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 Andre Simon, Head of Investor Relations. Please go ahead.

Yes. Thank you, Aurelia. A warm welcome to everybody to our executive call with our CEO, Matthias Zachert; and our CFO, Michael Pontzen. We decided to switch to a digital format for our Capital Markets Day due to still existing travel restrictions, and therefore choose a compacted content focusing on our recent acquisitions. We will give you a comprehensive strategic and operational overview, including the battery chemicals topics, [indiscernible], et cetera, during a bigger in-person capital market event in Cologne in the next spring. Today, Matthias will explain how acquisitions will drive our consumer protection to the next level in his presentation. Afterwards, you will have the possibility to ask questions in a Q&A session. And as always, please take notice of our safe harbor statement. And with that, I'm happy to hand over to Matthias. Please go ahead.

Thank you, Andre, for your introduction, and dear investors, dear analysts, dear people listening to this conference call. In light of yesterday's communication on our third quarter numbers and the following reaction afterwards, especially then listening to the feedback that some investors have provided to us, we would like to introduce an extra slide before we come to the core content of this call. The extra slides should be loaded up now on the WebEx, and it will address the cash flow on -- of our company in full transparency. And with this, I would like to hand over the word to our Chief Financial Officer; Michael Pontzen. Please walk us through this very slide.

Thank you, Matthias. Warm welcome from my side as well. As you can see on the slide, we're giving full transparency on our operating cash flow starting with the line of the reported cash flow. You recognize some EUR 105 million and EUR 128 million in the first 9 months, for the Q3, respectively. In that number included, you saw that we had a tremendous cash-out with regards to working capital, primarily driven by the price increases, which we saw in our raw material, which equal to some EUR 200 million and EUR 511 million, respectively. Next, included in the operating cash flow are some strategic initiatives, which we started a couple of years ago and which partly will come to an end or will ease in course of next year or the year after. First, it's basically our SAP upgrade. You know that we're implementing S/4HANA on a global basis. We spent, for the first 9 months, some EUR 15 million. There's another EUR 5 million expected for Q4. The expectation is that there will be an ease rather in '23 and not in '22 because in '22 we will go live here back in Germany, which is, as you all know, our major country when it comes to assets and people. And therefore, the ease will only start in '23. But you should book that into your account. Next, digitization come on this. We spent some EUR 15 million, 1-5 million for the time being. You should expect a similar number in the fourth quarter. And here, you should expect an ease in '22. The same is true for our restructuring expenses, EUR 15 million for the time being and, again, an ease in '22. With regards to M&A and integration initiative, we spend a whole lot of money in the first 9 months, summing up to some EUR 50 million, and we gave a split between buy side and sell side, as we were very active on both sides. The majority we spend in '21 on the buy side, summing up to some EUR 40 million and on the sales side to some EUR 10 million. As we announced earlier that, next year, we will focus on deleveraging and using the free cash flow to reduce our debt. You should expect on the buy side, a significant reduction in our cash-related M&A and integration activities and, on the sell side, obviously, depending on the projects to come. And last but not least, we saw some incremental effects. One, of course, the inflationary tendencies which we saw in energy, logistics and so on. Here, we expect a pass on of the costs in course of '22. And with regards to the unplanned outages, which we were referring to as well, we see them as a kind of one-off which we had to swallow in the first 9 months but particularly in the third quarter. So if you exclude all these initiatives or let's say, special items, you come to, let's say, structurally underlying operating cash flow, which is rather strong with some EUR 400 million in the third quarter and some EUR 820 million in the first 9 months of the year. And I can assure you that we, as the LANXESS team, put the priority next year on generating cash and making that cash in our hands. And that's from my side for the update and the transparency on the cash flow, and I will now hand back to Matthias to go through the strategic presentation.

Thank you, Michael. Thank you for the explanation. And our CFO has today been rewarded with a further title. CFO also stands for cash flow officer. And therefore, we take it serious at all respective levels, including myself. With this, I would like to turn the attention to the executive call and to the agenda. We will go through 5 agenda items. We start on the first one with a catch-up on what we have done over the last 2 years. The last Capital Markets Day you've attended in person, in Cologne, took place in November 2019. We will sum up our performance and delivery in a short video, which will come in a few moments. At that point in time, the key message was, among others, from a strategic standpoint, to leave Performance Chemicals and to turn the focus on Consumer Protection. In the next 2 agenda items, we will address Flavors & Fragrances, our new global growth platform that we have just created. We will further try to give education, as investors have requested this, on our biocides division, creating here another global player. And afterwards, we would like to give you a heads up on our sustainability targets. And eventually, and agenda item 5 would like to clarify how will the journey continue. And with this, let's start the video. [Presentation]

2 years ago, we summed up our transformation process with the statement that LANXESS is more profitable, more competitive and more resilient than ever. we promise that there's more to come and it will take LANXESS to the next level. Well, let's take a look at the results. Divesting and restructuring underperforming businesses enabled us to focus on more profitable areas and increased financial flexibility. The new segment, Consumer Protection, was established. As promised, we invested into Consumer Protection and fueled its growth with 5 acquisitions. The 2 larger ones were done just recently. Emerald Kalama Chemicals and IFF's microbial control business are perfectly fitting into the Consumer Protection segment. They're easy to integrate and have a very attractive financial profile, meaning especially high margins and strong cash generation. Consumer Protection now consists of the business units: Material Protection Products, Flavors & Fragrances, Saltigo, Liquid Purification Technologies. All of them hold leading positions in attractive markets and developed strongly. This tremendous progress will lead to Consumer Protection becoming the strongest segment in the LANXESS Group very soon. And we are still energized and we'll continue to change the face of our company in the next years, always guided by clear investment criteria and the goal to create even more value for our stakeholders.

