Lanxess AG

XETRA:LXS

Earnings Call Transcript

[Operator]

Hello, and welcome to the LANXESS Q2 2024 Results Investor Relations Call. [Operator Instructions] Please note this call is being recorded. Today, I am pleased to present Mr. Andre Simon, Head of Investor Relations. Please begin your meeting.

[Andre Simon, executive]

Thank you very much, Lara, and a warm welcome to everybody to our Q2 conference call from my end as well. As always, we will begin by asking you to take notice of our Safe Harbor statements. And with me today is our CEO, Matthias Zachert; and our CFO, Oliver Stratmann. Matthias will start with a short presentation and then we will open the floor for your questions.

With that, I'm happy to hand over to Matthias. Please go ahead.

[Matthias Zachert, executive]

Thank you, Andre, and a warm welcome from my side to all of you participating to our Q2 results call. I will start the presentation on Page 4 on the slide deck that we have distributed this morning. Here, comments on sales, you see that overall the market remains soft, but we have seen a slight sequential improvement versus first quarter.

On the profitability side, we went out with a pre-announcement and confirmed the numbers today, a steep increase, 69 percentage points -- 69% vis-a-vis last year's quarter, but clearly this is not sufficient, but it's a strong sequential improvement. Please take note of the fact that we are nicely advancing on our forward restructuring program. But last year we have sweated out despite a soft market, around about EUR 400 million of inventories, so that was driving utilization exceptionally low last year. And in Q2, we basically produced according to demand. And these 2 factors have been the primary drivers for a strong EBITDA improvement vis-a-vis last year, and also versus Q1.

We clearly conveyed to you that we focus on cash flow in order to further reduce the leverage, and this is driving therefore the free cash flow upwards. And I would like to be more explicit here and I move to Page 5. When we communicated to you last November, the direction we take, we clearly said EBITDA will move upwards, and we are working on this as we speak. So '24 should be just the first step in this direction, EUR 181 million definitely is not where we would like to stay. We have to clearly come back to the EUR 200 million, EUR 250 million going forward in the next few years, and we are doing everything to make that happen.

As far as exceptionals are concerned, we stated very clearly that we will move down year-on-year. We grow double-digit this year, and then we should further decrease and make a bigger step further into that direction of our target in '26. CapEx, we are still having a high amount of underutilized assets, therefore, we can, here for '24, lower our CapEx guidance further to EUR 330 million. And most likely, we will remain in the EUR 300 million range also for 2025 and then gradually move into an area of EUR 350 million to EUR 400 million.

On working capital, it remains definitely something that we would pursue further. The assumption is, I think, a reasonable one to assume that working capital to sales will go down further in Q3 and Q4. And as far as interest is concerned for the next year and this year, definitely you can assume that we will also go into the direction of the guided number that we show on the slides. So cash flow if all areas run according to plan, you should not be surprised that our cash flow goes strong northwards in the forthcoming years.

Page #6 and 7 show you the sequential improvement at some transparency that we've started to give you in the last 2 quarters. So also today we would like to shed more lights on where we had improved vis-a-vis Q1. And here you see on the first slide that consumer protection despite a really soft agro industry made good improvements for Q3, Q4, please be a little bit softer in your absolute expectation, because we see difference to our statement in May that the agro industry is not going to come back in course of '24. So we expect here that also Saltigo in Q3 and Q4 will have a very soft momentum.

As a matter of fact, in Q3, we will further reduce capacities in our Ag space because we see that simply the demand by the Ag players is being reduced. Destocking has been a theme that will continue. Additives comes also -- comes back in 2 of the 3 business units, construction remains soft, hurting our big business units, Polymer Additives. And Advanced Intermediates has been hit hard last year, it's rebounding, but definitely not back to levels that you can expect from this business.

When we move to slide Slide #7, we show the all other segments, and I know that this is an area that is being followed by our analysts. So we try to give you as much as possible transparency here as well. Please take note of the fact that this segment is composed of our overhead costs, where we have massively advanced, of course, but a key driver for the improvement is our Urethanes business that is reported in the segments. Margins are strong, above 20% and will improve further. And as far as our operational business is concerned, it's a project driven business where our pipeline is filling up further and further.

And there has been some events, or one event that we have been waiting for over the last 2 years, but now it has been decided. In March, the European Commission has taken a firm action, a firm decision on a directive, which is going to ramp up from '26 onwards, and puts the hurdles high to change here certain applications that are being used, where we have market-leading positions and the technology is the best in town. So, this is a game changer. We are looking at it, we are assessing it, because we see that customers are now moving, and therefore this is a clear positive.

