LANXESS Aktiengesellschaft (LXS) Earnings Call Transcript & Summary

Ladies and gentlemen, the LinkedIn community, welcome to the LANXESS Virtual Days 2023. My name is Claus Zemke, and I'm the Head of Corporate Communications here at LANXESS. The chemical industry is going through a period of significant change. Who would have thought that after overcoming the COVID-19 crisis, times would become even worse. Today, I'm honored and I'm pleased to announce to you, Matthias Zachert, our CEO, who's going to speak to you about changing a chemical company in a changing world. Dear viewers, we are interested in your thoughts as well. Please send us your questions and ideas in the comments below this video. We will address some of them later. And with that, Matthias, stage yours. We are curious to hear what you're going to say.

Good afternoon, and a warm welcome to our Virtual Days 2023. As the CEO of LANXESS, it is my pleasure to have you all with us today. It has been almost a year since Putin invaded the Ukraine. The year '22 has brought unbelievable cruel suffering to the people in our European neighborhood. Many of us thought that things would get better after corona. We were taught differently. The past year was of the most dismal that people of my generation have had to experience. The economic impact is certainly not the main issue. The welfare of people and the values of our society have always been of utmost importance in our history. Nevertheless, as business leaders, we have to deal with these economic consequences and try to mitigate them. That is our responsibility to our employees but also to our long-standing partners like you, our customers. We have benefited in this situation from the facts that we have completely realigned our company in recent years. Many of you know that LANXESS has undergone profound changes, of course, aims at making us more successful. For example, by focusing on a broader product offering and customer proximity or on markets where we expect growth and can contribute to innovation and sustainability. In concrete terms, we at LANXESS have expanded our footprint in several key areas. In 2021, we have acquired Emerald Kalama Chemical, a major producer of flavor and fragrances and preservatives. In 2022, we acquired the Microbial Control business of International Flavors & Fragrances. With this step, LANXESS also became one of the world's largest suppliers of microbial control products. On the one hand, all these steps have made us more independent of economic fluctuations, the extreme volatility we've seen in various markets in the past year has not really affected us to the same extent as it would have been the case with our polymer-heavy portfolio just a few years ago. This has benefited us, but it also has benefited you as customers. LANXESS was able to act throughout. It was always our priority to be able to supply you even in difficult times. And we succeeded in doing so even in these times of war and energy crisis, notably here in Europe. On the subject of proximity to our customers and overall stability, we have also had good reasons to acquire businesses with a strong footprint in the United States in recent years. And today, we can see that this decision was absolutely right. In times when value chains have suffered massively also as a result of the war, we've been able to supply our customers in the U.S. even faster, even better and with an even wider range of products. We are deeply convinced that the economic importance of the United States will increase even further in the future. America is focusing on reindustrialization and is doing a great deal to promote the manufacture of sustainable products in the country. For us at LANXESS, that means we will also in the future follow our strategic decision to focus our investments in North America and Asian growth markets. We will be expanding our local footprint in the United States and Asia while defending our asset base in Europe. We are excited about the opportunities ahead and are confident that this strategy will position us for the long-term success. In this respect, the difficult year '22 has given us much reinforcement and clarity of our cause. I won't hide the fact that we haven't done everything right in the past either. We introduced a new enterprise resource planning, in short, ERP system in 2022. It was probably the largest transformation program in our LANXESS history. It was launched in Germany in May '22. The aim was to integrate many newly developed processes and to bring them to life in order to manage the group more efficiently, a complex transformation that created massive and, in some cases, unexpected challenges, particularly in the area of integrated supply chain management. This is all the more regrettable because it happened in an already tense global logistics environment. We are pleased to see that both our ERP system is losing its teething troubles and that the global logistics situation is improving significantly at the same point in time. In this regard, we can therefore look forward to '23 with more optimism, and we do apologize to all customers that were impacted through these internal system changes. Ladies and gentlemen, even in these difficult times, we are all united by the need to use our planet's resources responsibly. Sustainability is therefore one of our top priorities at LANXESS. We are fully committed to reducing carbon emissions across the entire value chain. Back in 2019, we announced our goal of achieving climate neutrality by 2014 with regards to Scope 1 and Scope 2 emissions. And now we're taking efforts to the next level with our new Net Zero Value Chain Program. This program is designed to make it easier for our customers to adopt products with a lower carbon footprint and a greater use of renewable raw materials. Our ambitious target is to achieve climate neutrality across our Scope 3 emissions by 2050. We are committed to this goal, and we'll continue to work hard to achieve it. The newest instrument in our toolbox is what we call our product carbon footprint engine. This tool will give us the opportunity to calculate the carbon footprint of all our products at the push of one button. This transparency is, of course, what you as our customers need for making your value chains also more sustainable. Ladies and gentlemen, also in '23, the chemical industry is under tough pressure. Although we actually need just the opposite, namely support from politics, society and customer industries. Therefore, my request to all of you is let us work together to ensure that our stakeholders and political decision makers in particular recognize again the eminent importance of our industry. As an essential contributor in the global economy, the chemical industry plays an indispensable role in driving the conversion to renewable energies, ensuring a secure food supply for the world's population and improving living conditions globally. Looking ahead to '23, we are cautiously optimistic about the future of our industry. We as LANXESS are proud to stand by your side. Thank you for your support, and let us work together to navigate the challenges of '23 and beyond. I wish you all the very success in your businesses, and thank you very much for listening in. And now I look forward to your questions.

