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 Eva Frerker. Please go ahead.

Thank you, Stephen, and good morning, ladies and gentlemen. Thank you for joining today's call on such short notice. We apologize for any inconvenience this might have caused. As always, please pay attention to our safe harbor statement, which you can find in any of our presentations. And I'm here today at an investors conference today in Frankfurt. And right here with me is Matthias Zachert, CEO at LANXESS; Michael Pontzen, CFO is, of course, dialed in as well. And Matthias will start with a quick intro, and then we will open the floor directly to your questions. I will now hand over to Matthias. Please go ahead.

Thank you, Eva, and welcome, everybody, on this call. LANXESS went out yesterday evening with a profit warning, and so we would like to give an early heads up as quickly as possible to the financial community. Second quarter is considered to come in with a profitability of EUR 100 million EBITDA. We will also adjust our full year guidance to EUR 600 million to EUR 650 million. As a matter of fact, this assumes no pickup in demand, whilst focusing further on net working capital reduction. Nearly all industry markets are impacted by weak demand and destocking. And I think you have seen a series of profit warnings in neighboring industries or in the chemical industry already. This feels like Lehman 2. And we clearly see that even markets that normally tends to be very stable and close to the consumer industry are impacted. And with Q2, we've also seen that agro starts to weaken. Construction and electronics industry show substantial decline. And this is not only true for Europe, but also for Asia. China does not rebound. We are now seeing into Q3 order book. Our assumption was that latest Q3, order intake will improve, it does not happen. And therefore, our assumption in our guidance is that China will be weak for the entire year 2023. The current demand situation is at normal. And it's very pronounced, and we see this as clearly the aftermath of 2022, which now materializes in its entirety in 2023. We will continue the path that we have started in 2023. We will focus on cash flow, and here especially on further inventory reduction this year. Of course, this negatively impacts our EBITDA. We have to absorb more idle costs. And therefore, the focus on net working capital reduction is going to continue. But also clear heads up whilst we do this profit warning on second quarter, cash flow with EUR 100 million of EBITDA, and second quarter is the quarter when we pay the variable bonus worldwide. So with bonus payments and the dividend payment that we have issued, of course, you should make the calculation that cash flow in second quarter will be impacted. In return, on the basis of this financial projection, there will be no bonus variable pay that will be paid for this year, then positively impacting cash flow next year. I would like to finish with a clear statement that we are doing everything to counteract. We are addressing costs, investments and, of course, we'll take here respective measures to change our structural cost base going forward. And whatever we can do for 2023, we are already implementing as we speak. But of course, we will also address structural cost measures in order to mitigate any further weakness in demand for 2023, but predominantly 2024. LANXESS is experienced with crisis management, and therefore, we will also address this crisis with swift actions and in a professional way. With this, I would like to open the call for your questions.

[Operator Instructions] And the first question comes from Andreas Heine from Stifel.

Pleasure to have honored to ask the first question. The first is really on cash flow on a full year base. Of course, you with these lower earnings, we will even focus more on net working capital reduction. Could you outline this a little bit more and what you can achieve? Last year, you outlined that you had safety inventories of EUR 200 million, of which EUR 60 million were reduced in Q4. That would leave EUR 140 million. But as you said, it's an unusual situation and business activity is below normal. So inventories could also run below normal and prices are falling. So that's the first question. What can you achieve on net working capital? And the second is on the structural issues. You have large sites in Advanced Industrial Intermediates in the Inorganic Pigments and in Rubber Chemicals in Germany, which to my understanding, are all very energy intensive. What can you really do to change this structural disadvantage, which you outlined in the press release yesterday? And lastly, looking on the profitability and the balance sheet, including pensions, the financial leverage is now very high. How comfortable are you that you can go through this difficult situation without any additional need in equity?

Well, let's address that one by one, Andreas. As far as net working capital is concerned, we still see that there is clearly the potential, notably on inventories to reduce here net working capital by a few hundred millions. And if you look at the normal seasonality, this will definitely be a driver for third and fourth quarter. We started with this already beginning of the year. Second quarter is always the most cash-intensive outflow because of dividends and variable pay. So therefore, whilst we achieved free cash flow Q1, the focus on free cash flow delivery will be rather again in third and fourth quarter. As far as the energy-intensive plans with intermediates are concerned, reflect Advanced Industrial Intermediates, Inorganic Pigments. Last year, we gave an overview on the 53 production plants in Germany, highlighting 2 plants that are quite energy intensive. And definitely, these plants that are more energy intensive are being analyzed at this point in time. And the market's position and competitiveness are being assessed. And then we will take the decision if we keep them on stream or rather upstream. So definitely here, if we see the need for making adjustments, we will do them. On financial leverage with all respect, if you look into the maturities [indiscernible] maturities in the next 2 years, [ exclamation mark ]. And second, we have undrawn credit facilities of around about EUR 2 billion that are unconditional. There is no financial covenants or nothing associated to it. So of course, in this year, with the suppression of EBITDA, the multiples or the leverage moves up, but it's nothing that we consider as a concern due to no liabilities maturing and second, ample of financial credit facilities undrawn in our hands. I hope that clarifies everything.

