Lanxess AG

XETRA:LXS

Earnings Call Transcript

[Operator]

Ladies and gentlemen, welcome to LANXESS press conference for Q1. [Operator Instructions] I'd like to give the floor to Claus Zemke, Head of Corporate Communications.

[Claus Zemke, Head of Corporate Communications]

Good morning, colleagues. I would like to give you a warm welcome from the sunny city of Cologne. Welcome to our Q1 earnings call. We have Matthias Zachert here. We have Michael Pontzen, our CFO. And we'll hear a bit about how our first quarter has gone. And then they will have a chance to answer your questions. So ladies and gentlemen, I would like to give you a warm welcome as well to our conference call for the first quarter. We had a very good start to the new financial year. And this is sales -- and we had very, very positive start to the year, looking for the next -- [ looking ] over the coming year as well. I'd now like to turn your attention to Slide #3. We're very pleased that the group performed extremely well. We had the strongest quarter on a comparable basis with rubber in the history of our company. But in particular, I'm delighted that the New LANXESS recorded a significant improvement. And I'm pleased that the trend of the previous quarters is being continued. Sales volumes remained relatively stable compared with the prior year. And in the first quarter of 2017, we had a special item. We had a rise -- a dramatic rise in commodity prices, which means we brought forward the purchases of a number of customers. And as such, we had significant volume growth. And we had another -- we recorded another strong quarter-over-quarter sales -- strong sales volumes again. And we're delighted that the acquisitions that we made as well, particularly that the Chemtura acquisition has made a significant contribution to earnings. The integration is well on track. And the implementation of these efficiency-boosting measures have made significant progress and have thus been reflected in our profitability improvements.I would now like to move your attention to Slide #4. As you can see, we managed to record very impressive sales. This is for the -- this is for the last time we'll include rubber, which didn't perform quite as well. In EBITDA, we managed to record disproportionately strong growth of 14% from EUR 328 million to EUR 375 million. If you focus solely on the New LANXESS, then it was a 40, 4-0 percentage increase, which speaks for itself. The EBITDA margin also improved from 13.7% to 14.6%. With just New LANXESS, we had a increase of more than 15%. So this demonstrates that we're continuing to make progress to the target that we set ourselves last year.I'd now like to move on to Slide #5. What this slide shows you, firstly, is that we are operating in a challenging market environment. We -- but despite this, we're able to grow the joint venture with ARLANXEO. We had efficiency-boosting measures. We managed to operatively manage the business effectively. And in the first quarter of 2018, in ARLANXEO, compared with previous years, we managed to record a strong quarter. In 2017, we had some special items that were recorded. And the other thing I'd like to tell you about ARLANXEO is that it is -- well it's our market, that's the simply the way it is. So against this backdrop, 2015 and '16, we made the strategic step with Saudi Aramco. But one of the things that is becoming clear is the growth of New LANXESS. For the first time, we are now showing you the results of New LANXESS as a unit. And you can see that it -- there is much less volatility in the New LANXESS business than in the rubber industry. And in recent years, we have continued to grow this business.And now due to the portfolio changes that we have made, we now have -- less than 15% of the business is exposed to [indiscernible]. So previously, we had 50% with ARLANXEO. But now we've had a significant change to our structure realignment. And this will appear in our results over the next few years too. I'd now like to have a look at net income. Last year, we had integration costs for Chemtura, which led to one-off expenses. And this year, we also had one-off charges, but much lower than we did last year. And as such, net income on a reported basis is much stronger than it was last year, EUR 96 million compared with EUR 78 million in the prior year. On an adjusted basis, which means stripping out special items, we recorded an increase of more than 30%, which is very, very pleasing for the company. Ladies and gentlemen, I would now like to draw your attention to the segments. On Slide #7, we have Advanced Intermediates. We continue to have weakness in the agro markets. There are several agro companies who have been mentioned in this context. But overall, we have a strong position due to our broad diversification in the market. We had a 9% increase in sales, which were impressive; and even more pleasing, a 12% increase in earnings. And this means that we have a very strong segment that in recent years has also delivered solid results. And in the next few years, we are optimistic for this business segment too. We're also very pleased about the newly created segment, Specialty Additives. We had the acquisition of Chemtura here. The integration is well on track. You can see this on Slide #8. Sales rose significantly by more than 108%. Last year, we didn't have Chemtura included in the results. So Chemtura made a contribution this year. And in EBITDA, we had an 84% increase, which makes it the strongest quarter for this new segment. In the last 3 quarters, we had around 60%, 70% increases. And here, you can see that we have made a even more significant gain. And this -- the efficiency-boosting measures that we've taken will also be reflected in these results going forward. Now you can turn your attention to Slide #9. We had a decline in sales and in EBITDA. The key factor here was currency effects, because in this segment, we had -- we are very dependent on the dollar strength. And if you have a look at the detailed reporting, then -- and you strip out the currency effects, then this segment was actually strongest. And we had an 8% decrease, and this -- we had an 8% change in exchange rate, and this was reflected in the EBITDA. And in Performance Chemicals, this is the only segment that we expect to record a decline. Then in Engineering Materials too, we had a good performance. We have the urethane solutions business that we have integrated effectively from Chemtura. It's a high-margin business, but also the polyamide business due to the technological compounds that we offer for lightweight automotive construction made a significant contribution. And as such, sales were expanded significantly, and we also recorded a substantial gain in EBITDA. Now this segment will make a strong contribution to our performance in 2018. Ladies and gentlemen, this brings me to ARLANXEO. In the next quarter, it will no longer be reported as part of LANXESS. It will be reported separately. So here we're comparing our performance with the prior year. We had a very strong prior year quarter in 2017. We had the strongest quarter in the first quarter of the year. And over the successive quarters, the volatility of commodity prices pulled the results down. And this year, we expect the complete opposite effect. So we started modestly in the first quarter. But over the second half of the year, compared with the prior year, we expect to record an improvement in our performance. And this is a business that in a mass market like rubber, it is very volatile. We had a decline in earnings as well, and we expect this trend to reverse over the course of the year.Now on to Slide #12. It's pointing out again that as of the second quarter of 2018, our reporting structure will change. And this is just to provide you with information about -- this brings me to our guidance for the year. I believe that German industry has felt the impact of the weak U.S. dollar. We pointed this out back in March. And this will also have an impact over the next few quarters. But in the third and fourth quarter, we believe that the impact of the weaker dollar will be -- will not be as strong, because we also had dollar weakness over the last 2 quarters of last year. Now onto the market development. We expect to -- we expect an improvement. We're quite optimistic about market growth in almost all regions, with the exception of the agro business, of course. Here we expect the first half of the year to be weak in the agro business. We expect a slight improvement in the second half of the year. This could happen, but overall, the market is expected to stabilize somewhat in 2019.Should also focus on the trade disputes at the moment, which lead to a great degree of uncertainty for industry and for the economy. So we have to keep a close eye on things to see what impact this will have on the various regions in which we operate. Now for the New LANXESS, we are very optimistic. We expect to record volume growth even higher, in fact, than the strong prior year. We had a very solid first quarter of the year with New LANXESS. And now we are able to raise our guidance for the full year compared with last year. And we expect EBITDA to come in 5% to 10% above the prior year level due to the decline in the dollar. Now ladies and gentlemen -- despite the decline in the dollar. Ladies and gentlemen, we are optimistic about the year 2018. Ladies and gentlemen, this was the presentation about the first quarter. If you have any questions, then ask them now.[Operator Instructions] The first question, Annette Becker from the Börsen-Zeitung.