Yes. Thank you, Matthias. We've indeed got some questions so far. I will try to cluster them a little bit and group them and -- as far as the content is concerned. Maybe we start with the transformational course of LANXESS. There's a question. You have described the major acquisition LANXESS has done in the 2 years. How was the company possible to do that in spite of the corona crisis and in spite of the war in Ukraine?

Well, this is a good question. As a matter of fact, the pandemic was the biggest challenge for us because in many areas, only digital due diligence was possible. But definitely, we made use of our global platform. As far as all corporate matters, financial matters were concerned, digital due diligence was feasible, but you cannot step away from physical site visits. And speaking here about technology, whilst being on site, and this, we definitely ensured, and thanks to our global operations we could make sure that all sites that we acquired, all the major sites that were indispensable for bringing the business forward were visited by our engineers, by our technicians. And therefore, we could make physical due diligence also work, and without that we would not have considered going forward with the acquisition. So this was a combination, a true hybrid combination between digital constraints and physical opportunities, and we made use of both of them.

What is the status of the integration right now? Are the newly acquired companies really a part of LANXESS right now? Or is there still work to do?

Emotionally, they're fully part of LANXESS. There's no doubt about that. Both businesses that we acquired liked joining our company and considered that we were the right home. Technically, of course, there's still some plumbing that needs to be done, and this will be done in course of 2023. But operationally, I would say most of the integration has happened. And therefore, I think we are fully on course with what we originally intended to do.

Let's move over to the macroeconomic perspective. Energy prices, you mentioned that in many parts of your speech, they are still a matter of concern. What's the perspective on it? What's going to happen in the next 12 months or so?

Well, I don't have a crystal ball, a lot depends here on weather conditions, development on geopolitical tensions like in the Ukraine. We've seen that here, this can lead to surprises every day and we have to monitor the situation. And my assumption -- my personal assumption is at this point in time, we will not see the severity of energy price explosion like we have seen in 2022. Nevertheless, we will still have an alleviated energy-price level. And then, of course, we have to see how much the normalization -- the new normal will look like in Europe after new energy alternatives have been established and the new price levels have settled. And this most likely, we are going to see in '24 onwards. But our assumption is that pricing levels in energy will definitely stay alleviated compared to other regions like United States and Asia.

Closely related to the energy prices, of course, is the general topic of inflation. What's your perspective on that, going to ease? Or is this something we need to do learn -- we have to learn to deal with?

I think we still have to deal with this in 2024 and 2023. However, it's going to be less severe as we have seen in 2022. The reason for that is that most of the central banks have acted, some very early, like we have seen in the United States, others rather late, like in Europe, especially as far as the [ ECB ] is concerned. But everybody has taken measures by now. And therefore, the comparable base is now a higher one, and therefore the next comparable base will be definitely leading to one that leads to lower interest rates or inflation rates. And due to the increase in interest rates by the central banks, my assumption is that inflation is going to ease, yet it will still be a theme for '23 and a more modest inflation in 2024.

Globally.

Globally.

