Lanxess AG

XETRA:LXS

Earnings Call Transcript

[Operator]

Ladies and gentlemen, welcome to the LANXESS Telephone Press Conference. This conference is being recorded. [Operator Instructions]

Our speaker, Head of Corporate Communications will now start the conference.

[Claus Zemke, executive]

Good morning, colleagues, a warm welcome to our quarterly telephone press conference. Our Chairman of the Board of Management, Matthias Zachert; and CFO, Michael Pontzen will inform you of Q2 and give you an outlook of the full year, and then will also be available for your questions.

Mr. Zachert, you have the floor.

[Matthias Zachert, executive]

Ladies and gentlemen, welcome here in Cologne, on a lovely sunny day. Another good quarter is one that we can look back on, robust in operating terms and strategically robust. Our sales and earnings have been increased significantly over the prior year. We have now made the adjustments based on the announcement of the polyamide joint venture, so we are now reporting in the new reporting structure without the polyamide business.

In this new LANXESS core business, we have shown a strong performance. The increase in raw material and energy costs have been successfully passed on in full. The profile of the specialty chemical company has been further sharpened and I'll be commenting more on this in a bit. And at the same time, we have also been able to expand our climate goals and have received a clear recommendation from one of the strictest NGOs in this field.

Now let's come to the details. In this adjusted new structure without HPM, we are seeing a strong development. We have delivered. Sales have been expanded to EUR 2 billion, which is an increase by 36%. And let me stress that this is very significant indeed. And EBITDA has been increased by 14% to EUR 253 million.

On Slide 5, we are taking a look at the Specialty Additives segments posting record results based on good price development and fortunately, the recovery of several end customer industries who were severely shaken in the course of the pandemic, especially aviation, which has now shown a recovery with high-margin products. This is making a good contribution. Also, the Flame Retardant segment is showing a good performance. Sales were increased to EUR 760 million in this quarter, which is a 35% increase. EBITDA increased by 51% to a record result for the quarter in the amount of EUR 134 million. This is something we've never had before.

On Slide 6, we are looking at the Intermediate segment result. A clear increase in sales to almost EUR 600 million. This is an increase of over 20%. EBITDA showed a decline. This is a very high energy segment and the substantial increase in energy costs in Q1 now went through the P&L in Q2. So this is the seasonal effect that we are seeing in this quarter, and this is something we're used to seeing with intermediates. But with the full year perspective, this is usually going to be compensated. The segment at the same time is very logistics intensive. We have a lot of focus on production in Europe and shipping to the U.S. and Asia. You know the situation, logistics chains have been interrupted, logistics costs have skyrocketed, and this has an impact on our profitability.

In Slide 7, we are looking at the relatively newly founded Consumer Protection segment. This is something we started out with in 2020. And since then, we have been focusing very strongly on organic as well as inorganic growth, and we can see a strong performance. Acquisitions are paying off. We have been able to increase sales significantly by over 50%, EBITDA by almost 30%, and the new business created hereby acquiring Emerald Kalama, which is also going to be fully consolidated this year is bearing fruit. In the Flavors and Fragrances segment, we are seeing a marked increase in results. These synergies are tangible and there is more to come.

I would now like to briefly take a look and talk about the important strategic steps that we have been taking. First of all, on July 1, 2022, we completed the acquisition of IFF Microbial Control successfully. This will allow us to have an even broader portfolio of anti-microbial active ingredients and formulations for material protection preservative and disinfectants. This clearly positions us as a global leader in this field, thus creating a global champion who in the sphere of these active ingredients is a market leader. It's great to see that in these times we have also very clearly been able to strengthen our position in the United States. This is a growth market, which in the current geopolitical situation must and will be further strengthened and will prosper economically. So this was a step taken at the right time in the right market with respect to consolidation. This business will be consolidated in our business unit material products and thus, this business material protection will be one of our strongest pillars in the Group.

Slide 9, a brief summary of the strategic development. Moving from being a good player in 2016, in fact then, material protection was one was what we had as one of the leading providers worldwide. And in the course of the year, you can see that we were able to strengthen our position in 2016, commenced the former disinfectant business of [indiscernible] 2018.

We strengthened our position in the Beverage segment. In 2020, we acquired the market leader in Brazil for Biocidal Products in 2021. You saw the 2 smaller additions, acquisitions in France. And in 2022, the big step where we took over the Dow and DuPont legacy business in the U.S., and thus developed from a medium-sized player in 2016 into a global champion that we are now. So this is a true success story.

Slide 10 gives an outline of the significant steps that we were able to accomplish in high-performance plastics. In early June, we started communicating and we said that Advent and LANXESS together could form a global champion in polyamides and intended to do so. Together, we will take over the engineering materials business from DSM and create a new group with the scope of EUR 3 billion, starting with about EUR 500 million EBITDA, and of course, the potential of growth synergies and cost synergies. So this is a true group that will grow in Europe with the potential of becoming one of the leading plastics providers worldwide. This group is already represented worldwide with 18 production sites, 14 development centers worldwide. So this means we are very close to the customer just how it's supposed to be.