If we move to Page #8, you see how we look at the markets going forward or at our segments going forward. Consumer protection this year would be at best at the level of 2023. This segment was the most stable in '23. It should grow further '25 onwards, but the Ag softness in '24 holds this business or this division back from growing this year, but our view is that '25 destocking in Agro will finish, and then the segment will strive back to further growth.

Additives, here despite construction has all reasons to improve versus previous year. And of course, Advanced Intermediates is not returning to the normal profitability level but strongly rebound based on higher utilization and quite strong cost cutting improvements.

So with this, I move to Page #9 to our guidance. So despite a softer view on the agro industry, we maintain our guidance given in May. So 10% to 20% EBITDA improvement versus previous year. And as far as Q3 and Q4 is concerned, we consider Q3 to be at best at Q2 levels. I mean, we have done reasonably well. All indicators convey that Q3 momentum in the industry is softening. It's the summer quarter with quite a number of shutdowns, planned shutdowns in August, which has been always the pattern in the industry. We don't consider that this would be different.

And as far as Q4 is concerned, it has been always the weakest quarter in chemicals, and for us, in light of the fact that Q1 was for reasons that we have explained, a clear outlier to the low end. This year will be different. I clearly think and assume that Q4 would be better than Q1, but will go back to a softer seasonal ending of the year.

This is everything that we would like to convey to you, and I open up the call for your questions.

[Operator]

[Operator Instructions] Our first question comes from the line of Tristan Lamotte from Deutsche Bank.

[Tristan Lamotte, analyst]

A few questions, please. I was wondering, firstly, if you could give an update please on the Urethane's divestment and whether you still see a positive environment from a pricing perspective, given the comments you just made? And then for Q3 and Q4, maybe, could you talk about the size for Q3 of the incremental cost cutting impact, that I imagine continues into Q3? And any other moving parts that we should think about for the quarter? And then kind of by end market, are you specifically seeing weakening in areas that you can highlight in your order book? Or is it more a kind of general comment on what you're seeing across the industry? Are there any specific end markets that you would highlight changes that you're seeing quarter-on-quarter?

[Matthias Zachert, executive]

Thank you, Tristan. And, I mean, I will take the first and last question. Oliver will address cost cutting. So on the Urethane's business, feedback very clearly is the process and the project is running according to plan. But of course, you have to always look at your -- at new data points. I mean, the business is doing better than we had expected beginning of the year, and the decision by the European Union is a game changer. And we need to look at that what it means in terms of value, and therefore, the jury is out, and it's a positive situation to be in.

As far as end market is concerned, I've been specific on one market, Ag or Agro, which we highlighted as going into a different direction than anticipated in May. So that's what we change as far as all other end industries are concerned, we don't see a general economic a strong recovery. We see some improvements sequentially Q2 versus Q1. Q3, we will see some softening again. I think macro statistics are clearly conveying this as well, but there is no sudden implosion of volume activity. This is not the case, but we see some softening especially here in Europe. And I think this is being backed up by macroeconomic data. And that's basically the answer to end market setup.

And on cost cutting, Oliver will give you further information.

[Oliver Stratmann, executive]

Tristan, on cost cutting, we had announced from our forward program around about EUR 90 million we wanted to achieve in the year '24. And if we look into the basis, then we also mentioned 870 redundancies that we would have. We are far advanced, so I would say 80% to 90% of those have been signed. And I think it's a fair assumption that the number of people that are leaving the company after signing the contract rather earlier than later is higher in the beginning. So while I would be hesitant to really break down savings projections for the next 2 quarters, I think what I can allude to is that the savings are a bit more front end loaded, so the first and second quarter carry more of the savings than the latter part of the year, maybe that is of help as well in order to model the split of the savings for this year.

[Operator]

Our next question comes from the line of Chetan Udeshi from JPMorgan.

[Chetan Udeshi, analyst]

Yes. I had maybe a couple. Just thinking about your utilization improvement this year, if I'm not mistaken, I think, Oliver, you had mentioned at some point was it last quarter or the quarter before last that the sweating down of inventory last year costed you about EUR 100 million of EBITDA. Is it fair to say that it's now fully, like, in this number now in Q2, it's almost reversed or you still have that opportunity to recover more as the utilization improves further? And if possible, can you just give us a sense of where you guys are running your plants now? I think last year was below 60. Are you at least now in somewhere in 60s or maybe even 70s. I don't know, just to get a sense of that.