So ladies and gentlemen, I think you see that from November 2019 onwards, we executed according to the indication we have given. And I turn your attention now to Slide #5. Why have we built Consumer Protection and why do we love it? Because it shows characteristics of businesses that normally show high multiples as well. Characteristics are strong margins above 20%, rather noncyclical in nature with underlying secular growth, being asset-light, strong cash conversion, in most cases, above 70% or even higher. And these businesses have the power to address the environment of increasing regulations and even turn regulations into a competitive advantage. If we look at our Consumer Protection division, it basically is comprised of 4 business units. Two of them, you should know by now, Saltigo and our Liquid Purification Technologies. Two of them are getting new faces as we speak. And on these 2, we would like to give more color, more understanding, more education: Flavors & Fragrances, which provides solutions for personal care, food, beverage and feed; and our Material Protection business units, which over the last several years has basically more than doubled sales and tripled profitability. And this journey will continue, the journey as a key player in biosecurity. So with this, my start into the educational chatter on Flavors & Fragrances growth platform for consumer markets. Page #8 shows you, on the left-hand side, the 3 applications that these business units provide for: flavors; fragrances, which basically supply markets like home and personal care; preservatives, the application notably being benzoates, goes into food, feeds and beverage. And if you look at these markets, all of them are high margin and growing in nature. Growth drivers are care products. We have increased demand worldwide. Growth drivers is the beverage market. And believe it or not, in the world, as more beverages are consumed, global warming definitely contributes to this. And there's a clear theme in the world as well on low-tox products. Our business unit F&F provides highest purification and thus low toxicity. On Page #9, you show the structure which we've decided for in which we are going to present these business units. I will explain the market setup, production technology, where we stand on integration, upside potential that we identified in the due diligence, and eventually, it boils down to financials. Let me start with markets. On the left-hand side, you see we have global customers. And who are these customers? You basically find in our order book all big giants of the flavor and fragrances industry. You find Givaudan. You find IFF. Of course, you find Symrise as well. They are playing in the F&F industry. We see growing demands. We see that this is a high-margin, resilient business, and we love this market. DSM, nutrition and feeds, they are very strong on animal health, animal feeds. And of course, they are in our order book, quite visible. And at an earlier stage, I conveyed to you, we have Coke, Coke Light as well, as global customer. And if you have Coke on your side, you're ready for the ride. Customer requirements -- and this is what I specifically can confirm, customer requirements are very clearly quality, purity and low tox. That is what the customer wants at highest standard and always on spec. This is what we offer. Of course, these global accounts want customer proximity. They want to have one face to the customer and, eventually, reliability, governance standards, and this is what we have. So our solutions on the right-hand side, finest quality, definitely compared to peers, highest purity that we definitely offer. We have soft and nearly nature-identical preservatives, which the markets yearn for. We have a global footprint now, key account organizations to address these global customers, and long-term contracts, which gives resilience. So that's the market setup that we offer. Page 11, production technology. If you look at the slide, that's a global footprint. We are present in the U.S., as a matter of fact, a sole benzoate producer. We have 3 sites in Europe for the European market, which is a big and strong market. And in India, we have a plant world scale, providing products for the Asian markets. This is an undebated and undisputed market leader in this value chain. That's a real advantage. Page 12, integration status. Of course, everything starts with management team and leadership. So we have put a joint management team together stemming from Emerald, stemming from LANXESS. And we have, of course, introduced by now our performance culture that LANXESS stands for, claim fully fitting to energizing chemistry. That's completed. Ladies and gentlemen, they are up and running. On the operations side, we now introduce best practices from both companies to the 5 world-scale plants that we have. I mentioned at the time of the announcements that the Emerald sites were held by private equities. We will upgrade these sites to the LANXESS standards. That takes some costs -- incremental costs to the pure maintenance of around about EUR 15 million for the next 3 years incrementally. But for that very reason, we paid, I think, a modest price for the quality of the products we bought. Financially, synergy road map fully on track. First, synergy generation will happen within the first 12 months. And of course, here, predominantly in the SG&A space. The growth potential that we've identified on potential debottlenecking projects have been confirmed. I will address that in a few moments. So total synergies of EUR 25 million for the integration of EKC, we confirm. It's mainly driven by the F&F business units, mainly means majority-wise, 50%, 60%. The rest will come from K-Flex in the polymer additives and of course, in the so-called headquarter functions, which are reported in our recon segments. So synergies clearly on track. Let's turn to upside potential, Page 13. On the left-hand side, you see the rationale that we have basically had in our due diligence and which we confirm. If you look into everything that is happening at the European Union level, there is an organization, regulatory organization called the ESA. And specifically for preservatives and microbial control products, there's an organization called biotical products regulation, abbreviated BPR. What they say, benzoates are recommended as preferred option for home and personal care applications. That's the statement. We have benzoates, and