LANXESS Aktiengesellschaft (LXS) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. Welcome and thank you for joining the LANXESS conference call. I would now like to turn the conference over to André Simon, Head of Investor Relations. Please go ahead.

Thank you very much, Judith, and a warm welcome to everybody on the phone to our Q3 conference call from my end as well. I hope you and your families are fine and healthy. As always, I have our CEO, Matthias Zachert; and our CFO, Michael Pontzen Pontzen with me. Please take notice of our safe harbor statement. We assume most of you have had a look at the presentation already. Therefore, we have decided to only briefly set the tone today with Matthias highlighting some key aspects of the quarter, so we dedicate more time to your questions. With that, I'm happy to turn it over to Matthias. Matthias, please go.

So ladies and gentlemen, a warm welcome from my side as well, and I move to the one-page key message slide and would like to provide a little bit of color on Q3 and how we look on full year. In Q3, we delivered on expectations. But all in all, it was as communicated early in August, a weaker quarter. But please take note that the third quarter was impacted by plant maintenance. Our big plant in Antwerp stood still for 2 months. And of course, this left its mark in the P&L. Please also take note of the fact that the tailwinds, which we benefited from in Q2 unwinded due to contractual pass-through clauses in Q3 and, therefore, also impacted third quarter. And I'm sure that some of you have noted already, we focused on cash optimization on working capital in Q3. We reduced sequentially our inventories by a little more than EUR 100 million. And of course, the lower your inventory, the less you produce, and that left its mark in the P&L as well. I heard that some of you had questions on Advanced Intermediates. Don't be concerned, this is the normal quarterly delay. We saw the positive raw material impact in Q2. We passed it on contractually in Q3. And therefore, you will see that Advanced Industrial Intermediates will rebound in Q4. Now to the further key messages I would like to pass on to you. First, we saw sequentially volumes returning. We basically sold more than EUR 100 million incremental volumes in Q3, vis-à-vis Q2, which is a clear positive. Many of the industries are stabilizing on a low level and are moving up, and China definitely leads the pack. We saw from August onwards growth versus previous year, and this is a strong sign. It's the biggest chemical market in the world, so it's important that this moves upwards. Second statement, if you look at year-to-date margin developments, we stand at 14.4%. And this despite one of this deepest economic downturns we have seen over the last decades, if we finish somewhere around 14%, it would be the second best financial performance ever, and this despite the deep economic recession. I think this is a solid sign of the change in structure in portfolio that we have worked upon over the last several years. Also noteworthy that we operated Q3 at a utilization rates of only 69%. The last time we operated at this level of utilization was in second quarter 2009. In those days, we were just hardly able to post more than EUR 110 million EBITDA. Now more than 10 years later, at this level of utilization, we are at roundabout EUR 200 million EBITDA, absorbing the one-timers I've indicated before. I think this gives you a clear sign of the change in structure that we have undergone over the last several years. The newly created segment Consumer Protection stands out and shines, the third time in a row we are able to increase profitability in absolute terms and also increase our margin versus previous year. I think this segment will do well going forward in the next 2 years and will become an even stronger pillar in our overall company configuration. Next to operational focus and financial focus, we also work on ESG targets. We've communicated to you last year that we want to be climate neutral by 2040, where we set clearly a landmark in the European chemical industry. We have worked on further targets, like water improvement, where we conveyed new targets this morning. And I'm happy to say that not only the Dow Jones Sustainability Index, who was ranking us #1 in Europe last year, have recognized and rewarded this. Now also the reputed MSCI ESG index has upgraded us from BBB flat to single A. On Monday last week, we finished our reviews of the business, and the management Board has eventually discussed the guidance. And obviously, if you are in November, you should narrow the range. So we decided on narrowing the range and felt comfortable with a corridor of EUR 820 million to EUR 880 million. On Friday, however, we unfortunately had the unplanned chemical outage when we ramped up our caprolactam sites in Antwerp. And now we had to take it off stream. This is sad because the polyamide markets are tightening in Europe. And as we are just coming out of a standstill of 2 months, our working capital or inventories were depleted. For that very reason, we had to announce force majeure on Friday, Saturday, a, because of having no stocks on hand; and b, not being able to produce. So we will basically have something like a EUR 10 million hit due to loss of sales, which is really unfortunate because the market is, right now, really picking up, which is a positive surprise to all of us. And of course, we will incur idle costs. So I would like to recommend to all of you, please take that into consideration in your models. I don't see that we will be in the upper end of the guidance. We will be in -- we shoot for being around mid-range, but with a standstill and lost volumes, you should take a roundabout EUR 10 million of the midpoint, which I think is still focused then on consensus, where consensus stands right now. But for all transparency, I think this is valuable information for your models. As far as Q4 is concerned, I think we look into November now with a solid order book. And December, anyhow is always a modest month. So with this, I think we have a precision to guide you accurately. And with these statements, I open up the floor for all your questions.