And the next question comes from Georgina Fraser from GS.

The first one is the 2Q guidance is nearly half of what we saw in Q1, which was already a very weak quarter. Could you say a little bit more about what has really deteriorated into the second quarter? And if you can give us an indication on how volumes and pricing levels are looking? And then my second question is just in the context of thinking about the leverage and you've got those undrawn credit facilities, how are you thinking about the risk of another gas spike materializing at some point later this year? And how do you think that you would manage that? Could there be further downside risk to the EBITDA guidance that you've given?

Thank you, Georgina. Well, let's come on Q2. We've basically not seen any trading change in April, May, June. Originally, at the outset, beginning of May, our assumption was that May will turn in a little stronger and with further upticks in June. But as a matter of fact, this did not materialize, May remained soft. And June is clearly no major change as far as trading pattern is concerned. As a matter of fact, in -- from May, June onwards, we saw that also agro starts to soften. And therefore, from the end industry perspective, volumes are brutally down. We know that volumes are clearly stronger down than consumption level is in the industry. And therefore, we clearly see that destocking is continuing, but we still clearly also see that worldwide demand is soft. Destocking at some point in time will end. And when this is going to be the case, I mean nobody has the crystal ball. Indications originally from our customer base was that they will come back in Q3 with orders. At this point in time, we don't see that. And for that very reason, we clean the bar now on our macroeconomic assumptions. So volumes are -- is what is missing. Pricing-wise, we basically maintain prices wherever possible at the level that we have established prices at. However, of course, with energy clauses being in place in many of our contracts, declining raws and declining energy prices will mechanically run through as they have last year run up, respectively. Now on gas, we didn't hedge for the last 10 years. At current levels, where TTF is in the 20s and in the 30s, we definitely will not go into the winter unprotected. But of course, here, we are sequentially adjusting our position. We see right now that storage in gas storage is already reaching 80%. This is far better than anybody had anticipated. We might come to 100% gas storage earlier than October. And therefore, there might be a further pressure to oversupply gas on the markets. And this is something that we definitely have in our game plans to then take further respective protection. So that's -- we have a clear risk mitigation should we have volatility in Q4, Q1 in winter season. So I think from the gas side, this year, definitely, we will be better prepared, not only through our contracts, but also so taking an active risk protection. I hope that answers your questions.

Yes. Just is there any way that you could give us some kind of quantitative guide on the volumes? Is it a similar mid-teens decline that we're seeing in 2Q or worse than Q1?

Let's do that in August when we report Q2 data. This is -- I mean, it's not very often that companies make conference calls when they do adhocs. We want to do that for all clarity and openness to the capital market. But of course, also, we are restricted on what we are saying. We will give full-fledged data as usual with our August Q2 reporting that we will convey.

The next question comes from Konstantin Wiechert from Baader-Helvea.

My first question would also be around the HPM joint venture. If you could maybe -- I know we haven't talked about this today, but if you could also maybe shed some light, if there's anything that changed to your previous estimates and if there's any debt program that might be at risk here as well? And then my second question would also be because we heard that quite some time now from some investors that at this price levels, you might also become an interesting takeover target. How would you respond to this and would you be open for takeovers from strategic investors?

Well, to be very crisp on both questions, this is not a call on HPM or the Envalior joint venture. Envalior has gone through the long-term refinancing and therefore, syndication is completed, that was done in April. And with this financial matrix, financial capital structure for the joint venture has been established. As far as your second question is concerned, I mean this is up to the market. We are a company that will definitely go for value creation in the coming years repositioning the company further. And therefore, we will run the company as professional as possible and then markets will judge on the valuation.

Okay. And maybe I just think about one add-on question previously on the Advanced Intermediates. I guess we will see some further impairments here this year. Is this already on the table? Or still nothing that we should think about?

Well, as far as impairment testing, this is definitely an exercise that is done in all companies, also in ours, the normal impairment exercise is done in our case at the end of the year and cost of Q4. And of course, we will look at the business plans at the cash-generating units and see if impairment needs is on the table or not. In the past, this was not the case. And of course, with this year's financial performance, we will have to look into this. It's nothing for the second quarter. Should we do an impairment -- I mean, we will do an impairment test in the second half of the year as in previous years. And should there be a need for an impairment, we will communicate that in due course, but it's nothing that we currently need to evaluate.

