LANXESS Aktiengesellschaft (LXS.F) Q3 FY2025 Earnings Call Transcript & Summary

Good day and thank you for standing by. Welcome to the LANXESS Q3 2025 Results. [Operator instructions] And please be advised, today's conference is being recorded. I'd now like to hand the conference over to your first speaker today, Eva Husmann, Head of Investor Relations. Please go ahead.

Thank you very much. And also from our end, welcome to our Q3 earnings call. As always, we have our CEO, Matthias Zachert; and our CFO, Matthias (sic) [ Oliver ] Stratmann, here today. Please take notice of our safe harbor statement, and 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, sir.

Thank you, Husmann, and welcome, everybody, to Q3 '25 LANXESS conference call. I start the presentation on Page #5, where we give the key updates on financials on EBITDA being the first to be addressed. We have a decline to EUR 125 million compared to last year, partly driven by portfolio effect. We have divested the Urethanes business beginning of the year, but predominantly due to volume decline in the third quarter, stemming from low demand in end industries, competitive pressure from Asia, and also due to respective uncertainties also in the United States from tariff situation. Volumes declined by 6.5%, leading to utilization, which is now around 67 percentage points, clearly too low to achieve good underlying profitability. As far as net debt is concerned, we managed that tightly. So we kept it stable compared to second quarter, as you can see. And one driver behind that is also the working capital management, which has here a positive contribution, but mainly stemming from better collection of receivables, but also lower sales driving receivables down. And noteworthy, of course, what we've communicated end of September, just for the fact that this was completed in the third quarter was the right to exercise our put option in Envalior. Now let's turn our attention to Page #5. Overall, the economic situation in the chemicals sector in the world has not changed, but Europe is under heavy pressure. And for that very reason, we have now started a further cost reduction program, which is yet in the negotiation with workers council and unions. The overall amount we are targeting is EUR 100 million, also coming from further streamlining of our admin functions. And in order to support our target here, we have globally gone for a hiring freeze until further notice. And due to the sluggish performance in group profitability, we have, of course, also released our provisions in third quarter for variable pay as far as managerial grades are concerned. Page #6 shows you what we have done in order to counteract the current weak economic environment. As you recall, '23 was a tough year for the chemical sector already. At that point in time, we started the FORWARD! program. This is largely implemented as we speak. So by end of '25, the headcount reduction and cost reduction will be in place. Summer this year in Q2, we gave reference towards production efficiencies that we will go for, especially through the site closure at Widnes, U.K., closure of the Hexane oxidation in Uerdingen and product optimization, production optimization in our El Dorado site. So this is something we are implementing and working on. Hexane oxidation has gone off stream. The witness is being prepared and the same holds true for El Dorado plants. What we are now working on is the EUR 100 million restructuring program basically coming from reduction in personnel and related costs. This will be done through the ongoing demographic change we have in Europe, but also focused redundancy packages. So we will use both tools as we have done in the past. And we will also adjust processes going forward in order to get further agility and also assuming an underlying operational level where you simply need to be more competitive in order to regain power once momentum and volumes return. On Page #7, this is how we look into next year. I wouldn't say that the tariff situation will improve 2026, but there will definitely be -- or that definitely is a too strong word in current times. But our assumption is that the high uncertainty on tariffs will somewhat soften. In many cases, there is some kind of agreement that's being found. So we are not anymore in the full escalation process, but somewhat on the direction, at least this is our view that people find bilateral or regional agreements. That should give a little bit more planning certainty for all of us and, of course, for all of our business units. Our assumption clearly is that the government stimulus that has been decided by the German