[Operator Instructions] The first question is from Thomas Wrigglesworth, Citi.

First one, if I may, on CheMondis, can you just -- could you refresh us as to what success looks like in 3 to 5 years for CheMondis? Where could this go? And then I know, because I was on your website the other day, you don't charge yet. But when you look at the active companies participating, do you think about a revenue per user type of model? I'm just trying to think about how we might dimensionalize the kind of the revenue opportunity 3 to 5 years down the line. Second question is just the -- how performance exiting the third quarter is in specialty additives. I know that there's been a number of end market challenges there, but we are seeing bromine prices in spot markets pick up. I was wondering if there was -- if you could give us a little bit more color around the specialty additives kind of run rate and exiting third quarter.

So I will address CheMondis first. In the bigger Investor Relations document, which we dispatched, we have included 2 pages on CheMondis because we said during 2020 when we were on the road, virtually, that we would give some further color at the end of the year, so we did. So when you look at the CheMondis slides that we included in the deck, you basically see that in the last 12 months, this platform has developed incredibly well. The amount of transaction has not doubled, not quadrupled, but, what you say, for 8x higher, 8 folds, I don't know. So it has gone up by 800%, which is remarkable. And if you look at the number of companies that are now active on the platform, we've moved up by 300%. We have now more than 50,000 products on this platform, so this in itself shows that CheMondis has established itself as leading chemical platform in Europe. And we have traction, and this is the most important thing on platforms, unique traction. And this is there. Now if we look at a platform, it normally takes 4 to 5 years to really show if the business model works or not, so the jury is still out. But you have seen that, now, the biggest global chemical distributor in the world, the Brenntag has signed a strategic cooperation with CheMondis. And I think this is also a strong proof to the pudding that this platform is somewhat interesting, attractive. So -- but the next 2 years will be decisive. Now that we have traction on the platform, we will now have to introduce monetization models. And either this breaks the platform. If it does not, of course, the platform starts to have revenue and, hopefully, one day, once it's really scaled profits. So monetization models we are now working on, and we will start introducing them in 2021, most likely in the second half of the year. And this will not be big sales, but the bigger and the longer the platform is successful, of course, the stronger the growth rate should be, and that will be the next big step. So that's the one element, getting CheMondis on monetization features. If I now think 5 or 10 years down the road and should we achieve to really have success with CheMondis also in the forthcoming 2 to 3 years, then at some point in time, LANXESS will reduce its 100% ownership in the completely ring-fenced legal entity. And where our eventually holding will be is yet to be decided, but it doesn't need to be a majority position. But we will always be invested in the platform because we want to have access to a digital go-to marketplace. And with this, I think I've covered all aspects of your question. Now on specialty additives, I fully agree with what you are saying. Bromine is doing well. This gave the business divisions relative stability. Of course, we suffered in Q2 and Q3 also from E&E and construction going down, but construction has stabilized and even moving up now in some of the regions. The 2 businesses that we're suffering and that we're leading to a negative hits in Q3 was basically Rhein Chemie with its big exposure to the automotive industry, and the lubricant additives. I mean, they are really hit by aviation. We have literally no sales to the aviation industry anymore because planes are not flying, and you are not flying most likely. And the second industry, of course, here on lube adds. We have EUR 120 million, EUR 130 million sales on the automotive industry. We just see them recovering right now, but third quarter was still pretty soft. And for that very reason, the overall segment was soft in Q3. And with this, I think I've addressed all of your questions.