And just on Ag business, and maybe this is for Matthias, I'm not entirely sure of what is your peak Ag season in terms of your business because we know for your customers is typically the H1, more Q1, Q2 depending on seeds or crop. But for you, is it Q4 which is the biggest quarter of the year? Or it is actually Q3 given your lead time might be a bit more longer to supply? I'm just trying to understand whether if Q3 is weak in Ag should we just write it off or can Q4 then actually turn out to be stronger given the seasonality maybe better in Q4 than in Q3 for Ag?

[Oliver Stratmann, executive]

Okay, Chetan. Let me take the utilization question, Chetan. You remember correctly 2 things. Firstly, we mentioned throughout the last year, we indeed had a burden out of the planned and necessary severe destocking we have gone through and digesting the high priced inventories that amounted for the full year to around EUR 100 million of a burden. And you're also right towards year end last year, we were at utilization rates that were in the area of the low to mid-50s. Now with Q1 we had advanced in the direction of again being in the 60s. And when you look at the chemical industry in Germany, I think the chemical association for the industry announced something in the 70s now for the second quarter, and I don't consider ourselves here to be too different from that.

So, utilization has increased. I'd like to just put that into perspective with a longer term history of utilization rates where something that has just entered into the 70s is still extremely low. In this environment of low utilization, I think the flexibilization of our cost structures, we have proven quite nicely and indeed, the next to the forward program and our savings, the higher utilization and fixed cost absorption has helped as well, but one quarter here doesn't balance the shortfall of 1 year.

[Matthias Zachert, executive]

Yes. I would like to step in here to make the point very clear. Last year, we clearly stressed was exceptionally because demand was very bad. And in a bad demand environment, we on purpose reduced our inventories by round about EUR 400 million. So, the average of 58% utilization that we've seen in '23 is absolutely... [Technical Difficulty]

[Operator]

Our next question comes from the line of... [Technical Difficulty] Apologies everyone. There seems to be a technical difficulty on the speaker's end. One moment, please. Be on standby.

[Matthias Zachert, executive]

So I understand we were disconnected. So I continue from where we had been cut off. We will return to normal utilization in the years to come. From the current levels, which is below the industry, we are in the low 70s, we will come back again. The question is, is it going to be '25, '26. But with the normal utilization clearly and a low cost base that we've now put in place due to the forward program, it's obvious that the rebound in profitability and cash flow is strong. That should not surprise anyone.

With this I come to your question on Agro. The seasonality that you have referenced to is very similar to ours. We normally have a good Q1, and a good Q2. As a matter of fact, Q1 tended to be for our Ag business always the strongest, Q3 and Q4 have always been softer. As a matter of fact, in Ag, we had Q4 in general, the softest quarter for our Saltigo business. And this year, of course, is going to be an abnormal year as far as Ag, hence demand is concerned.

I hope with this Chetan, everything has been answered.

[Operator]

Our next question comes from the line of Martin Roediger from Kepler Cheuvreux.

[Martin Roediger, analyst]

Yes. I have 3 questions please. Firstly, on your order book visibility, it was low at the beginning of this year. Is that unchanged or is there any change in recent months for you, obviously?

Secondly, a follow-up question on your comments on the end customer industries. You say that your -- in your outlook that Agro and Construction will remain weak also in the rest of the year. And these 2 end markets represent around 30% of your group sales. So, I wonder which end markets compensate or over-compensate this headwind in volume terms? Is it automotive, chemicals, general industry, consumer goods or whatever?

And finally, a question on Envalior, your equity earnings are improving sequentially quite a bit, and you're right that Envalior benefited from an operational improvement. Correct me if I'm wrong, but this is probably due to synergies and rising utilization rate. Is the recent trend sustainable? If so, then the former guidance of minus [ EUR 15 million ] EBITDA per -- earnings per quarter for [indiscernible] net equity income is not anymore valid.

[Matthias Zachert, executive]

Thank you, Martin, for your questions. Let me address one by one, and Oliver will step in on financial comments. As far as order book is concerned, we clearly see that '24 shows more transparency and more normal pattern than 2023. We see that orders are stabilizing in all industries where destocking has come to an end. We've seen last year that customers really stepped out of quarterly ordering, sometimes completely. This is only happening now in the agro end industry and the other industry we cannot comment strong and completely full order books than we would run at full throttle. But we see that customers are coming back into regularly order patterns on a quarterly basis.