government, and we see that they are working on it, should be visible in 2026, potentially more in the second half than in the first half, but we see now that the respective regions and states within Germany are already working on it, and therefore, it will still take some time. But our assumption clearly is that this is going to ramp up in '26 for the German economy being clearly a positive. Business units that definitely should benefit because they are -- all of them are having business in a visible way in construction, for instance, is Advanced Industrial Intermediates pigments, obviously, but also our polymer additives where construction plays a major role and the same holds true with our biocides business. And therefore, these 4 business units are the most obvious candidates for benefiting from infrastructure stimulus. But now we also have antidumping, which should be mentioned. In many of our business units, we are working on specific cases, value chain by value chain. By now, however, I can fortunately confirm that 2 cases have been positively decided. One happened recently in October for European adipic assets, sorry, for adipic acids, not assets. So here, the European Union has decided on a European protection of the respective value chain. As we are playing in this with an Advanced Industrial Intermediates, we definitely have here a better position, even though it needs to be mentioned that notably from China, substantial capacities have been sent to Europe pre the decision-making process. So we currently, I think, in the next 3 months, we'll have to absorb the landed goods from China. And then from '26 onwards, we will start seeing that this antidumping case plays in the right direction. Also on the phosphor chloride ester products, we have a positive case decided for the European industry, and let's see what further decisions are going to follow. What we also take note of is market consolidation. So at the end of the day, competitors also in our value chains step out. That's beneficial because we clearly see that our business units have strong footprint where we play. We've always alluded to the fact that most of our business have very strong leadership positions also through a good technology and good plant. So they have everything to be the last man standing. This definitely holds true for Advanced Industrial Intermediates, where we've seen that competitors have stepped out like on hydrofluoric acids. We are clearly here the strongest in the markets. And therefore, my assumption is this plant will make it to the end and then take a good time afterwards. But right now, we are fighting and make sure that we are here in the market to stay for good. The same can be said on Rhein Chemie with a more modest tonality, but also here, we are in the end consolidation in the Western Hemisphere with our accelerators and antioxidants. But also in neighboring value chains, of course, we know that from our former business unit, polyamide, which has been -- is now part of the Envalior also here, for the Envalior business, there have been notifications by competitors of Envalior that they are closing capacity like fibrants recently went out and communicated in October that they will close their caprolactam capacity. And we know that Envalior has a very, very strong capacity in Antwerp and being world scale. So at the end of the day, that will be positive for the ones that will be running in a more consolidated market. So we see that in crisis times, markets consolidate. And at the end of the day, the ones that stay in the market take the benefit. Ladies and gentlemen, let me now come to outlook, described on Page 8. As far as the macroeconomic environment is concerned, I think you all take note of the fact that economic environment is volatile. High uncertainties persist. And for that very reason, let's focus now on LANXESS. We are now adjusting our guidance to the lower end of the previously mentioned EUR 520 million to EUR 580 million. So that's what we are seeing at this point in time. I would like to mention, of course, versus previous year, urethane is out. Q4 is normally seasonally weaker than Q3. What you should take into account, of course, we look into our business when we make our guidance. We are now beginning of November. So we look into the books of October, November. Based on this, we provide our guidance to you. So this is not out of the blue, but with respective analysis and business judgment. And based on this, we are guiding around the lower end of EUR 520 million. Ladies and gentlemen, this is what we would like to communicate to you. And now we are open to your questions. Please go ahead.