benzoates, as a matter of fact, are short globally and even scarce relating to high purity benzoates. We focus on high purity benzoates globally. So what we've spotted in the due diligence, and that was our interesting question, can we debottleneck the respective sites in the U.S. and Netherlands, and this was confirmed. So we are now working on gradual CapEx spending debottlenecking projects that creates visible shareholder value. Listening to your feedback from yesterday, we will, of course, do that with care because we want to satisfy the requests from investors. Let's come to financials, Page #5 -- sorry, point #5, Page #14. The financials reflect specialty character. The business unit will be, by and large, EUR 450 million in sales from the starting point and predominantly being in the home and personal care and second chunk in food, feed and beverage. EBITDA margin should be 20% plus, cash conversion above 70 and synergy potential, we confirm with 25. Having said this, I think we can tick the boxes on the investment criteria that we flagged right at the beginning of this chapter and I think investment criteria for these business units are maximum. So overall, let us summarize the 5 agenda points for these business units. Well positioned and growing markets. We have a global presence with lean asset structure, a clear road map to realize synergies. Upside potentials are there through debottlenecking. And as far as financials are concerned, impressive, high margins, strong cash conversion. Next chapter addresses our IFF Microbial Control acquisition. Here, another global player will be created. Page #17 shows you the microbial control application areas. And LANXESS and IFF are a perfect fit Both businesses are complementary to each other. In some segments, we strengthen our application fields relating to paints and coatings, animal health, wood protection, construction. In other areas, we get a new field of microbial control products, energy and households. We like them. We see that the end markets show strong growth drivers. Let's talk about virus. All of us know by now, unfortunately, coronavirus. In the animal space, virus outbreaks happen on an ongoing basis. We had a few years ago Zika, notably Latin America. We had and still have African swine flu. And I could tell you about various other viruses that need to be controlled. We have the products to combat them. Microbial control products, you also need in other areas with growing volume momentum because population is increasing. Water scarcity goes up. So you need to disinfect. Also, urbanization in the emerging countries leads to an increase of households. Necessity for wood, necessity for paints and coatings, all of these applications need microbial control products. And guess what? We have them. Page 18, I follow the same structure as before. We talk about markets, protection, technology, Okay. Here, we will talk about regulatory compliance as well, eventually about synergies and financials. Let's come to markets. Page 19. I think the picture here tells it all. We are a global player. We get stronger. In Europe, we had a strong footprint ourselves. Of course, IFF adds good competence as well. North America, please understand that IFF inherited its -- the competencies of Dow and DuPont. What a chance. Now we team up [ woof ] and got North American antitrust approval by now. Latin America, good team-up too. And in Asia, from 2 mediocre players we form a strong one. So we will have a global presence reaching everybody, and we will have global asset structure. We will have application centers everywhere. That means customer proximity, customer solutions. And in this business, you better have regulatory support everywhere because this is like a pharma business. Regulatory affairs are the name of the game. You need to register. And for this, data is needed. Studies are needed. Otherwise, no sales are going to happen. So market presence, wow, what a global player. Now let's come to production and technology. We believe in integrated value chains. That is the recipe of success for business unit material protection. We love that. We've always built on this with the Chemours integration, adding up the stronger set of both actives and then penetrating the markets with trademarks and brands, which you see on the right-hand side. These are so-called formulations. So on the left-hand side, you see the actives that we have. And we added up further actives from the IFF sites. So in our -- so we are now a broad player in the actives sites. And based on the actives, the good thing that you can do, you can create new formulations. You can sometimes even team up between the actives and out of them bring new formulations to the markets. Fantastic. On top of that, I need to say that some of the active on the left-hand side, we, or businesses that we acquired like Theseo, we were sourcing beforehand. Now we integrate the value chain. What an opportunity. And on top of that, our global sales force can do cross-selling. We love that. Eventually, my final point to production and technology. IFF had a business model with 2 active production sites. All the formulations were done [ through tollists ]. That's no problem because as long as you own the data in the studies, you own the markets. Well, we now will get the data and the studies. But we can look at the overall setup and see how we can fill up our formulation sites and potentially rethink the tolling approach of IFF business that they had before. That's an opportunity. Let's come to regulatory competence, Page 21. Guys, if you want to sell the biocides, you need to register in whatever jurisdiction you enter. In Europe, this is pretty much regulated through European Commission, ESA and the BPR that I indicated beforehand. And if you register, you need to have data, data, data on efficacy, toxicity, what have you. And then you need to have studies. We have all of that. If you look into the left-hand side, if you want to have all these data, if you want to register, you need to have regulatory expertise. This is called regulatory affairs, same name as used in the farmer industry. By now, we have one of the world's largest team for biocides in the chemical industry. Hey, now we add up to our expertise. The special strength that comes from IFF Microbial Control contributes, especially for the U.S. EPA markets. Now that's fantastic. On the right-hand side, look at the registration. We, LANXESS, have 50 active ingredient