Yes. Just very quickly, and forgive me -- forgive my ignorance. So you still got 100% of CheMondis. You didn't share any of the economics with Brenntag in the partnership. Or have you?

No, no. I mean, at this point in time, we agreed that we team up and that we work together and learn together. And Brenntag went out last Friday, I think, and made the announcements that they are entering into a strategic partnership with CheMondis, but this did not lead to a participation in CheMondis. At this point in time, we would like to keep the platform to ourselves because, if we are successful, of course, the -- Brenntag will learn how this platform is so successful. And potentially one day, they will then enter also into a holding in CheMondis. But our preference is, at this point in time, to develop it further because should we be successful, the value of the platform will move up. And right now, we believe in the success of CheMondis.

The next question is from Matthew Yates, Bank of America.

Matthias, I appreciate your introductory remarks that maybe we shouldn't overanalyze any given quarter in Intermediates. So when you take a step back, how do you think this asset has navigated the crisis? And can you just give me a reminder as to the ambition you have for it going forward? And then the second question around capital allocation. I saw you recently put EUR 100 million into the pension, so you're obviously conscious of those liabilities. In the context of looking at potential M&A, can you give us a sense how much firepower you think you actually have for that? And I'd be a bit remiss to ask if I didn't ask if there was any indication about any progress you're making on finding interesting opportunities in this downturn.

Very valid questions, Matthew. So I take them one by one. As far as Advanced Industrial Intermediates is concerned, I think I stressed that either in March or latest in May that my view was on 2020 that Advanced Intermediates will be the second most robust business in our portfolio. So I stressed at the beginning of the year, Consumer Protection would be shining or will shine, stability versus previous year or growth were my comments. I said Advanced Intermediates will be down, but compared to all other segments, they will have the second best stability in our portfolio. Then I positioned Specialty Additives as third and Engineering Materials as fourth in the ranking. I clearly stick to these statements, and I think at the year-end, you would see that exactly this ranking will be achieved from everything that I know as of today. We fortunately have an Advanced Industrial Intermediates, the big business units, pass through clauses. They are always leading to volatility from one to the other quarter. One quarter, we take sometimes margins of 19%, 20%, 21%. You've seen that in 2020, by the way. I think it was the second quarter where we had a sky high margin. Now in the third quarter, you see the opposite. If you would simply add EUR 10 million to the profitability of the segments, the margins would look completely different. And therefore, what you would see in Q4, we saw now a modest margin in Q3. You would see a rebound in Q4. This is the pattern of the last several years. And therefore, I feel strong about Advanced Industrial Intermediates. This is the area where we are going through nice debottleneckings. This division has grown over the last several years by more than EUR 100 million in EBITDA. It's a super cash converter, and it has, from its market position and from its industrial cost curve, simply very, very strong position. So I feel very good going forward. Now the funding -- the voluntary funding that we hit on pensions, this does not reduce our firepower because, at the end of the day, it's considered as a quasi financial liability by the rating agencies. So if you increase your net debt and fund your pensions, it's a wash. We have funded our pensions due to the big amount of liquidity that we have in the balance sheet. And you know that, right now, liquidity costs money. You don't get money. And if you fund your pensions, you don't pay any more 40 basis points. You basically make an investment in reducing your interest penalty in your P&L. And therefore, it is -- any funding of pensions is in current times a roundabout 80 basis points, 100 basis points accretive to the P&L. I look at the CFO, we are at 1.3 percentage points on pension, so it's even more than 100 basis points. It's 160, 170 basis points positive. And therefore, this was a financial decision we took. And now to your last question, so we have ample firepower. I think it stands somewhere, depending on where you see the rating and rating agencies, between EUR 1 billion and EUR 2 billion, depending on what financial models you're using. So therefore, you can see that we are in a strong financial position to also look at M&A, which we are doing. I've indicated in August that we have basically started to monitor the markets again. We were cautious in Q2, but are now open to also inorganic growth because we see that the financial markets are resilient. We have not seen that after March-April financial markets closed up. They are liquids. And therefore, we see that the environment is as such that our portfolio has proven to be strong. Our financial position is strong. The markets -- the financial markets are strong. And for that very reason, we have decided to look around, but with our discipline that we've proven in the past. And therefore, should something occur in the next several months or 2021, don't be surprised that we go for inorganic growth as well. This, I hope that all questions are answered.