[Operator instructions] We will now begin with our first question. This is from Christian Bell from UBS.

I think the extra context around the competition in Asia was really useful. And I guess that's where I kind of want to start with my questions. I have 2 that both relate to competition coming from Asia. And the first one is, are you able to indicate what proportion of LANXESS' business you would consider relatively insulated from Asian competition? For instance, sort of what product lines do you feel have a stronger competitive moat or less direct exposure to Asian imports? And if possible, could you provide a rough percentage of the business that represents? And then the second question, following from that, given the competition from Asia, what type of resolution or policy change would LANXESS need to see in order to restore competitiveness in the intermediate segment and your other segments? And once resolved, how quickly do you think LANXESS could regain lost volumes or margins in the affected business units?

Well, Christian, let's take that step-by-step. I think if you -- on Asian competition, I think if you look into our 3 segments, you somehow can take the analysis from there. The business which has been most impacted is intermediates. You see here the profitability decline. You also see the volume decline. This business is more volume-driven relating to inorganic pigments, but also AII. So here, of course, we are in direct head-to-head competition with Asia and here notably China. If you go to the intermediate, sorry, into the additive space, this is the segment which is impacted, but not as heavily as Advanced Intermediates. So impact here clearly is there. Here, the impact, however, is also coming from tariff situation. A lot of our flame retardant business from El Dorado, of course, uses the market in China. And I think you know very clearly that here, the escalation on tariffs is at its toughest and therefore, exporting flame retardants from United States to China is not an easy sell. So additives is being impacted, but not the same way as intermediates is, which, of course, is by and large, operating from Germany, where energy prices, et cetera, are not competitive. Now the division that has been impacted at least is Consumer Protection. That's the strategic direction that we've decided on and executed on. So Consumer Protection, of course, sees competitors here and there, but not at the same magnitude. So I think this gives you a very good indication on exposure to Asian competition. But Christian, let's face it. We see Asian competition everywhere in our German industries. We see that in the automotive industry. You've read Chinese competition being mentioned by the capital goods industry. There was an interview by a medicine company producing medical devices, Braun Melsungen, a German company that also despite producing medical devices mentioned stronger competition because many, many, many of the goods that China shipped to United States are currently being shipped to Europe. So we see extra volumes due to the tariff escalations ending up in the European markets. And this is in Q2, Q3, these have been the strongest quarters where the incremental volumes were visible. So you see that not only in chemicals, you see that in end industries as well. Now your second question was alluding to political changes. What does it take to restore our competitiveness? Well, we are in dialogue with politicians at the level [indiscernible] very clearly, where we definitely find support. We definitely address our points also in Berlin, where more and more our points are understood. It takes apparently a little longer in the European Union, but all of my peers in the industry, we are very active on that end. I know that from the -- my colleagues in neighboring industries, automotive industry, capital goods, we are also very often present in Brussels to make things aware there. But in all clarity, Christian, we have decided now to simply go for regaining and restoring our competitiveness ourselves. That's the reason why we take further measures on the productivity side. So we will again cut costs. We are not cutting capacity. We will streamline here, notably the functions in order to keep the operational profitability where we want it to be when volumes return. But clearly, the organization will be another -- will go through another lean efficiency program. And therefore, that's the way we want to restore competitiveness because when we take out another EUR 100 million, that will be eventually a higher competitiveness for our product base, and that's our way to go for restoring our competitiveness. I hope that clarifies all of your questions.

Next question is from Thomas Wrigglesworth, Morgan Stanley.

A couple, if I may. Firstly, the take-or-pay contract that you call out in Saltigo, does that have implications for 2026? Is this basically an early termination of an agreement that means you book the profit now, but then you don't have the business or you've got a fine replacement business in '26? And my second question is around free cash flow for 2025. Clearly, working capital is unwinding this quarter versus last year where it was up. So obviously, you're trying to make the working capital more efficient. But what can we expect from a full year basis? And what other levers can you pull?

And of course, we will take both of your questions, I will take #1 and Oliver will take #2. The take-or-pay is in the business Saltigo. We've every now and then stressed that we here go for -- I mean, this is custom manufacturing business. So specific projects for specific customers. And in many of our contracts, we have take-or-pay clauses. So when a customer goes under a certain level of volume, he has to pay if he doesn't take. And this is something that was triggered. So of course, leading to everything but good volume momentum, but we get an equalization or protection for the lower volumes through the take-or-pay clause, and that was -- that's the business model and that was beneficial in the third quarter. And for that reason, we've mentioned that. We have this in a variety of contracts that is part of the business model. And it protects us, of course, in a year like 2025. And then I give the words to Oliver on free cash flow. Oliver?

Well, on free cash flow, you've already hit the nail on the head that working capital plays a major role here, provided that we're going into Q4 with the typical weak seasonal business momentum. If you look back through the last years, what you've seen is the cash inflow that comes from our typical seasonality in terms of working capital. You know that we have typically our maintenance turnarounds in the fourth quarter and then consume the working capital, bringing it down. You can also expect us to continuously work on and deliver on cost savings. And of course, we'll be remaining very disciplined in terms of CapEx. Now to bring it down to the point, and I will give a very comparable answer to the question compared to the last 2 years when I was asked that we will be very diligently putting an eye on free cash flow generation and working into that direction. If you look at the inflows in the last fourth quarters of the last years, they were between EUR 70 million and north of EUR 200 million. Whether at the end of the day, we'll be able to show a positive free cash flow for the full year, we'll have to see. But I can assure that we put everything we have into that direction.

And just as a follow-up, Matthias. So this is always going on, right, in the Saltigo business, this take-or-pay where customers are probably -- it doesn't feel like this is a one-off, but more of a -- this is just the nature of the business?