The next question comes from Matthew Yates from Bank of America.

Just one question really back on leverage in the balance sheet. I appreciate we don't have the full context yet of how things -- how tough things are across the sector and you're absolutely right that some of your peers have given negative updates in recent days. But I'd like to ask a little bit more about the implications of this morning on your balance sheet. Firstly, can you confirm whether you redeem the hybrid bond that was callable in June? And how significant losing that equity credit is to the metrics that the rating agencies look at? And I'm sure those rating agencies would take into consideration where we are in the cycle and what we think the more normalized level of earnings could be. But when are you planning to next sit down with Moody's? And to protect an investment-grade rating, do you anticipate now having to make some concessions around dividend cuts, disposals or possibly even an equity raise?

Well, the hybrid bond has been cold, and we basically did not have to do any liability management. So we just called the hybrid bonds. That will reduce interest rates and cash outs by round about EUR 25 million. So this is a clear benefit to net income and also cash generation. It was our most expensive debt maturity with 4.5% fixed coupon. We are now at average costs between 1 and 1.5 percentage points, I guess. So the financing, which has put long-term secured, so that's [ 0.1, 0.2 ]. Of course, we are sitting regularly with rating agencies. We have finished our rating reviews this year already. They are normally organized in April, May, and we have done that by now. The hybrid is an instrument that is normally very high in the ranking methodology-wise with Standard & Poor's. It's not the same approach that Moody's takes. So therefore, it's clearly a different emphasis as far as this is concerned. And to the last question, we have investment grades since the spin in 2004. I think we know what it takes to defend investment-grade rating. And this is something that we definitely will strive for and protect. And we currently see that we have all measures in place to defend our investment-grade rating. And investment grades, we are currently Triple B Flat, or in Moody's language, Baa2. And therefore, we have still a good room to remain in our investment grades even in a cyclical downturn, which we currently definitely have.

Our next question comes from Angelina Glazova from JPMorgan.

I just wanted to follow up on the discussion on the second quarter and full year guidance. How should we think about the guidance of the second quarter? Is it fair for us to assume the EUR 100 million of EBITDA is an abnormally low level? And then does the guidance for full year actually has seen some improvement in the third and fourth quarter. The reason we're asking is if we were to assume the second quarter levels to last through the second half, then we would be coming closer to EUR 500 million of EBITDA for the full year, but the actual guidance is somewhat higher. So if you could give us some color on that, that will be helpful.

Yes. Angelina, very clearly. As far as Q2 is concerned, I mean, it's a matter of volumes. We are in second quarter now below 60% utilization. And this is because of clear demand shock. And on top of that, we clean our inventory. So doing this whilst demand is weaker in a double way. Our assumption is for Q3, Q4 that demand is not going to jump start. But the benefit in Q3, Q4, we should have in Q3, Q4, a lower input cost base. Right now, we are still sweating out our high-priced inventories of Q4 and Q3 last year. This exercise will more and more be dealt with the further we go into Q3, Q4. But very clearly, we are not factoring in the third and fourth quarter a rebound on volumes.

Our next question comes from Jaideep Pandya from On Field Research.

My first question really is on the portfolio and the resilience point that you've stressed for the last couple of years. So if I just compare the COVID 2020 results and [ Exxon ] Engineering Materials, you roughly did around EUR 700 million EBITDA, and you're guiding for EUR 600 million to EUR 650 million this year. So what is really -- are you saying that volumes in 2023 are even lower than 2020? And then the follow-up to that is when you look at the industry, I appreciate everyone is warning this year, but last year, everyone had a mark step up in EBITDA when length has sort of remains in the sort of EUR 800 million to EUR 1 billion range. And now you're sort of dropping along with a lot of your peers. So I just want to understand what is really the resilient versus non-resilient part of the portfolio. That's my first question. And the second question is I really appreciate around the utilization point and the inventory point, but could you share some context on how much under absorption are you actually taking this year because of the high inventories that you came into the year with? And then the last question is really around the compensation. I just want to understand what is the compensation policy in these cases where on a long-term basis where -- how would the compensation for a long-term effect? Is this not going to be affected because this is really a cyclical downturn? Or is this going to be affected because there is some degree of length of specific elements into this?