registrations around about 5,000 formulations. That's quite a lot. What will be added through the IFF integration, once approved by antitrust authorities, 50 further active ingredient registration will be added with more than 1,500 formulations. So this is a data-rich IP and registration-rich transaction. We love it. Page 22, cost synergies. We will gradually in-source the IFF Microbial Control formulations worldwide. IFF has something like [ 14 potters ]. We don't need all of them. That would increase the utilization levels of our formulation sites. Of course, we need some CapEx. We will try to keep them as low as possible. But the investments here are financially awesome. In the middle of this page, you can see the tollers that we get on board, also the production sites that we get on board. You see ours. You see the ones of IFF. And you will also see a few exes -- well, we will x out some formulation sites, getting EUR 20 million of cost synergies in return. Page 23, top line synergies. Cross-selling will be an opportunity, for sure. We have a global franchise. So we will leverage our global franchise. We will do complementing product offerings, new formulations. And we think that, with all of that, EUR 10 million of top line synergies should be achievable. Let's look at financials. The financials of our business unit Material Protections have been sound before. They will get sounder. Sales, all in all, around about EUR 750 million in super duper microbial control applications, as indicated before. EBITDA margin, between 22%, 25%. Cash conversion pretty high, 80% upwards. Synergy potential for the business that we acquire, meaningful because, I mean, this is pretty complementary. On the right-hand side, investment criteria met, in all cases. So let's sum up, Page 25. As far as the market is concerned, that's a global footprint, strong market presence, production technology, how the access to key actives will enlarge our product portfolio and enable new formulations. And this is done by an unbeatable regulatory affairs team who will then make sure that we will launch new formulations in all the markets globally. Additional strength will come from synergies and will enhance the margins and cash conversion. That is why we've done and pursued the IFF acquisition, a true global player will emerge. Ladies and gentlemen, let's turn the attention now to Chapter 4. We would like to give an update on our sustainability targets. Where do we stand after all the acquisitions that we've completed or announced for next year? Our climate targets were ambitious and tough. And I think this has been seen by many investors globally, recognized and appreciated, as they were ambitious. I mean we added now 5 acquisitions, 4 being completed, 1 yet to be closed. But we, out of the due diligence, have a good understanding where the CO2 footprint is. So based on all the announced and the one acquisition yet to be closed, we adjust our targets for '25. We stick, however, to the target 2040. All in all, if we look at our '22 CO2 reported emission, we will add on an as-is basis 250,000 tonnes CO2 from the acquisitions we've done. So you see that the footprint -- CO2 footprint of the acquisitions is modest, fitting to our underlying chemistry. And of course, we will improve the acquired businesses as well with projects, most of them we have identified by now. And on the basis of this, we adjust our '25 targets from 2.4 million to 2.6 million tonnes. You see that from 2018, this will be a visible and substantial decline in CO2. And is, I think, pretty ambitious if we compare ourselves on a European and global basis versus peers. Please note also that in our company, management board and the next level of line management has by now incorporated these absolute CO2 reduction targets into the variable compensation. So we mean it. And we want to not only improve relative emissions by tonne, we go the next step. We want to reduce absolute emissions by tonne even though we want to grow. Only this contributes to climate improvements. Chapter 5, more to come. Let's address this. 2 years ago, I said to you we will go for Consumer Protection. So Consumer Protection, as you can see on Page 29, we want to double up but we don't want to stay there. More to come. So Consumer Protection clearly will -- the segment will lift up group margin. Will contribute once assets are improved, synergies are implemented, of course, which needs investments. But once this is completed, cash generation will be visible at a different level and financials will be clearly more resilient compared to past historic performance. Page 30 shows you the high-quality business. Within our company, Consumer Protection will be on the left-hand side of the slide, the biggest segment division in our portfolio. In 2019, it was the smallest one. And at that point in time, it emerged out of Performance Chemicals that none of you liked. I think all of you have now realized that this segment is a rising star. Why? Because we are present in applications that everybody is considering to be strong and growing and financially attractive. We are in applications of disinfection, microbial control, flavor and fragrances, water treatments, agro solutions, animal health, food and bev, home and personal care. Comparable peers in this field are Ashland, Croda, some parts of Clariant, Lonza, and of course, the new DSM animal nutrition business, just to name a few. This is a higher multiple universe, and we are proud to be part of that now. Page 31, however, clearly indicates to you that in the next 2, 3 years, the journey will continue. Of course, for the short term, next 12 months, integration and deleveraging has to be a key theme. Let me turn. The journey will continue. Portfolio transformation will continue, but we also have organic growth projects. This is related to digital transformation, example, Chemondis. This relates to attractive investments like battery chemistry. Also, it relates to debottlenecking projects like the ones I mentioned earlier. Incremental benzoates will lead to incremental profitability. Unfortunately, we need CapEx and cash out for that, but we will do better on this context to the past. And we will give an update to you latest in our Capital Markets Day events, which hopefully will happen here in Cologne face-to-face. With this, ladies and gentlemen, I close the session for the presentation, and we are delighted to take up your questions now one by one.