Well, we've done always long-term contracts with -- on bigger projects with our customers and long-term contracts always with take-or-pay. So this is nothing abnormal. But of course, the current demand environment is somewhat abnormal. And that's the reason why for -- it's not the first time, but it has not happened that often that customers decided for pay rather than take. And that's the reason why we stressed that in this quarter.

Next question is from Martin Roediger from Kepler Cheuvreux.

I have a question on the bonus provision release, which was a low to mid-double-digit euro million figure, if I'm right. A, is there a chance for another release of bonus provisions in Q4? B, if so, is that upcoming release of provision already baked in your guidance? And c, what has been the total budgeted bonus pool at LANXESS at the beginning of the year? Maybe in that context, you write in your handout that the release of bonus provisions has positively impacted the segment Consumer Protection. Did other segments benefit from that release as well? I'm asking because I see that the reconciliation line is in Q3 less worse than in Q1 and Q2. So I wonder, is there also an effect here as well? Or is there another reason why the reconciliation line had a relatively low loss in Q3?

Martin, all valid questions, and I hand all of them over to our CFO, and it will be in good hands with them. Go ahead, Oliver.

Martin, thanks for your 2 or 3 questions. So you've quoted directly the low to mid-double-digit million amount. And I will start basically from the back with the other segments. What you have to imagine is, first of all, everywhere where our management people are working, they are eligible to a bonus if the criteria are met. Hence, if the criteria are not met, wherever they are working, the release of the provisions will be shown. -- because they are also built in these line items. So you will see them basically not only in every segment, but also in every line item. And with regards to the other segment and the development now and our guidance for full year, the point is for the last -- for the first 2 quarters, provisions have been made. And then the provisions that were made all the way to the 30th of June were released. Hence, our corporate reconciliation segment looks quite substantially improved. And for the fourth quarter, I would be rather expecting something that is more comparable to the amount of expenses we have had in the first or second quarter. And that then if you sum it up, leads to the amount that we are expecting there. for the full year. Then you asked whether there's going to be another chance of a release. You know that our variable compensation is based on several criteria. Most important one is EBITDA. We have already mentioned that this has been released. So I'm not expecting any further release, but you have, of course, the fact that there is also no building of provisions, which in the fourth quarter is one building block that also flows into our guidance.

And the next question is from Andres Castanos-Mollor from Berenberg.

Just a follow-up on the all other segments line, which is essentially the question. So you explained well the improvement there for the -- because of the bonus release. I wanted to ask if there is other corporate costs that are evolving favorably year-on-year and also on the current hedging impact that we're seeing this year. I assume that's a benefit. Can you compare it year-on-year, please?

That will be all addressed by Oliver.

Yes. On the corporate costs, indeed, our efforts to take out costs to save within FORWARD! and the newly announced program will not only come from business, but we will have a clear focus on our admin functions. We are taking out costs here in basically every function. The larger functions will, of course, contribute more. And you will -- you also know that I've been talking about the implementation of our new SAP program for quite some time here. By the end of the year, we will come to an end. So next year, you will also see savings coming from this one. In terms of the hedging, indeed, you do see a relief because we have a rolling hedging approach. which I would rather not quantify with a 1 million number but guide you to the rule of thumb in terms of the overall impact, which still is there when you look at the weakening of the U.S. dollar and that rule of thumb was EUR 3 million per cent change in the exchange rate, and that is valid also going forward.

Next question is from Jeremy Kincaid from Van Lanschot Kempen.

I also have 2 questions on the antidumping. Firstly, could you -- there were obviously 2 positively decided cases over the quarter. Are you able to quantify how much revenue as a percentage of your business that those 2 decisions could impact? And then my second question is you also mentioned that there's some cases in execution. Are you able to call out which cases could be most material for your business or which would be the largest impact to the business if successful?

Well, definitely valid questions. On the first one, I can tell you that is for the 2 business units being positively impacted by this. I mentioned AII and Polymer Additives. I will not flag to your revenue, but I will flag to you that this is on the EBITDA side, low double-digit amounts, respectively. So it is something that we see. So that's on the first one, antidumping being decided upon. On the potential execution, I have to clearly state to you this is competitive intelligence. This is not for us, favorable if we speak about that. And therefore, we keep it to our chest.

Next question is from David Symonds, BNP Paribas.