Can I just ask a quick follow-up along the same lines? You mentioned financial markets are liquid. You spoke earlier in the call about a pleasant surprise on some of your end markets picking up. Under what circumstances would you restart the share buyback that you did earlier in the year?

Well, this is something that is on our resource allocation list. And of course, it's -- if we consider that the M&A market is not sound and opportunities are not there, we would definitely rethink the share buyback.

So the next question is from Andrew Stott, UBS. The next question is from Andreas Heine, MainFirst Bank AG.

I have several, all very small. On your M&A, just for clarification. Usually, you talk about bolt-on or midsized. The definition of that is maybe different from company to company. I would assume anything with bolt-on or midsized is where you do not need equity. Maybe you can comment on this. Secondly, you're referring that you reduced inventory. If it has a negative impact on the P&L, is that more or less equally split about -- across the segment? Or was one segment more affected than the others? And then on the battery material and lithium project, any ideas you can share with that, what the strategy midterm might be? And the last one, capro, you said market is tightening. Is that only the upstream part of caprolactam? Or do you see this also in the downstream polyamide and polyamide compounding business?

All valid questions, Andreas, so let me take them one by one. M&A, bolt-ons are basically acquisitions, something in the EUR 100 million, EUR 100 million, EUR 200 million, EUR 300 million, but below EUR 0.5 billion. Midsized acquisitions would be -- like Chemtura, this was a midsized acquisition. Company size roundabout $1.6 billion to EUR 2 billion. Big transformational acquisitions are, in our definition, acquisitions where we buy at least half of the turnover of our company because if you do this, then you are engaged in the integration,not only for the next 12 months. Normally here, the integration takes you up to 2 years, sometimes even 3 years, depending on the complexity. So this is how we define M&A. Now on inventory rundown, the 2 segments being impacted the most where, obviously, Engineering Materials due to the HPM plant maintenance and Advanced Industrial Intermediates. On your third question, lithium, well, I said in the last conference call, we need open borders. And then after borders are opened, give us roundabout 3 months for running and testing the process, looking if we need to work on the technology and simply learn. As you know, believe it or not, borders are still closed. And with the unclear Presidential situation in the U.S., I -- my personal assumption is borders will not open until a Presidency is being decided. So we need open borders, so that engineers can really work on the pilot plant, on the process, on the technology. And we need open borders from Canada to the United States. We need also that our Germans can travel. I mean, I have my central power task force here, the chemical engineers, that basically do the key engineering work for top sites worldwide, and they cannot enter. And they are here in the U.S.. And before I invest money in big extraction units, I want to have my engineers really checking, validating everything, so that we invest on best conscious decisions. It is what it is. Corona is there. And we have, as you know, unfortunately, borders closed, which never happened, I would say, in the last several decades. Now on capro, what is tight, what is not tight, as a matter of fact, I'm surprised how strong the rebound was. I was pretty negative on the automotive industry still in summer timing, but the rebound is now visible also in Europe. And we had to announce a force majeure in downstream because we cannot source in Europe polyamides. It's tight, and this gives you proof to the pudding that the automotive industry is replenishing their inventories because they are pretty rundown as well. And that's the reason why we had to announce force majeure. If the polyamide market would have been long, we could have sourced from competitors polyamides and do the compounding then with external polyamides. But we don't get anything here in Europe because the market is tight. This in itself is a positive news going forward. But of course, it's now unfortunately a negative news to our customers because we've always been a very, very reliable supplier, which they recognized and rewarded, and it's very unfortunate. So we do everything that we can to get capro back on stream. And with this, I think all 4 questions have been answered, Andreas.