LANXESS Aktiengesellschaft (LXS.F) Earnings Call Transcript & Summary

Good afternoon to everybody. Good afternoon to everybody from Cologne, and a warm welcome to our conference call regarding our important strategic decision to exercise the right to offer for the sale of our shares in Envalior. I have our CEO, Matthias Zachert; and our CFO, Oliver Stratmann with me. Today, we do not show the presentation on the call, so please be so kind and view the presentation, which we have published on our website. And always, please take notice of our safe harbor statement. And with that, I'm happy to hand over to Matthias for a presentation and afterwards for your Q&A. Matthias, please go ahead.

Thank you, André. And ladies and gentlemen, I welcome you to our conference call, and I'll start the presentation on Page 3. Just to wrap up on what we have done roughly 3 years ago, Advent and LANXESS together formed one of the strong players in the polymer industry, especially on polyamide 6, with some further products gum on specialties, which notably came from DSM and some polyamide 66. So all in all, this was -- this is one of the leading powerhouses in the polymer industry. And we were happy at that point in time to set up this powerful joint venture and with strong leadership by 2 shareholders, strong management team and all the power that this joint venture can unfold in the years to come. Important step, of course, to improve also the business profile on the LANXESS side. With the first closing, we announced that we expect proceeds of EUR 1.1 billion. Eventually, we got EUR 1.3 billion, which compares to at that point in time, an evaluation by capital markets between EUR 600 million and EUR 700 million. So I think the first closing was already all in all, a good closing. However, we kept 40% of the shares in the joint venture because we consider that after synergy implementation, further value could be achieved for both shareholders and thus for LANXESS. End of this month, the lockup periods will end. And this is the reason why we have decided to make use of our optionalities and has given or have given respective notification to our partner today before end of September, the notification period would have expired. On Page 4, we show you the strategic rationale that we have at that point in time taken in order to form the joint venture and to let go of the polymer business. We clearly wanted to reduce further our automotive exposure, which used to be a significant portion of our turnover and is now by around about 10%, including aviation, we are now a 10% sales exposure at group level. We went down from 4 to 3 segments. We have, in the meantime, reduced our net debt from EUR 3.8 billion to EUR 2.1 billion, and we clearly stressed that we will deleverage the balance sheet strongly. And I think we are here going in the right direction. And we not finish there, but will further improve also thanks to the announcement we've made today. As far as CO2 emissions is concerned, we year-on-year have walked the talk and improved clearly in our sustainability metrics. Now let's come to what we have decided today. Let's give you -- let me give you further clarity on our way of exiting Envalior going forward. Let's recap on the left-hand side of the slide, we show the first step or the closing that happened a few years ago. At that point in time, we, of course, achieved the proceeds of EUR 1.3 billion. That was the first installment, which was announced already at the time of the signing when we said that our business was evaluated at a multiple of 12, and at that point in time, reflect a total enterprise value of EUR 2.5 billion. And at that point in time, when we announced the transaction, we also said that EUR 1.3 billion after the first closure leads to EUR 1.2 million residual value. The reason for this announcement was very clear as we stressed that. And today, we give you further clarity in the simplified structure that we show here. So the EUR 1.2 billion base value, of course, need to be evaluated according to where the business actually performed but we locked in 3 years ago, the EUR 1.2 billion, which at that point in time was reflecting the 12x multiple. And therefore, this put option now will no longer be rediscussed on multiples or on net debt levels, the cornerstone is the EUR 1.2 billion. And for the ratio or the percentage of the EUR 1.2 billion, the achievement of the last 12 months EBITDA in percentage of the signing EBITDA is important. Signing EBITDA being shown on Page 9 of this presentation being EUR 505 million. So the mathematics for calculating the value of the put is as simple as that. Now when we come to exercising the put option, the first optionality, the window opens, April '26, and at that point in time, it is subject to financing. Should our partner, Advent, not be -- we'd not be in the position to finance respectively. Then with further time after 2 years, we can again put our optionality. At that point in time, without conditions for 50%. And without conditions means without conditions. I now would like to bring your attention to Page #6. So here, we give the time line, and we show September 25. This is today, we have given notification on the fact that we exercise our puts. By April 1, '26, our partner has the chance to then come back to us and give us a feedback if they will follow our respective put optionality. If they cannot show and demonstrate respective financial capabilities, then a period of 2-year starts. There would be in '27 also the possibility for Advent to pay at the same conditions of April '26. And to call then on their side, the participation that we hold in value for the same conditions as we have exercised April 1, '26. If this does not happen, then by April '28, we can decide on our own, again, for the hard puts on 50% of the shares we hold. Should this then be exercised, the remainder would then continue Envalior, and we would then leave the rest together in an exit with Advent. I would like to stress that this is without the shareholder loan we have provided to Envalior. This, of course, needs to be added to the proceeds equation with the time line mentioned on Slide 6. Ladies and gentlemen, I would like to sum up. I think we have here demonstrated in this document that the contracts nearly 3 years ago was well negotiated, thoughtfully negotiated. We had a clear predetermined exit mechanism envisioned and executed. We clearly delivered on our strategy that we have conveyed to you 3, 4 years ago. And I think we have here in this contract, further upside valuation that is offered in the future. And with this, ladies and gentlemen, I hope that clarification is given. You can assume that we have taken all legal respected advice in order to prepare this documentation and to go attack in the communication as this is very privileged information, and we are happy that we were able now to share with you the information that has been given in this presentation. With this, I close the presentation on my end and open the call for your questions.