[Operator Instructions] The first question is from Sam Perry, Credit Suisse.

Just on synergies. If I look back to the Chemtura deal, you targeted just under 7% of sales, the synergies. If I look at the Emerald Kalama and IFF, they may be slightly higher than that, but not by much. And then over delivery on Chemtura synergies was quoted as a reason for sort of earnings progression and upgrades in the year following that. So can you give an indication of where you've actually got to on Chemtura synergies and if you think that the synergies from these 2 deals could be higher than that?

Well, thank you very much, Perry, for your questions. As far as Chemtura is concerned, I think we did reasonably well. You've seen that through the continuous improvement in margins that went up from something like 15%, then 16%, 17%, 18%, next 19% pre-COVID, then, of course, the decline. So if we look at the implementation of synergies, we were on spot of the synergies we mentioned at the outset. As a matter of fact, we delivered and slightly over-delivered. But the flip side of the coin, we also needed more CapEx to make them happen. Not a lot, but we definitely had some overrun in CapEx at the same point in time. So overall, the financial bottom line, the financial delivery of Chemtura transaction was delivered. Now you yourself have answered your question, I think. You stated that in comparison to the size, the synergies we've announced for IFF and for Emerald are quite substantial compared to sales. So you clearly see that we are here ambitious, but we think these numbers are realistic. They are definitely not lowballer numbers. We consider them as realistic, and first of all, we need to deliver on them. I hope that clarifies all your points.

Great. Maybe one follow-up just on Slide 31, deleveraging being a focus. Can you maybe shed some light on whether there are any specific, even if they're smaller, divestment candidates within the portfolio to achieve that?

Well, should there be smaller divestiture candidates in the portfolio, we will flag them at the day of the signing. I haven't seen my CFO for such a long time, and my M&A department is also not always present. So I might not be up to date on everything. And therefore, we will announce once we sign.

That was a joke.

That was a joke. I know, my jokes are not that good anymore.

The next question is from Andrew Stott, UBS.

The question, it was actually on the production infrastructure you've got. I think this might be more a question around Kalama than IFF. But it strikes me might need midterm, at least, if not short term, a bit more presence in LatAm and Asia. Is that the right observation? Or are you happy to run the export model from what you've got? I'm thinking of obviously some very sizable end markets in those territories in the areas you're talking about in Consumer Protection.

Andrew, your feedback is -- your question is very valid. I would like to look at Consumer Protection. We made an acquisition in Latin America for that very reason. I think it's something like 16, 18 months ago. We announced that in December '20, when we bought the market leader on biocides in Brazil called IPEL, so we enlarged our footprint in Latin America in the biggest market for sure. And we might be present in China as well through formulations in Consumer Protection. So this is definitely something we are looking at and consider. At the same point in time, I take investor feedback over the last 24 hours and the last few quarters seriously on -- watch out on CapEx. So we will look into this. We see growth opportunities that are impressive, but we need to mitigate also the entire investor base and take their concerns seriously.

So can I just follow up on that? Because you've obviously guided for this year on CapEx, but I don't think I've seen a midterm guidance. So are we to assume EUR 450 million to EUR 500 million for the midterm? Or is it going to be going materially higher than that?

Well, definitely not materially higher. And we always kept to the around about EUR 450 million, EUR 500 million. For the last 2 years, we considered this to be the right balance between pursuing growth, optionalities, upgrading past acquisitions and keeping our sites with high maintenance standards. So we would not consider moving into substantially higher amounts. But now with the feedback we are getting, I mean we will have to show you the improvement in cash flow. Therefore, we also have to look at CapEx but not now moving CapEx up, but basically looking into growth projects that we had also for the next 2 to 3 years and potentially do a different decision criteria so that we show that this company can jump start cash flow as well and also contribute to absolute EBITDA growth for the business that we have. So that's basically the decision process we are in. And surely, we will give more color on this in the course of next year.

The next question is from Martin Roediger, Kepler Cheuvreux.

I have 3 questions actually. Firstly, on your portfolio in Flavors & Fragrances, you shifted the benzyl value chain from advanced intermediates to the new created business unit, Flavors & Fragrances. But why didn't you that also with the menthol business? Why is menthol not part of F&F? Is it too much integrated into aromatic network? Second question is, as you mentioned that on Page 24, on IFF microbial business, the cash conversion is above 80%. But I recall that in August, you mentioned it is around 90%. So did you get any new information in recent months which made you changing this figure? And finally, when we stay with the Consumer Protection segment, there are -- also you mentioned the 4 business units within this segment. But 1 of these 4 is Liquid Purification Technologies. And I wonder if the recent acquisitions and the recent focus on the other activities within Consumer Protection may change your mind regarding your CapEx projects in LPT you announced earlier a year ago. So do you think this CapEx portion is still to come? Or did your strategic priorities change?

