LANXESS Aktiengesellschaft (LXS) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the LANXESS Aktiengesellschaft Full Year 2024 Results Webcast and Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Andre Simon, Head of Investor Relations. Please go ahead, sir.

Yes. Thank you very much, Erin, and a warm welcome to everybody to our Q4 full year '24 conference call from my side as well. As always, we begin by asking you to take notice of our safe harbor statements. And with me today is our CEO, Matthias Zachert; and our CFO, Oliver Stratmann. Matthias will start with a short presentation, and then we will open the floor for your questions. And with that, I'm happy to hand over to Matthias. Please go ahead.

Thank you so much, and welcome to all of you to our fourth quarter conference call. I'll start the presentation on Page 4 and give the summary on how we look at 2024. All in all, it was a challenging year. Markets have not been benign. But due to our successful cost savings program called FORWARD! and due to the acceleration in the implementation process, we were able to get more savings implemented in the course of the last 12 months, and this definitely supported the increase in profitability. Different to 2023 when we massively reduced working capital, despite having consequently negative impact on the utilization, we were able in 2024 to again put more emphasis on cash flow but profitability increased. So the higher utilization contributed to profitability improvement as well. Oliver and I stated very clearly at the outset of '24 that we will again deliver on cash flow and focus on further debt reduction. And I think we clearly can state we walked the talk. Solid free cash flow despite still modest profitability. By the way, we also secured long-term financing with a new sustainability linked revolving credit facility maturing in 5 years from now. What I'm delighted to confirm today that our portfolio transformation as far as focusing on chemicals and letting go of polymers, is accelerating as well. We have now received all clearance from all global institutions and therefore, can close the transaction in course of April this year. So here, we are also faster than originally communicated. The cash proceeds that we will get in April will be used to immediate the leveraging. Noteworthy, however, also that we had to fund our restructuring program, FORWARD! So we had cash-outs in the course of '24. And all in all, we have to state that macroeconomic weak demand is clearly visible in '24, and we only see a very modest improvement in close of '25. Noteworthy also, we were faced or confronted with a massive destocking in the agro industry in '24. Our assumption is that destocking is no longer a theme for our industries, including agro in '25, thus, some modest volume improvement should become visible. Let's turn our attention to Page #5. Here, the headline numbers. EBITDA is up 20%. We guided at the outset of '24 for an improvement of 10% to 20%, 12 months ago, this guidance was perceived as somewhat ambitious. And I think we can now clearly say that our guidance at that point in time was the right one. Free cash flow, I mean, we had through the entire year '24 ups and downs on a quarterly basis on free cash flow, which was pretty normal. But we clearly stated our focus will be on either improving cash flow or keeping the cash flow at the same level or improved level than '23 based on improvements on operational performance. But if we can achieve a positive free cash flow, we will do our utmost to get there. As far as safety performance is concerned, we can clearly state that we are, here, top notch in the European industry with 0.6 as far as MAQ is concerned. We achieved here a clear top ranking. And this is, by the way, the third time in a row. As far as net financial debt is concerned, another decrease of roughly EUR 100 million, so minus 5 percentage points. So you clearly see, we walk the talk. If you look at 2025 with the cash proceeds coming in from the Urethane's transaction, we entered back into good territories as far as financial leverage is concerned. Now I move to Page #6. We know very clearly that '21, '22, were not satisfactory at all as far as cash flow generation is concerned. We clearly stress here the reasons behind it. We would clearly, however, like to stress this company has, over the years, been a free cash flow delivery company. And in the last 2 years, '23 and '24, we generated roughly EUR 700 million. '23, the P&L was impacted by that. '24, we were, by and large, net-net on the same level as far as working capital is concerned. And therefore, despite weak macroeconomic environment, I think we finished the year on a strong cash flow basis. Now ladies and gentlemen, let's move to Slide #7. We clearly give here the indication that we are fully on track on -- after the levering up in the acquisition phase, we are levering down. We've done that many times before in our company history. So here, we are executing as we speak. And once the Urethane proceeds come in, I think you see that we are then entering again into territories, which should be considered as more normalized. But 3x net debt to EBITDA is not our target. We will go back to levels that we had before. And I think you all know that we have a 40% participation in one of the global polyamide leaders in the world, Envalior. And I'm looking to your models. I'm quite frankly sometimes very surprised to see what I'm reading there. In majority cases, the valuation on the Envalior stake is taken from our balance sheet, the accounting methodology where the book value of Envalior resides, some even take further discounts in this regard. We always stressed that Envalior is being priced or is being evaluated at a multiple and EBITDA. And if you look into the Standard & Poor's publicized reports of the 13th December 2024, you can take the EBITDA and the net debt and everything out of that and come to a better calculation than if you look at technical accounting valuation, which is not reflecting the guidance of our company. With this, I move into our segments. And here, I reference Page #8. Full year 2024 has shown weakness in Consumer Protection, solely driven by agro chemicals and Saltigo. Saltigo reported a record year in 2023 when the agro industry was at its peak, facing, however, in '24 severe destocking. So we were hard hit in Saltigo as well. The other 3 business units, despite difficult macroeconomic environment, all improved. Our assumption is that Saltigo will improve in '25 versus '24. And therefore, the segment will be better off in '25 compared to '24. As far as Additives is concerned, an improvement to '23, we are still definitely not satisfied where we are. Construction industry was still a drag in 2024. And therefore, the biggest business unit Polymer Additives was hit hard, but could through cost savings make first steps in the right direction. Advanced Intermediates, I would not stress that this is back to normal profitability levels. We have seen clearly higher profitability by the segments in previous years but compared to '23, which was toxic. In '24, Intermediates business recovered, but still needs to improve further. So ladies and gentlemen, with this, I move to Page #9 (sic) [ #10 ] outlook for the 3 segments, more pronounced improvement is expected from Consumer Protection. As far as Additives is concerned, modest improvements like we convey for the Intermediates space. So let's come to the guidance of the entire company. And here, I start off with reported. So let's come to the guidance of the entire company. And here, I start off with reported '24 numbers, EUR 614 million. Please take out the profitability pro rata of Urethane. All in all, Urethane solution achieved an EBITDA of roughly EUR 50 million in '24. If you take it out for 3 quarters, you have to deduct [ EUR 40 million ] and we communicated that in Q4, that was one of the reasons for the positive profit warning on 20th of January that we did better in fourth quarter. We delivered more profitability than you had in your models, than we had expected because we saw that in December, which normally is the weakest month in the fourth quarter, we saw a clear uptick in many of our business units. So we consider this as a kind of pre-buying. And therefore, if you adjust for around above EUR 20 million, you come to a like-for-like improvements, '24 to '25, of roughly 10 percentage points. And that is the guidance operationally. The headline numbers are EUR 600 million to EUR 650 million with 1 quarter of Urethane being included. So Page #11 summarizes everything. We don't consider macroeconomic-wise a significant pickup in demand, only modest improvements. I think I don't need to stress that we are living in quite turbulent political and thus, economic times, making predictions today where from 1 week to the other, fundamental changes can or could occur, it's always quite challenging. But nevertheless, on what we see today, we give a guidance of EUR 600 million to EUR 650 million reported EBITDA numbers. And as far as Q1 is concerned, we would like to be more specific here. We consider an improvement of 25% to 35% vis-a-vis our first quarter last year. Ladies and gentlemen, this is it for the presentation, and I'm delighted to open the floor now for all your questions, which Oliver and I will take.