So this group will have approximately 4,000 employees, and we assume that the transaction will be closed in the first half of 2023. For LANXESS, this is of interest in many ways. We are participating as a shareholder in a growth story in a joint venture that has substantial potential. And at the same time, we will receive at least EUR 1.1 billion in cash, strengthening our balance sheet. And of course, we will sharpen the profile of a specialty chemicals company, which is very exciting.

On Slide 11, we are showing you that very clearly we are working consistently to pursue sustainability in a targeted fashion. After 2018 and 2019, where we, for the first time, defined very ambitious Scope 1 and Scope 2 goals, which were much more aggressive than the average of the industry, 2040 climate neutrality, that's the buzzword. In the last 12 months, we worked very hard on Scope 3 transparency. Scope 3 isn't that easy because it relates to what we call upstream and downstream supply chains. We analyzed these for years, and so we have now obtained precise data. And based on this data, we have established projects, ways of taking action and identified how we can further reduce for Scope 3. And so we have now also very clearly quantified our Scope 3 goals, and we are now entering into this communication phase. We want to have net 0 in Scope 3 by 2050.

At the same time, our Scope 1, Scope 2 and Scope 3 goals have been submitted to the science-based initiative, SBTi. I'm sure you'll be familiar with it. It is known to be the strictest NGO that also advises the commission and scrutinizes all industries worldwide, pronounces recommendations, defines targets, and also communicate accordingly who is compliant and who isn't. SBTi confirms that LANXESS is on the 1.3 degree climate pass according to the Paris Climate Agreement. This positions us worldwide as one of the few chemical companies that have received this confirmation from SBTi, and this is something we are proud of. We are proud to face this competition. We are proud that even a very strict NGO, like SBTi acknowledges that we are fully on track with respect to sustainability. We feel that this is a commitment we must make.

Ladies and gentlemen, on Slide 12, I will look at the full year guidance based on what we know today. Our world is very volatile these days. We have constant changes. We must make assumptions, and we make these based on the data we have at our disposal now. And here, for the new reporting structure of the Group, our guidance is as follows. We assume that in 2022 we will have an EBITDA of EUR 900 million to EUR 1 billion, which is on a comparable level a substantial increase of up to 25% compared to the prior year figure of EUR 800 million, EUR 230 million, EUR 250 million coming in from our polyamide business. If this was included, you would see that we are indeed on a substantial growth course of about EUR 1.15 billion to about EUR 1.25 billion for the Group as a whole. And this shows the change of our portfolio. The strength in spite of the difficult environment, we are posting good results. In the new reporting structure, as I said, a 25% increase is substantial indeed. In this guidance, the business for IFF Microbial Control is included for the second half of the year, of course, without the polyamide business, as I just explained.

Ladies and gentlemen, this has been our information on Q2 at LANXESS and the outlook for the full year in a difficult environment, and we are now going to open the call to your questions.

[Operator]

[Operator Instructions] The first question is from [ Annette Becker, Borsen-Zeitung ].

[Unknown Analyst]

I have 3 questions, if I may. One, I would like to know whether you could comment on the share of earnings of Emerald in the first half year? Then the gas crisis, you did not mention it with one word. Do you think after Q1, you have already said all there is to say, but what's the situation like for you 3, 4 months down the road and the development has continued?

And third question, you've talked about the reduction in sales, logistics, supply chain difficulties that those were the only reasons you gave, but do you see any downward trend in the economy as such?

[Matthias Zachert, executive]

On the first question, the Emerald business alone, it's impossible to comment on this alone with our benzene products. The business has been combined last year. You cannot separate the 2 anymore. We have 2 production sites in [indiscernible] and Nagda, which we brought in. There are 3 production sites by Emerald. And this is now a conglomerate -- worldwide conglomerate, which optimizes production, assets and prices. It optimizes all 3, and you cannot separate it to a distinguished one from the other. It is now controlled worldwide on a worldwide basis. I can't say that much. We see it in consumer protection.

The business that did best here, driven by synergies is the flavors and fragrances business that Emerald was integrated into. Hence, you see that the acquisition really paid off. And we are absolutely pleased with this business in particular, because organic growth and growth opportunities are still to come in the benzoate area over the years. Second half of '23 and '24, there will be an additional momentum because this year, we are just now embarking on expanding the facilities. Benzoate is the high-level product in this business unit. And we are optimistic that this new business unit over the next years will contribute in a good way to the earnings of the group as such.

On your question about gas, I think, in the first quarter, we were the first company in the chemicals business that spoke out on gas, the implications, the shortages. We communicated our defense plans and what shape and form we were affected. What we did, what types of countermeasures we would adopt and all that still holds true. It has been discussed with the individual plants and sites, besides know that should the gas supply stop today, they know what they have to do. So, against the background of this analysis as to how we would proceed in a state of emergency, nothing has changed. One thing that has changed though is the price.