[Annette Becker]

I have 2 questions. What about sales in -- growth sales. What about the changes -- what would it look like if there were no currency change effects? And what about ARLANXEO in the coming year?

[Matthias Zachert, Chairman of the Board of Management & CEO]

[ Frau ] Becker, let me answer the second question, and Mr. Pontzen will take your first question. At ARLANXEO, we assume that EBITDA will be similar to what it has been in the last 2 years, between EUR 360 million and EUR 380 million. But we are not giving any firm guidance for ARLANXEO. Rubber is too volatile. And that's why this is just an indication. The figures, however, are focusing on New LANXESS. Mr. Pontzen?

[Michael Pontzen, CFO & Member of the Board of Management]

To answer your question with regard to the currency and portfolio effects. Well, in New LANXESS, in the first quarter, we have about 6% increase. The 2 factors, price and volume, have increased by 5% and 1%, respectively. And I'd like to stress the fact, as Mr. Zachert said, we are comparing ourselves with a very first -- strong first quarter in 2017. There was organic growth of 6%, and this is something that we're very, very pleased with.

[Operator]

[Operator Instructions] Well, dear colleagues, there is another question from Annette Becker.

[Annette Becker]

Well, if nobody else has any questions, I'll ask another one. What about the -- you've talked -- how did you get any hedging with regard to currency exchange rates? And how did you manage this compared to the competition? In other words, how did you manage to deal so well with the weak dollar?

[Matthias Zachert, Chairman of the Board of Management & CEO]

Mr. Pontzen?

[Michael Pontzen, CFO & Member of the Board of Management]

Well, Ms. Becker, that is a very good question. The weak dollar could be compensated for to a certain extent. But of course, we also have losses as a result of the weak dollar, translational effects as well as transactional effects here. And we have defined in the past that at LANXESS, for every cent difference in the exchange rate, U.S. dollar to the euro, means about EUR 700 million EBITDA. And in the first quarter, we had a very clear change in the U.S. dollar exchange rate. Last year, we had a very strong dollar, which is on average EUR 1.06. And now we're at EUR 1.23, which is a weakness of $0.17. So you can extrapolate all of that. So that in the quarter, it's not only in terms of the sales volume, but also in earnings, we see that there is a decline in the EBITDA. And this meant in segment Performance Chemicals was felt very strongly, but also in ARLANXEO. Hedging is something which counters this. And that's why the effect was somewhat less. But here too, we have had to tolerate a weakness of the dollar. But we had good sales growth in terms of price and volume so that we can overcompensate that. Are there any other questions?

[Claus Zemke, Head of Corporate Communications]

[Operator Instructions] There don't seem to be any further questions. If all questions have been answered, then I would like to say thank you very much for participating this morning. And we look forward to seeing you again in person at our next event. There's our AGM, for example, would be the next opportunity, which will be taking place in May. I hope you all have a lovely day. Thank you very much. Goodbye.