As far as other end markets are concerned, we are more positive on profitability, not because of all end markets improving, we see soft volume increase in most of the industry segments, but this is driven by destocking coming to an end, customers ordering again. And of course, we are more bullish on our side because we don't have to sweat out inventories anymore. So we can produce according to demand. Last year, we were producing below demand in order to reduce net working capital. This has changed, and that is driving profitability in Q2 and should also help us in Q3 and Q4.

On Envalior, I reference again to what I've said in May. Please look into the rating documents. There are 3 of them existing. They are published and the rating agencies that track Envalior have in their reports a clear steep improvement on the operational side. And that is reflected in the financials that we record. So that should not be a surprise. It's normal -- I mean, it's normal that the polymers industry improves like we improve. And of course, if you look into the synergy into the rating reports, you would see that strong synergies contributes as well. And therefore, it shouldn't be a surprise that also the financial line item that you referenced to on Envalior should improve this year versus last year, and that should be a theme also for next year going forward.

Any further comments on financial guidance, Oliver?

[Oliver Stratmann, executive]

It has been said.

[Matthias Zachert, executive]

Brilliant. Then next question please.

[Operator]

Our next question comes from the line of Andres Castanos-Mollor from Berenberg.

[Andres Castanos-Mollor, analyst]

Can we please have a sequential picture of volumes and prices, Q1 versus Q2 and also looking forward? Is the reason why you guide towards a lower sequential EBITDA in Q3 lower or the same sequential EBITDA in Q3 versus Q2. Is this mainly because of lower volumes or because of lower prices?

[Matthias Zachert, executive]

Well, the third quarter is normally not the peak quarter, we -- in always had -- I mean, in the sector chemicals, but also for us, a strong first semester and a somewhat softer second semester with Q4 being the weakest. You see now that on the comments I've made on the call, we should in Q3 again benefit from a higher utilization. But of course, I referenced the Ag industry, I referenced that in August, it's always the time for planned maintenance. We will have that this year as well as scheduled.

And as far as pricing is concerned, you've seen the development in Q2 versus previous year. We've given you the sequential indication, Q2 versus Q1. This theme is going to continue, but we will now not be specific on pricing and volume on Q3. This is what we will convey to you in November when we comment in detail on third quarter. I hope that helps.

[Operator]

Our next question comes from the line of Andreas Heine from Stifel.

[Andreas Heine, analyst]

Yes. Actually, 2 left. The first in consumer protection. So in general, the consumer protection end market should be more resilient, but they had also their destocking movement. Is there that you realize that the end markets are now getting faster back to normal? Or is that only improving with the general industry trends? That's the first question.

And the second is on net working capital and actually on free cash generation. So you highlighted that the ratio was 24% in Q2. Last year, if I am not mistaken, it was at the end of the year, 21%. Is that level you can reach this year again? Or have you done -- with all your efforts you have done last year, reached a level which is not sustainable towards the end?

And then what I basically want to understand whether the network and capital rundown in the second half is enough to offset the much higher CapEx in the second half, roughly a little bit more than EUR 200 million, if my math is right. And whether it's possible, as you have achieved in the first half, a balance free cash flow, so around breakeven, whether that is also what we might see on a full year basis.

[Matthias Zachert, executive]

Thank you, Andreas. Oliver will take the cash flow question, I will take your first one on consumer protection. I think consumer protection, if you take out Saltigo and the Agro industry, it follows the same theme of the other divisions, i.e., destocking has come to an end in most of the industries. So volumes are picking up, but not like a rocket, but softly improving. And this we've shown sequentially. So the business would grow on a full year basis. Would Agro be stable or even growing? We see after record results last year in Saltigo, a steep decline, because if you look at the volume decline or if you look at the -- on the segmental view where we post volume decline, it's entirely coming from Saltigo.

So if you look at the facts here, I've never seen in Saltigo a volume decline in this magnitude. It simply shows that customers are partly not ordering anything because they have stopped production on their own, sweating out inventories in the value chain. And they clearly flagged to us, they will come back, but most likely not this year. And that is giving you the indication on end industry demand on CP, consumer protection, and specifically on our Saltigo business.

And with this, I pass on the word to Oliver.

[Oliver Stratmann, executive]

Thank you, Matthias. Andreas, on the 24% working capital to sales question, you are right to assume and we mentioned that in the call before that this percentage ratio will come down as we move through Q3 and Q4, whether it will hit the 21% at year-end, I cannot guide that right now, but the direction and the focus is very clear.

[Operator]

Our next question comes from the line of Rikin Patel from BNP Paribas.

[Rikin Patel, analyst]

I just had one left. On pricing, so in the Additives and Intermediates business, you're now seeing headwinds for about a year and I suppose that's a function of passing through some of the lower energy prices. In H2, can we now expect flat or even higher pricing year-on-year, especially when taking into account some of the higher energy prices we've started to see from recent weeks?