Just one for me, please. And it's a follow-up on the Saltigo take-or-pay. Are there any shared services between Saltigo and Advanced Intermediates that might mean that the lower volume in Saltigo, which triggered the take-or-pay clause also affected fixed cost coverage in Advanced Intermediates? Or are those businesses totally separate now? And then maybe just if I can squeeze another one actually on the same subject. Was the take-or-pay payment for lower volume in the third quarter or for lower volume in the first half?

Well, that was -- I'll start with the second one. That is respectively for the running quarter. On the second question. And now on the third one, let's be very clear, we are a group. We are playing together here. If one business unit makes take-or-pay contracts with the other business unit, goodness, we are not in this -- we are not working like that. Saltigo is a very strong technology chemical player. Of course, Saltigo every now and then when we need a need for specification for analysis, extremely sophisticated chemical products. Internally, some business units make use of Saltigo. But within the own group, within the own legal entity here in Germany, we don't go on a managerial basis on take-or-pay. That would be completely bureaucratic. So take-or-pay, we have with external parties, but not with internal parties.

Yes. Sorry, just to be clear, I meant -- because obviously, the Saltigo business used to sit within Advanced Intermediates. So actually just meant are there any shared assets that would mean that if you run a lower operating rate at Saltigo, it might impact fixed cost coverage in Advanced Intermediates.

No, Saltigo has its own assets. So here, we are speaking about small vessels, and its custom manufacturing business. So it's a very dedicated focused value chain. And intermediates, we are talking about big vessels. So there is, again, some help here and there on research application know-how, et cetera, on finding solution and chemical reaction, but the one business unit Saltigo does not produce for Advanced Intermediates. That's not the case.

[Operator instructions] We will now take our next question. This is from Tristan Lamotte from Deutsche Bank.

First one, I'm just wondering kind of high level, with the European chemicals industry under pressure. Do you think that there could be significant knock-on effects from the closures of capacities of competitors given that chemicals is so interlinked and the companies buy from each other. So do those ongoing closures decrease the efficiency of the supply side in Europe?

Well, definitely, we see that the weakest capacities will vanish. And therefore, I alluded to earlier to the vibrant caprolactam capacities. We always stressed when we were owner of the polyamide value chain. We always stressed as LANXESS being 100% owner of the polyamides that our Antwerp caprolactam plant was one or is one or was one, I referred to when we were owning it, of the most competitive ones in Europe. And we always flagged that BASF Antwerp was also extremely powerful in its setting. Thus clearly stating indirectly that all remaining Capro plants in Europe would be less competitive. And now looking at today's situation, the 2 fibrant plants, I think DSM always mentioned that they were at a capacity around 140, 150 kt, whilst ours was under LANXESS running at 230 kt, BASF was known to be also above 200. These are the most competitive couple sites, and the smaller ones vanish. And if you have less competitors, your position gets even stronger when volumes return. Right now, the market is long. But when volumes return and markets turn tight, the less competition you have, the better you shine. And therefore, the crisis that we currently have cleans up the capacities in the European setting, the strongest survive. So you have to make sure that you belong to the strongest. And with the setting that we have, I clearly see that most of our plants are world scale. We are in Europe in a good position. And when the consolidation happens, it will eventually be beneficial to the ones that are still playing in the market. And that's how I look at consolidation.

And maybe a second unrelated question. I was just wondering how the agriculture business performed in the quarter. And how do you see conditions for that business developing over the next few quarters? Are you seeing pricing pressure there?

Well, we have -- this quarter, we had a mixed picture. We saw companies last quarter sending positive picture and then 1 quarter later, completely changing their view on the market. So we overall see that volumes in the agrochemical markets have stabilized and is improving, whilst pricing pressure in the market is still there. So that's, in a nutshell, how we look at the agrochemical markets. But on our order book, we've been very clear. We currently still see a very soft order book, and that's the reason why we keep the modest tonality on Agro.

And I would now hand the conference back to Matthias Zachert for closing remarks.

Well, operator, thank you very much for your moderation. And to all of you, thank you very much for participating and listening to our Q3 earnings call. We will start road showing now, and Oliver and I will look forward to seeing you on the road, answer your question, and we send our best regards from Cologne. Bye-bye from LANXESS.

Thank you. This concludes today's conference call. Thank you for participating, and you may now disconnect.