[Operator Instructions] And your first question comes from the line of Thomas Wrigglesworth from Morgan Stanley.

Two questions, if I may. The first is on Consumer Protection. You've given this a darker green arrow than the other divisions in your Slide 9. Should we, therefore, expect faster growth in Consumer Protection here than in the other divisions? And could you help me understand the drivers of that growth, given there's quite a mix of businesses? I'm wondering, in particular, if Virkon is doing well in the light of avian flu outbreak in the U.S. My second question is about free cash flow generation. You, obviously, deliberately haven't given us a guide for 2025. But clearly, the free cash flow conversion in '24 has normalized to a better level as you point. Can we assume that free cash flow conversion from EBITDA, that's now the kind of base case and we can assume that going forward for '25?

Thank you very much, Tom. And as cash flow is one of the top priorities, I pass on the word immediately to Oliver to get first things first. Oliver?

Fantastic, Matthias, thank you. Tom, on free cash flow, you will remember last year that I said we will put full focus on generating cash. And then I was reluctant to speculate on working capital developments. Now looking back, high-end side, I think we've proven that in the year '23 and '24, amidst very difficult conditions, we have proven to put cash flow first and we've been able to generate a nice free cash flow here. You should assume that, that is our topic going forward as well. And I would just like to point out and stress what Matthias has said before. Please look at the full year and not so much at the individual quarters and be aware that there are seasonalities also reflected in our cash flow. So typically, in the beginning of every year, you can assume that working capital is being ramped up in order, for example, to cater maintenance turnarounds in the latter part of the year. So we will have volatilities there, but we are targeting cash as we did in previous years.