All valid questions, yes, really sound questions. Let me take them one by one. Yes, we moved the benz products from intermediates to the new business unit because they belong to each other. The 2 sites that we have were always supplying the F&F industries, animal health industry even before. But we had no other -- I mean we had no other home. The sales of these 2 sites were, all in all, in the area of EUR 100 million, EUR 120 million. And for EUR 100 million, we don't make a separate business units. Then you have too much SG&A. So it was basically embedded in intermediates. And now with the acquisition of Emerald, you basically marry the 2 benz products that supply animal health, Flavors & Fragrances and, therefore, this is simply a perfect fit. The one value chain is toluene oxidation. The other value chain is toluene chlorination. So the precursor is the same. The markets are the same. The fit is, therefore, perfect. So that was the rationale for setting up the F&F business, to bring markets together, to bring value chains together. Now on menthol, you're totally right. I mean menthol is also F&F industry, no doubt about this. But if you look into the production setup, it's completely embedded in a very integrated production for both setup. The elements and carving it out would be -- would create quite a lot of complexity. So we decided, in this case, rather for the assets and not for the markets. Eventually, market-wise, it's completely going into the F&F and menthol direction. And so therefore, I can fully understand your question, and please understand the decision that we have taken. Now as far as your second question is concerned, you are spot on. We now merged 90% cash conversion business into MPP, and we decided to then basically give the overall picture on what we communicated on material protection in 2019 when reflect an 80% cash conversion. So we basically team up both businesses, and that leads to, on average, more than 80%, which I think is in itself mouth-watering. On Consumer Protection CapEx, on -- we love Liquid Purification Technologies. You might have seen that a player -- there are 4 players in Liquid Purification Technology and the company called Purolite. It was privately held. This business is a competitor of ours, and they are a bit bigger than us. And they -- I think Reuters or Bloomberg stated they have EBITDA of 100 million, 150 million. They were sold for more than 15, 17x EBITDA multiple. And therefore, the business is now going to a company called Ecolab. So this transaction happened. I understand why Ecolab was buying them because the market is growing. It's -- water scarcity, we explained, is a problem of mankind. And therefore, water purification is a solution to it. So we believe in LPT. We announced a greenfield site 12 months ago. And of course, greenfield is CapEx intensive. Our capacities are pretty tight. In light of the feedback we collected from investors over the last few days, we will readdress or rethink or relook into these projects and potentially rather try to do incremental debottlenecking than greenfield investments. But at the same point in time, we believe that this market is going to substantially increase in terms of momentum. And we, as 1 of the key 4 players, as a matter of fact, we are #3 in this market, we think that this business offers huge opportunities going forward. Thank you.

The next question is from Jaideep Pandya, On Field Research.

And first of all, thanks a lot for the cash slide and all the kind of other important words on cash and color on cash. I've also got a couple of questions. Firstly, just around the oil exposure from IFF. Now that the oil and gas markets have turned significantly and there may be sort of a need for increase in oil production, how does this business work, especially when you're trying to sort of jump-start CapEx? And should we see material growth in 2022, because some of the reference businesses in some of your competitors are seeing quite a decent growth uptick. So -- and then how would you sort of say if the business went back to sort of 2018, '19 days, could the lost EBITDA that we saw in the slides you presented be gained back? That's sort of my first question. The second question is around the pharma site that you have. Could you give some information around your customer negotiation and sort of growth potential in this? Because this is, as I at least understand, a very strong position for Emerald. And just as a side remark, how are pricing negotiations in this business, especially in pharma? And then finally, Lewatit, which is the resin that you have for cleaning up PFAS pollution, surprised to see you haven't mentioned much on that today. So is this really something still in the R&D phase? Because, obviously, on your press, you've talked a lot about it.

Jaideep, thank you very much for your kind introduction and comments. Your second question, you need to readdress again. I haven't understood everything, but I will answer the first and third, and then let me give -- let me get your question -- the second question again. So on oil and gas and IFF, please understand that we will only comment on this industry-wise once we own the assets. We're, of course, right now in a phase where we have to adhere to highest legal standards. And therefore, we don't make comments on the business itself or its running momentum, et cetera, because we clearly don't want to look into it, even if we don't get these data. So I will only comment on this from the understanding that we had coming out of the due diligence. We thought at that point in time that the timing is good, and we made a statement at that point in time that the EBITDA was around 85%, 86%, something like this. And we said this is somewhat [ trophy ] and also a sign of the business being handed over within 2 years a few times, changing ownership. So we basically set this business on a normal asset basis would be higher. Today, I would say the timing for the acquisition seems to be a good one. So we were [ thought on thoughts ] potentially somewhat lucky. Now where this business is truly going to be in '22, my feedback is let us close the transaction, then we look into the books. We look into the contracts, we look into the customers, and then we provide more color on it. Now on Lewatit, I mean PFAS is -- Lewatit is a great product. We make postings on this already. Lewatit has a high functionality to basically clean everything, clean dirt, clean water, clean PFAS molecules or purify nickel, purify cobalt also for battery chemistry. Also here, our resins are being used. So the growth momentum of Lewatit is strong. PFAS is more and more on the agenda going forward. So I think here, momentum is going to increase. And I think we are doing rightly so to invest innovation behind Lewatit. That should answer your third question. Even though LPT today is not so much addressed in this conference call, I think this would be potentially a follow-up for the next 12 months. So can you now address again your second question?