Well, let me take them one by one, Jaideep. As far as volumes are concerned, the answer is clearly, yes. We see a volume decline, which is steeper compared to March, April 2020 pandemic crisis. And we even see a steeper volume decline compared to Lehman because it's lasting longer. And therefore we are now in a destocking models in the industry, which basically started November last year, and we are still currently in it. So this is pretty easy here. On your second question, 2022, we have shown, despite all the volatility and severeness that was already visible in 2022, we posted a 14% EBITDA rise. Potentially, you did not pay attention to this because net working capital was so very negative, and we clearly take note of that. But 2022, we maneuver P&L-wise, relatively strong [indiscernible]. But of course, now this year, that's question number three, we have to reduce our working capital. And this will hurt the P&L by roughly EUR 100 million. We are going down, if we look September last year, we had inventories at its peak. We will sweat out hundreds of millions of inventories at the sacrifice of utilization, and that was, of course, the P&L. And as far as compensation is concerned, our compensation, I think from the setup is quite tough. We have clear boundaries. When we are off track in the boundaries, there is no compensation on variable performance. And with the guidance we've communicated today, there is no compensation on the variable side for the leadership. And I think in good times, you get good pay; in bad times, you get bad pay. I think this is how it should be, and that is being factored into our compensation as well.

Our next question comes from Oliver Schwarz from Warburg Research.

Firstly, just for clarification, Matthias, you said that the impairment that might be a topic for year-end evaluation talks to your auditors and so on and so forth. So just for clarification, the EUR 100 million EBITDA pre in Q2 2023, does that contain, let's say, any kind of one-off drags on profitability that are not reported in -- under, let's say, one-offs, but are included in the operating results? That would be my first question. And secondly, on the guidance. As you stated, you are not looking for any kind of volume improvements in the second half of the year from now on. Looking at your guidance, if I were to take the EUR 100 million of Q2 and extrapolate that into the second half of this year, I would be significantly be below your adjusted guidance of EUR 600 million to EUR 650 million. So what kind of self-help measures do you expect to implement to improve the EBITDA level, not talking about cash flow here, but EBITDA. Could you help me out with that?

Well, on your second question, we definitely would benefit in the cost of goods sold through lower input costs and also lower logistic costs that will kick in, in the second half. Normally, our tender contracts for logistics run out in May, June. And so therefore, on both sides, conversion costs, but also logistic costs, we will have a lower base in second half. And as far as your first question is concerned, listen, Oliver, we made a profit warning yesterday evening, meaning this is a different view on the markets. The consequences that we -- or the countermeasures we now take and the potential onetime costs that this will incur on write-offs is associated to countermeasures. And you can be very sure that this is already being followed on our company, but I can only communicate on OTCs associated with countermeasures when countermeasures are communicated. I alluded to the fact that we look at sites that are energy-intensive. I definitely will also look at cost structure. When you have a crisis, normally as a management team, when you're a professional, one should use crises to clean the barn, and to adjust for structures and take tough decisions where needed so that you come out of a crisis reinforced and stronger. That is what we've done in the past, and we will do that going forward as well. But then, of course, we will communicate what measures will lead to what consequences. And please give us this time to do that in a professional way as we have done in the past.

The next question comes from Rikin Patel from BNP P Exane.

Just sort of a broad question on destocking and demand. [indiscernible] by a number of your peers. I'm just wondering, have you guys seen any market share losses over the past quarter to half year? And secondly, just on the consumer business. You've had softness in Saltigo and Ag. Just wondering if you've also seen a similar slowdown in some of the other verticals within that business. And maybe if you could quantify the volume headwinds during Q2 in those units.

Well, let me address them one by one. As far as your second question is concerned on market share, we don't really see that. We track export statistics, import statistics. We talk to our customers and want to understand how they position themselves. And basically, the feedback from our customers are -- this goes across the board. And by the way, it impacts our supplier as well. When we deploy net working capital, we are not ticking off suppliers. We stick to most of our suppliers, potentially renegotiate contracts here and there now. But it's a decline in consumption that our suppliers suffer from as well. And therefore, by and large, we see that market share is where it used to be. And the clear feedback is it's softness in demand and it's destocking across the board. I think this is [indiscernible] by pharma companies these days. So it should not be surprising that chemicals face that at face value. To your second question, consumer protection is the least impacted on the volume side. But also here, we see softness, as stated earlier on agro, but also other consumer and exposures, but the businesses that are impacted most are definitely into this analysis. So ladies and gentlemen, with this, we see that questions have been addressed. And I hope that we could clarify all your immediate questions today. That's the reason why we decided in early hours to do this conference call. Of course, full fledged reporting on second quarter will be done in August. And of course, Investor Relations team and ourselves and the Management Board, CFO, CEO, will be always there to address your questions and concerns. Thank you so much. And with my best regards, from Eva and myself, and Michael being on the line, we sent our best regards from Frankfurt today. Take care. Bye-bye.

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