[Operator Instructions] We are now going to proceed with our first question. The question has come from the line of Martin Roediger from Kepler.

Two questions. Firstly, so the first possibility to sell the 41% stake in Envalior to Advent is in April 2026 and is subject to the financing by Advent. I struggle to understand how the 8 biggest private equity company in the world with EUR 53 billion asset under management does not get any financing. Can you help me how Advent can get around of this topic so they can delay the purchase or can delay your put option? And secondly, regarding 2028, where you have the second put option where you can sell half of your 41% stake regardless of any conditions. So assuming you have done so, when are you able to dispose the remaining stake in Envalior? And is that just in a joint exit? Or is there a different time line that you can sell the final 50% stake to Advent later on?

So Martin, let me make the comments on your first and second questions. On the first one, well, you clearly make the points. Advent is one of the biggest private equity companies in the world, highly reputed and very knowledgeable in the chemical space. They have proven this in the past several years, if not to say, decades. But here, it's totally in their hands. So we have now as a partner exercised our put optionality and now Advent is to answer. This is as far as your first question is concerned. On your second question, I mean today is all about the exercise rights we have '26 and '28. We are, by law, following external, internal legal advice. According to law, we have to communicate this information to the capital markets. As far as all other communication is concerned, this is, again, privileged. And for that very reason, let me refrain to what I've said before. Of course, we have an unconditional exit rights of up to 50% of our shares that we hold at this point in time. And on the rest, I've only said and I stick to this, we will go for a joint exit.

So we are now going to proceed with our next question. And the question come from the line of Jeremy Kincaid from Van Lanschot Kempen.

My first question is just on the EBITDA of the EUR 505 million for Envalior. Is that how much you think that the company will make over that time period? Or where does that number come from? And maybe if you could provide some context around what the rating agencies think that number might be over the same time period. That would be very helpful. And then also, if you could just give us a little update on what you think you might do with the proceeds if this deal goes through as planned?

Yes. Well, let me address that one by one. I would take the second, third question, Oliver, you would like to comment on the EUR 505 million?

Yes, Jeremy, I think that number resides back from the time before you started covering us when the deal was set up. That was the initial EBITDA. That was the basis basically for establishing the JV. So it's a reference point right now. And any LTM last 12 months EBITDA as a basis would be simply calculated as a percentage of that EUR 505 million. And in the presentation on the final -- the last chart, you will find an exemplary calculation here, I think it's really pretty easy and pretty straightforward.

Yes, I hope so. I mean, we try to clarify as much as we could in line with the legal requirements. Now I would like to address your second and third question. You asked for information on the rating agencies. I give you one, but you can look at Moody's report and Fitch report as well. I guess just referenced to a rating that is even public, I understand. So it can be the Googled or looked at in the Internet, Standard & Poor's issued in December last year and the expectation they are on yearly numbers. The expectation for '25 is EUR 380 million to EUR 420 million. So that's the expectation for full year '25. I referenced also the numbers for '24. Here, the number of 300 tenders made. I would like to state that the EBITDA number that we are addressing is an EBITDA number, of course, with adjustments like EBITDA pre. And now I come to the year-to-date numbers in our P&L that we have communicated. And if you look into our numbers, first half '24 shows equity number. So consolidation of affiliates in the equity consolidated line of minus 73%, the same position in the first half '25, again, following the line at equity consolidation is minus 59%. So you see that operationally, in our accounts in value improved by 20%. Now 20% improvement on EUR 310 million looks pretty similar or close to the numbers for December '25 of the Standard & Poor's rating reports, just as a mathematical based calculation of public available numbers. Now as far as proceeds is concerned, we are not there to have the proceeds. But today, I think Oliver and myself would clearly look at deleveraging the balance sheet has clearly highest priority for us. The more money we get, then, of course, balance sheet at some point in time are cured. And then you can bet we would consider a strong share buyback. Next question, please.

We are now going to proceed with our next question. The questions come from the line of Christian Bell from UBS.

