn. Talks to Moody’s has so far confirmed our current rating and there is from Fitch we haven’t got new report on ratings yet.
We are in discussions with the rating agencies. They know that we have this temporary weakness in our business.
We have told them what our measures, our strategies are, and we will certainly do whatever is needed to keep an investment grade rating because that’s what we always said, we want to remain in investment grade rating. Thank you very much.
Peter, I’d like to come back to your question. As we discussed supply demand temporary, one, please be reminded a year ago there were really, really tight markets.
And because of the tightness in some products, customers had some let me say safety stocks because of the tight supply. Right now, they have to be stop their safety stocks so this comes on top, number one.
Number two, some customers selling their safety stocks. So there are our customers and at the same time they are sellers but this is temporary, this is one time effect but this is adds to what we have discussed.
Do we have any further questions?
Operator
We have a follow up question from Mr. Stephan Kippe of Commerzbank.
Mr. Kippe, please go ahead.
Stephan Kippe - Commerzbank
Yes. Thank you for the opportunity.
Maybe coming back to pricing, you mentioned that it was not only price concessions but also a mix effect in the second quarter that put a stop on or reduced the prices. Could you give us at least a feeling or in a ballpark what percentage or what part of the pricing reduction was a mix effect and what was outright pricing?
Are we talking about maybe a third half or even lower? And the second question is and it kind of connects to what you just said about the market and inventories.
Given that we've now seen about five to six quarters of volume reductions and we are still facing, according to what you've been saying facing car manufacturers that have significant inventories. At what level do you consider to be the normal underlying demand of the market?
Could it be that maybe in 2010 or '11 we have seen a huge restocking and now we're more in a situation that's closer to where the normal trajectory should be or is the truth somewhere in the middle? Are we closer, is the truth somewhere nearer to the 2010-'11 levels or is it nearer to where we are now in terms of the long-term underlying demand trend of the global market?
Thank you.
Axel Heitmann
Stephan, we do not we are not at all in a normal situation. And consumers as we have discussed drive less and they use that highs longer than anticipate, maybe some of the customers even consider not go for winter time, next winter.
So we do have had normal situation in the markets. Hauliers commercial transportation is down because of the global economy and as a result of that some, use our, they have the part of that fleet is idle and they take the tire from the idle or, and use them on those their business.
And all this is amplifying the situation. When demand is picking up for them they immediately need new set of tires and all the stuff.
So this will amplify then restocking. I believe we have seen most of it in Europe but we still have some destocking to come.
In Asia visibility is very low but some people want me that they are sitting on quite a substantial volume. I do not know if they just say that to gain present part but this is the information I received.
On mix effect Stephan we cannot quantify that within the various business groups, we cannot. Next question please.
Operator
There are no more questions registered this time.
Axel Heitmann
Thank you very much. Well, then, as this point, I would like to remind all the people on the call that up from the sales side that we will be hosting an Analyst Round Table on September 19th and I’d also like to mention that we will have a Media Day on the proceeding day on the 18th, so if you guys from the… or friends if you have not yet registered then let us know whether you’re available and we would be more than happy to welcome you here.
I’ll hand over again for the very final words to Alex. I am personally delighted to see you in a few hours, in a few days during the road shows.
Axel Heitmann
Hello, and thank you very much. Ladies and gentlemen, we have an extensive Q&A.
There is not much I can add to that. And what I can say, what I want to convey is we do utmost to do what has be done and more information in September on that.
Thank you very much. Bye-bye.