Yes. Let's stay on the global level for a second. You have touched the fact that LANXESS is going to invest in the United States. Very -- yes, blunt question. What is better in the U.S. or to put it more politely, what can Europe, what can the rest of the world learn from the United States right now?

Well, my general stance is we should all learn from each other. It's -- there is no country, there's no nation that has inherited only the blessing of this world. At the end of the day, the various nations, cultures that we have, each nation, each culture has its advantages and its benefits. And the beauty of the world is if we take it at its best, we can all learn from each other. So we can learn from the United States. I think the United States can also learn from Europe and Germany. But when I look at the current situation, what I always admire in the United States, they are pragmatic and they are willing to change. This is something that in Europe, notably in Germany, is a little milder developed. Sometimes we are less pragmatic. And with change, we take our time. And here, definitely, we can accelerate. And that is something that, of course, needs to be done in the current environment. I think LANXESS has been a company that was always open to change, and therefore we will address this at our pragmatic, in our dynamic way. And therefore, would like to take out of the current challenges that we have, opportunities and therefore be a good supplier to our customer base going forward.

Pragmatism seems to be, yes, a new principle in China as well. At least they have adopted quite fast to a very new point of view as far as corona is concerned. What's your perspective on China in these days?

Well, China in terms of corona has had its good time and then a challenged time. And I think they've taken now also a clear approach on making the best out of the current situation again with pragmatism, and clearly also seeing that the economy is very important to the overall country, to the overall nation, to the population. And therefore, if I look at China, I think they are now adjusting wherever adjustment needs to happen, and this will be positive for the worldwide economy, potentially not now for the running quarter. But my assumption is that economy-wise, we would see China back in the worldwide GDP contribution from Q2 onwards. China is the second biggest economy in the world. So we need China in the global economic -- if the global economic environment should move back to prosperity and growth. And therefore, my expectation is that China is going to start contributing in Q2 latest and second half to a positive spin on the worldwide economy.

Some of our customers ask this question about the transportation situation. You mentioned already the fact that the chains are relaxing in a way. Question is, what does LANXESS do to make sure that all of our customers receive all their goods in time?

Well, what we have done last year but also this year, we are not going for spots ordering with ocean freight capacities, for instance, or other capacities in the logistical value chain. In order to be always in a position to develop goods to our customers, we go for ensuring that we have enough capacities on a yearly basis available. We did that last year. We continue doing this, this year. Sometimes this costs a little more but gives definitely security supply. But despite this approach we have taken to secure freight capacities, we've seen that there were a lot of delays because shipments did not arrive due to jams -- traffic jams in harbors and on the sea routes. But as far as making sure that we have reserved enough capacity, this is something that we did last year. We will continue doing that this year in order to be in a situation that we can supply goods to our customers.

One quite particular question, use of hydrogen in the chemical industry. Is this a topic for LANXESS as well? What's the general perspective on the hydrogen topic?

It's a positive one. I mean, we have a few energy carriers that will replace in the future fossil energy carriers, hydrogen is one of them. But of course, here, it's nothing for tomorrow. It's something that needs to be developed over time. In Europe, it will most likely take 5 to 10 years also to develop the network and to then get the green hydrogen into the network from different countries. And therefore, we definitely follow this. This is also what we want to do and put in place and make use of once it is available in order to get to the climate-neutral value chains in 2050 in Scope 3. So hydrogen will definitely play a role. But it needs the efforts of all countries, of all regions to basically invest in infrastructure and the green hydrogen development so that basically the entire value chains can turn into climate neutrality in the next decades to come.

Maybe as a final question, a big one. If we are meeting here in 1 year from now, what will be your assessment of this year 2023? What are you going to say about this difficult running year?

Well, altogether, we come -- moved through this year successfully. And this -- successfully means that we tied the relationships. I think strategic partnerships in the long-term gain more and more importance. We're living with so volatile -- in such volatile times that relationships, friendships need to tighten. And as strong partners, I think you can mitigate or overcome any challenge, and this should be the goal we take for '23 and also going forward.

Good. Thank you, Matthias, for taking the time to join us today. If you are looking for further information, I would like to invite you to join our further sessions of our Virtual Days, and of course follow our LinkedIn channel. Thank you for joining LANXESS live today, and see you next time. Good afternoon. Goodbye. See you next time.