I just have one really. Just -- are you able to sort of clarify who determines whether Advent has the capital to complete the transaction, is the assessment entirely within beer control? Or are there other safeguards in place?

Well, pretty straightforward. We have our contractual rights. So this is not just a normal process. I think you can see here in this what we have communicated, this is well thought through. And every answer given to us, therefore, expects from a big private equity company will therefore be well thought through. This is not just a decision to take like this. This will be a decision following highest professional standards.

So in other words, they would need good reason to be able to show that they don't have the financial capacity to be able to execute the transaction.

Well, I think I just allude to what Martin Roediger has said, this is a blue-chip private equity funds. They have a contractual obligation, and they will be, of course, tracked by our analysts and investors worldwide. If they follow what's they have -- what they will have to communicate. So of course, now we have to wait for Advent's answer, but they, of course, will have to look into the contracts and see if they can do what they have contractually committed to.

[Operator Instructions] We are now going to proceed with our next question. The next question comes from the line of Andres Castanos-Mollor from Berenberg.

Congratulations on the announcement. So what mechanisms do you envisage back then when you signed the deal to make sure that whatever Advent entity that was linked by this contract was doing its best efforts to raise the debt. And do you -- can you name the entity? And do you have an idea if what is the capacity to do that as at today?

Yes. Let me take that question, Andres. The entity is an entity of Advent and in the typical investment entity. And in the contract, of course, there are certain obligations and documentation duties for them to obtain sufficient financing. Hope that really helps your question.

Yes, it's not in value, the operational company. So this is a holding company of Advent.

Right. Okay. I've got what I wanted. Another question, if I may, please. On the 20 -- on post 2028 exit. So that would be not subject to any put or any other mechanisms that would be most likely a joint exit when it's a final exit of the to co shareholders? Or is there a room for a different exit on different time line?

Andres, I would say the following. We have not really gone into detail, but your assumption here is a reasonable one.

[Operator Instructions] We are now going to proceed with our next question the questions come from the line of Anil Shenoy from Barclays.

Sorry, my questions have been answered. I meant to take myself back out of the queue. I'm sorry about that.

No worries. All good, Anil. Any further questions, operator?

Sure. We are now going to proceed with our next question and the question's come from the line of Tristan Lamotte from Deutsche Bank.

The release mentions Advent -- they're required to acquire all or half of the LANXESS shares if they had the financing in April 2026. Are they required to buy all of them? Or could they choose to buy 50% even if they have the financing?

So contractually, we have a very straightforward situation. It's exactly 50% or 100% or 0 if they cannot get the financing. That's what the contract says.

We are now going to proceed with our next question. And the questions come from the line of Michael Schaefer from ODDO BHF.

Two questions. I'd like to come back on your Slide 9. You've made pretty clear how the calculation looks like if EBITDA of Envalior last 12 months drops below EUR 455 million or ever on the opposite end. So if we find out basically that the EBITDA is going beyond EUR 505 million, it's rather unspecific what kind of further upside potential you are talking about. So is this kind of the same kind of pro rata calculation to the upside? Any clarification would be helpful. And my second question is pretty simple, maybe. Why now? If I recall correctly, you basically stated in the past that the whole idea of the JV creation, was not only about creating a world champion, as you alluded to, but also to generate significant synergies. And if I understand this correctly, we are in the middle of this process. So the question is, wouldn't it be wiser to wait longer to see this -- the synergies coming through entirely? So any reasons,, any remarks on your side would be helpful.

Yes. very well understood. So let me brief on both questions. On the first one, 505, I mean we don't want to overload the information provided to you. I think we show very clearly what the algorithm is, so to say. The likelihood today, if you follow rating reports, the likelihood today that we are above the EUR 505 million in the current market environment is not that high, therefore, we clearly specifically focused on where the likelihood rather is, and that is below the EUR 505 million. That's how you should read our communication. And of course, if the joint venture does better than EUR 505 million, we clearly say we will take a benefit as well. Now, why now? We have not decided this on a spontaneous basis. We have looked at this from the legal side from a business side, for I would say, several quarters. And if you follow the rationale that I have conveyed in because of the call, of course, we have to evaluate balance sheets. We have to think about market environment, about fewer market dynamics. And I think in the -- in what we have decided today, we have a balance of all, including future upsides where synergies and marketing -- market environments are more benign. So I think the decision we take today and communicate today is a very balanced from all perspective, and that's the reason why we've decided today to exercise our option in due course today. That's it, Michael.

[Operator Instructions].

Thank you very much to all and see you in due course. Best regards from Cologne, bye-bye from LANXESS.

This concludes today's conference call. Thank you all for participating. You may now disconnect your lines. Thank you, and have a great day.