[Matthias Zachert, executive]

Well, I think we clearly can show to you that the business is rebounding that this business has been hard hit, and '23 is obvious. We clearly stated the business was impacted due to the IT system change. We had a -- as we clearly pointed out here in Germany, like a few other companies that made ERP system changes, we were hit in Germany hard, and that was the case for Intermediates.

On top of that, Intermediates is more biased towards German production, and the German production base due to the exploding energy costs where then hitting Intermediates another time. So the business is not in bad shape this year, it's rebounding. But definitely we have seen different profitability levels here in the past, and we should see a further increase in the years going forward. But '24, I think, is the right step in the right direction. But we have to do further steps and we have to go back to fitness and running shape again. We are not there yet, but we are doing everything to get there.

[Operator]

We have our next question coming from the line of Georgina Fraser from Goldman Sachs.

[Georgina Iwamoto, analyst]

So, just 2 questions left for me. The first one probably for Oliver. Could you remind us about any upcoming refinancing needs for 2025? And if there's any early look you could give us on how to think about interest costs for next year?

And then the second question is, Matthias, you mentioned that although not falling off a cliff, there's a bit of softening of demand into the third quarter, particularly visible in Europe. Could you maybe talk about any end markets in particular that you're seeing change? And I'm specifically interested in what you're seeing in the aroma molecule market.

[Matthias Zachert, executive]

Yes. Oliver will definitely address the first one and then I come back. Oliver?

[Oliver Stratmann, executive]

Yes. Fine. Georgina, in '25 there's one EUR 500 million bond that becomes due in May. And we have mentioned in the past that we have basically pre-financed that bond already. So we have lines in place, and therefore, the first real maturity is in 2026. On interest costs, I can remind everybody that right now, we have an average interest cost of 1.0%. If we were to finance something in the future, and I will remain humble in forecasting interest rates for '25 or '26. But for this instrument, it would indeed then potentially become more expensive.

[Matthias Zachert, executive]

With this I'll take on Q3. So as far as end markets, I think I've been very clear and explicit on Agro. So if I should explain that further, let me know Georgina. But clearly, Argo was extremely down in the first half. We've seen some order intake in Q2, but we have not seen any kind of further sequential improvement in Q3, the opposite. That's the reason why we in Q3 will adjust production plans, we will reduce production for Ag end markets, because we see that our end customers are simply rather looking at '25 and no longer at '24.

[Georgina Iwamoto, analyst]

[indiscernible] Sorry, I was just hoping you might be able to say something on your other end market.

[Operator]

Apologies, ma'am. Please stay on the line. The speakers have disconnected. Please be on standby one moment. Please go ahead.

[Matthias Zachert, executive]

Yes. Georgina, where have we where have we been interrupted by the line?

[Georgina Iwamoto, analyst]

We heard up until you were saying that Agro is clearly looking weaker into the second half. And then we couldn't hear more after that. And I was hoping to hear more about any other end market.

[Matthias Zachert, executive]

There's something with the line connection provider, we will look into this after the call. So on automotive, because automotive is of course important. We see that the car industry is going for planned shutdowns in August. They will do that again in December. This is normally what they always do in Continental Europe. And we see that this is being done this year and in Q3 as well. And I think with this, we have addressed key end industries.

You mentioned aromatics specifically. On aromatics being part of our Advanced Industrial Intermediates business units, aromatics is clearly rebounding compared to last year because of higher utilization. Also the aromatics value chain had too much inventory, and we have reduced that. And therefore, we produce here also according to a normal plan, As a matter of fact, the aromatics are improving more visibly. But if you have any further question on aromatics specifically, please let me know.

[Georgina Iwamoto, analyst]

That's great.

[Operator]

Thank you. As there are no further questions, I will now return the conference back to Mr. Matthias Zachert, CEO.

[Matthias Zachert, executive]

So, if there are no further questions, then we'd like to conclude the conference call. Oliver, the IR team and myself will start roadshowing from Monday onwards. So looking forward to see you on the road. I would like to be very clear, we do everything in order to improve cash flow, to improve profitability. We want clearly to show that to you in the second half of this year. And we will go further strides '25 and '26, and we are looking forward to sharing this. We had 6 tough quarters. Now, it's the time to come back. Thank you very much and see you soon. Bye-bye.

[Operator]

Thank you, sir. This now concludes our presentation. Thank you all for attending. You may now disconnect.