Sure. Just a quick one on your pharma grade for the benzoate chain where you have made, or rather your previous owners have made investments in the Netherlands. I just want to understand what is the scope for the pharma industry in Emerald. And then I was just asking generally, how are pricing contracts done? Is it really annual pricing or 6-monthly pricing? And that's more a question for biocides rather than just Emerald.

No, I understand. So the debottlenecking that was done by Emerald in the past, it's basically by now sold out. We have it in the market. We have a lack of volume, and therefore, reflect the incremental debottlenecking that we identified for the benzoate products, not only in home and personal care, but also in the industrial biocide space. So benzoates are needed, but especially benzoates in highest purification. I mean only highest purification goes in pharma, for instance, because you need to simply apply for highest purification standards. And therefore, that is exactly the direction we will take going forward with this business. Pricing truly depends on the end application and on the respective customers. What we are currently doing, and this was -- I mean you learn and change according to new dynamics. What we're currently doing in all contract negotiations is to add energy indices and energy price escalation clauses. So definitely, whenever we go for long-term contracts now, this is a topic that will be embedded in our contracts. And on the F&F industry contracts, you do have some spot markets. But of course, with high-quality investments, high-quality specifications, if it relates to animal health, if it relates to farmer, if it relates to the big key accounts globally, you normally go for longer-term contracts. And longer-term contracts, of course, you need to embed raw materials but also energy clauses in order to have protection.

The next question is from Rob Hales from Morningstar.

I have 2. First, just on the biocides market. And assuming the IFF transaction closes and the Troy, Arxada, if that's how you say it, merger closes, what does the market share for the big 3 players look like at the end of that consolidation? And my second question is just more on R&D generally for both businesses. We haven't talked about much about that. Can you give us an idea of the R&D intensity for Kalama and IFF Microbial Control? I don't know, a percent of sales or just qualitative comments would be great.

Well, Rob, on the first question, on the biocides business, this is a pretty fragmented market. You see that from all the little medium-sized players around the globe. I think we've given a chart at the time of the announcement of the acquisition, and we basically showed there are a few global players around. There are a lot of medium players and national players around. So it's a global market, regional local markets with a few global players. But in essence, there are so many companies around. We've started the consolidation process, and so let's see where we go. But we don't give market shares. Definitely, that would be -- that's not the driving force here. Now on R&D. Of course, it depends here if you launch new molecules or not or if you launch existing molecules. So at this point in time, I would only like to talk about Consumer Protection. This is a division that definitely is higher in R&D compared to the other 3 divisions. It's the one with the highest R&D and marketing sales percentage to sales. But obviously, this division has also the highest gross margin and highest EBITDA margin. So this is the characteristics of the entire Consumer Protection segment.

The next question is from Andreas Heine, Stifel.

Yes, basically one question I have, adding to what Rob was asking on this market. Looking back to the last years, you basically did a number of acquisitions in this biocides market, all smaller ones, either for technology or for regional strength. Putting this in context, becoming bigger in this business, then obviously, growing this with further bolt-on acquisitions would certainly be very interesting, kind of the same as we see this in the adhesives market. Will you continue to do so, or is now the free cash flow generation prioritized that you will only do this in the midterm?

Very good questions, it's nice to hear your sound, healthy voice again. Definitely, we've done small acquisitions in the biocide space. We've now done a bigger one. We've done medium-sized ones in the past. So we've done all of them. And we would like to continue doing this. We know the market globally pretty well, have a very good understanding on regulatory changes, on innovation opportunities. So this is something we understand well, and as a market leader, we should -- I mean this is obvious that we should understand markets, customer and trends. However, for the next 12 months, integration and cash generation is priority. And this is what we want to focus and deliver on. And afterwards, we will see further.

The next question is from Georgina Fraser, Goldman Sachs.

I've got 2. The first one is on cash. And thank you for highlighting a lot of detail in your presentation today. I was just wondering like looking back at the last 10 years, LANXESS has generated about EUR 10 billion in EBITDA cumulatively and EUR 1 billion in free cash flow, so a conversion of about 10%. Now I appreciate that you've been highlighting how strong the cash conversion is with the recent acquisitions you've made. But I was wondering what initiatives that you have going to improve the cash conversion of your legacy assets. And do you think that we're heading into an operating environment next year that we'd see an improvement in that business too? And then my second question is on your JV with Standard Lithium. We have got travel to the U.S. possible from next week. So I was just wondering if you could give us an update on that project and some insights into your plans to get your engineers over for the final appraisals.

Yes, you're most welcome. So on your first question with 10 years, I will not embark on this because there is no point in commenting on the EUR 1 billion to EUR 1.5 billion CapEx that we spent and wasted on rubber. There is no point in looking into historic chapters. What I conveyed today is that we will increase -- we want to increase EBITDA in absolute terms, and we want to increase cash conversion in absolute terms, and that will be the focus. As far as Standard Lithium is concerned, if there is something new that we can convey on technology, on agreements, et cetera, we will communicate it. Sometimes you can't because you are simply restricted due to the finalization of analysis, finalization of contractual agreements. And then you simply have to adhere to legal constraints, and for that very reason, I cannot provide an update at this point in time. Please wait until we have something further to communicate. If there is something that can be communicated, definitely, we will do that.