Now, what we are seeing is prices that are completely different to those 2 months ago. 2 months ago, we saw prices that were already drastically high, they increased by a factor of 10, and this has worsened even more since. When the gas supply was curtailed even more, gas prices went up from EUR 100 to EUR 200. Well, the industry is facing an epical challenge in that respect. And if we are not careful here in Germany, we are risking a deindustrialization of gas-intensive industry. The repercussions of that, I think I don't have to convey them to you. You know that the situation is dire, it's dramatic, and I do hope that at the federal level and also in Brussels, this is acknowledged. Sometimes I get the feeling that Brussels doesn't know yet what's happening here, because they get caught up in regulations and legal texts that put additional requirements on the industry instead of easing the burden.

If you want to deindustrialize Europe, you're on a good path to do so. And the repercussions of that can be seen in other countries, recessions and other terrible impacts are then to follow. Hence, I hope that not only industry is doing their share in stabilizing the economy, adopting countermeasures, but that also politicians will do everything they can to stabilize the economy and the industry in Europe and in particular in Germany, and not to leave them behind.

The decrease in sales, just to be clear, this is not only due to logistics. We have a reduction of about 6% in sales volume across the group. Of course, logistics plays a part in it. But whether it's 1 percentage point or 2, it will be somewhere around this range. However, we also observe that the markets are getting weaker. China is quite weak. It used to be the driving force of the chemicals industry for a decade or 2, but that has changed. China is stagnating, if not decreasing. Europe is relatively stable as we speak but becoming weaker. And also, in the U.S., we see that the situation is okay, but there are [ per signs ] of weakness to be seen. I expect this development to continue. So, the peak of this cycle has already been passed. We don't see any big rupture in the third quarter, but we see an increasing weakness. And the volume reduction of 6% also includes market weaknesses.

And I do hope this answers your questions.

[Unknown Analyst]

Yes.

[Operator]

The next question is by [indiscernible].

[Unknown Analyst]

I would have asked about your expectations. You've already spoken about them, but let's look at price developments. You said at this -- in this quarter, you were able to pass on higher costs, but will you be able to continue with that? Will you be able to or will that become even more difficult to pass through those costs in the economic situation?

[Matthias Zachert, executive]

Well, Mr. [indiscernible], the context is in inflation, so we cannot do much. 26% of price increase is in Q2. In my career, I have never seen an increase of that dimension. That's new to me, and it shows how much we depend on input cost inflation, how big the repercussions are. We pass it on, and it's a good thing that we're able to do so. This clearly goes back to the strengthened portfolio 4 or 5 years. In the past, this wouldn't have been possible, but now we're able to do that. So, the transformation is actually paying off.

In the second quarter, we once again achieved a situation where despite weakening markets, as described, we were able to do this. And we will continue to try that. But if there is headwind in terms of the economy, it will be more difficult. But if we don't try, we are the ones that will be hit hard, and we don't want that. So our direction is clear. Price increases on the input cost side must be passed through by us, even though it might be more difficult when the economy takes a turn for the rest.

Was that the answer to your question?

[Unknown Analyst]

Yes.

[Operator]

[Operator Instructions] There is a new question by Benedict [indiscernible].

[Unknown Analyst]

My question is this. With regard to the site in the lower Rhine region, how are you progressing when it comes to the substitution of fuels? You are not alone. You have to closely connect to Currenta and the other sites there. How are you progressing?

[Matthias Zachert, executive]

That is clearly a part of our climate strategy. Yes, we have 3 big sites, Dormagen, Uerdingen and Leverkusen. At 2 of those sites, Uerdingen and Leverkusen, we still rely heavily on coal. And here, together with the other Chempark colleagues and friends, we're taking a fine-tuned approach to get away from coal in order to further reduce emissions, of course. There are teams that has been set up together with Currenta that are creating the necessary technical preconditions. What we would like to do over the next years is to change from coal to gas in the first step, of course, in the current situation, that is an ambitious plan, and then from gas to hydrogen. These are the plans.

And now we, of course, will have to take a very close look at how to implement these plans, whether this is a good time to implement them in the short run or whether we will wait a bit with a view to the gas price explosion. That is still a decision to be taken. But the tendency is to build, do the switch to implement the switch in order to optimize in a climate-friendly way all of our sites. That's the current state of play.

[ Mr. Arnaud ], does that answer your question?

[Unknown Analyst]

Yes.

[Operator]

[Operator Instructions] And the next question is from [ Sarah Bethahoe ], Reuters.

[Unknown Analyst]

My question is, how are the water levels in the Rhine level affecting your operations?

[Matthias Zachert, executive]

Very valid question. Well, today, the River Rhine, wonderful River by the way, is at 102 centimeters. So currently, we are not impacted. We monitor this carefully. If you recall, something like 2, 3 years ago or was the 2018, 4 years ago, the Rhine was still operationally used by us when the levels were at 67 centimeters. So there is still a way to go until it gets tighter. But as of today, touchwood everything is on track. But of course, this is something that comes on the radar, and we are monitoring it, but currently business is not impacted. I hope this clarifies your question.

[Operator]

We have no further questions. [Operator Instructions] If there are no further questions, we would like to thank you very much for participating and for your attention. And of course, we are looking forward to meeting you face to face. But up until then, we hope you have a nice summer day for today. Thank you very much all the best. Thank you for participating. This is the end of the conference. The lines will now be closed.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]