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

A couple of questions. The first one, just on the sustainability targets, you've not been particularly explicit about further moves in the portfolio in terms of divestments. But assuming you were to do something, just curious how the Board or the Remuneration Committee reflects that change of scope in the CO2 targets that management are now compensated on? And the second question, sorry, if this is a very silly chemistry one. But there's a growing regulatory backlash in the U.S. around benzene. We've seen it in suntan lotions and now deodorants. I appreciate benzoic acid isn't exactly the same chemistry. So I'm wondering is that an opportunity that as products get reformulated, actually, there's an opportunity here for [ fetanald ]? Or am I totally kind of barking up the wrong tree there?

Thank you, Matthew, for your questions. On the acquisition divestments, well, this is something that the Supervisory Board is going to decide on an annual basis, and therefore, there is no change in the decision-making. Our targets for '24 have been -- and that's basically the first part of the CO2 tranche. They have been decided and locked in. And now the next tranche will be addressed next year, and the Supervisory Board is going to decide anew on this. And therefore, I cannot comment on steps taken by the regulatory body. On your second question, I don't really have this on my radar. I mean the benzene has nothing to do with the benz products. The benz [ addeds ], for instance, or benzoates, they are derived from toluene and not from benzene. So potentially, I mean you might want to look into this again.

The next question is from Charlie Webb, Morgan Stanley.

Maybe just 2. First, a follow-up a little bit on Jaideep around Emerald Kalama's margins and raw material pass-through. Just given all the moving parts and the strong move in raw materials you're seeing across the rest of your business, I was just wondering if you can help us understand what you're seeing in Emerald Kalama in terms of inflation in raw materials, what do you have a degree of back integration, which I assume is very helpful there. But just understanding that. And how quickly did that pass on to the customers? Is it a contractual pass-through mechanism? Or is it more just, on a monthly, quarterly basis, you renegotiate based on the moving parts? So that's the first question. The second one on sustainability, obviously, in the flavor and fragrance industry and in consumer industries, obviously, we're talking a lot more about bio-based alternatives. And I'm just wondering how that fits into the benzoate portfolio. Are there bio-based alternatives? Is that something you have R&D or technology in-house to do? Or is that something that's very difficult to do and, therefore, you don't see that as a risk? I'm just trying to understand whether there's a risk opportunity and how that fits into this kind of move towards bio-based materials.

Two valid questions, Charlie. So on Emerald, first of all, our F&F business is not only Emerald. It includes also our products from LANXESS. So if I look at the new business unit, you have both. You have spot markets. We sell into contractual long-term markets. In the long-term contracts, we normally have raw material escalation clauses included. That has kicked in this year, of course. But even in the contracts on the spot markets, we basically, in course of this year, if we look at this from an aggregated standpoint for the entire business units, we're able due to the tight markets to pass raw material price escalation on to the customer and, in most cases, even fortunately, during the running quarter. I come back to what I've just said, we saw in the raw material precursors, even though they are called benz products or benzoates, cetera, et cetera, the precursor is not benzene, which really exploded in terms of raw material price increase. The precursor is toluene, which also went up but not at the same pace as benzene went up. So on your next question on bio-based raw materials. I mean this is a theme which is starting. I think all of the chemical companies, by and large, are looking into this. We currently look at this, and we've announced in the last few weeks an alliance, for instance, with BP, which I think is known to all of you on bio-based materials. So we source from them now, for instance, biosilica [ exane ] with which we introduced into our compounds and our engineering materials, which are now called Durethan Scopeblue. So we are starting this process, but we are far from being fully in all value chains on bio-based raw materials. First of all, we need to get the very few materials that are being produced. I think this is going to be a evolving process over the next several years, and we are not talking about 1, 2 years, but rather 5, 6, 7 years because the industry needs to basically reshape its entire value chains. But as you can see from our communication, we are starting this process, like we have started a few years ago, to set ourselves ambitious targets on CO2 and are now delivering on them year-on-year with absolute reduction.

And there are no further questions. So I'll hand back to Matthias Zachert for closing comments.

Well, if there are no further questions, I thank you all for listening in. It's -- we follow here the feedback on getting more into explaining the 2 new business units, Flavors & Fragrances and our Materials Protection business. We will continue doing this because we think these businesses are exciting. They will form core pillars of our Consumer Protection going forward. So what you're going to see in the next 1 to 2 years, these 2 business units, but also our Liquid Purification Technologies and Saltigo will be key drivers. We look on all of these businesses with pride and with expectations, with positive expectations. And I hope you're going to understand this segment more and more next to our 3 established segments that we always gave updates on in the last few years. So you see LANXESS will continue on the transformation journey and be part of it. Thank you very much for your time. Have a great weekend and see you on the road next week. Bye-bye.

Ladies and gentlemen, this concludes the LANXESS conference call. Thank you for joining, and have a pleasant day. Goodbye.