Great. Thank you, Oliver. And now let's come to Consumer Protection. '24 in Consumer Protection was down basically because of Saltigo. And I stressed that before. Saltigo was coming from a peak year, falling substantially in course of '24 to levels that Saltigo had not seen in the last 5, 6, 7 years. So that was really a massive hit driven by the massive destocking happening in agro. When we now look at the agro industry, we think that destocking is over. If you look at the 4 out of the 5 companies that are driving the agro industry, you see still a muted tonality, but you see that all of them are definitely seeing improvements versus 2024. So '25 may not be a great year for agro. And I give you the feedback, please look into what the listed agro companies have communicated, the tonality is still muted but it should be a better year than '24. So if Saltigo is improving and assuming that the other 3 business units improved like they have done last year, the segment's Consumer Protection should report a better momentum than the other 2 divisions in our portfolio. I hope that clarifies everything, Tom.

Everything is clear.

And then next question please.

Your next question comes from the line of Martin Roediger from Kepler Cheuvreux.

Thank you for taking my three questions. Regarding your guidance for Q1 2025, do you see that volumes in Q1 are really missing after the prebuy in Q4? In other words, do you see in your data, Q1 is almost over, that volumes are soft in Q1? Keep in mind that the comparison base is still rather low. Second is on politics. With almost 100% likelihood we will get a debt [indiscernible] upcoming German government. Do you think you can benefit from the EUR 500 billion special fund for infrastructure? Or in other words, how much of your 15% exposure to the construction industry is related to building of streets, schools, railway tracks, et cetera? And then finally, just one clarification question on Saltigo. You had in the past, especially with 1 key customer, problems with demand. So volumes were particularly in some cases 0. Do you see that this customer is now coming back, and that is the reason why you are more confident? Or is it more related to the statements you have heard from the listed companies?

Thank you, Martin. I would be very crisp on the 3 questions. Q1, I think we've been very transparent in where we see profitability, 25% to 35% up. We will not dive down into giving you percentage terms on volume, pricing, FX, et cetera, that would be all done with Q1 reporting. So the transparent guidance, what we do is to flag out where we will be in Q1 from a profitability standpoint. And I hope this is information and comforts enough for your models. Then to the second question, politics. The EUR 500 billion -- I mean, first of all, they need to be decided. This is not put in place yet. It's being announced. And the first step on the approval process has been taken. Now it still needs to pass the [indiscernible]. And then we need to have a new government in place to decide on how they are going to spend. So my assumption is EUR 500 billion for the German economy is a big booster for sure. Is it going to ignite growth in Germany and with positive spillover on Europe? Yes, I think this is definitely likely. But of course, it will -- from the time the government is formed until it's being seen in order books and then volume momentum, I assume that this will rather be an element of '26 and not an element of '25. The good thing, however, is now we have most likely a government, no longer 3 parties, but 2 parties. And apparently, 2 parties that are able within 2 weeks to decide on something fundamentally positive. We need this kind of approach now in Europe, and we need the big countries who join. And therefore, if this is -- Germany coming back to growth for the Eurozone, that will always be a kick-start for the entire Eurozone economic development. So I hope that finally, after 2, 3 years, we are coming back on track. And if the German economy is going up, if construction is going up, LANXESS will definitely benefit. Now on Saltigo, my comments on more improvement in Saltigo is based on the fact that destocking is simply over. We will not comment on granular customer contracts or orders. Our belief in '25 is that despite still soft agro overall market dynamics, we will see an improvement in '25 versus '24. If it comes better, we rejoice, but it's beginning of the year, and I think at the beginning of the year, one should always be modest.

Your next question comes from the line of Matthew Yates from Bank of America.

A couple, if I can. Matthias, I wanted to revisit something you said at the round table just before Christmas. And you were saying that in order to LANXESS to achieve a sort of specialty type margin, the company would somewhat need to shift its product offering and its customer service capabilities. Can you talk a little bit about what the incremental cost and timeline for achieving something like that would be? And then the second question, as you brought it up in the introductory remarks. Should I give you the chance to just elaborate a little bit on the Envalior discussion. If I look at that latest S&P report, their forecast for EBITDA in 2025 is around EUR 400 million. They're saying the business has gross debt of EUR 4 billion. So it's 10x levered. I assume net debt is a bit lower. Can you help me understand better why there is equity value in this business? Or is that premised on the idea that profitability can be much higher than the estimates that they're putting out there for just 2025?

Thank you for your two questions. I will take them one by one. Your reference made on product upgrades, customer service relates to statements I've made at the Analyst Roundtable in London in December. And I basically stressed here not only what you have referenced, I stressed here that in the next chapter of LANXESS, our company will now extract the best and the most operationally from our leadership positions that we have. We have, fortunately, left all commodity and polymer linked products at the time when you could well divest. This job has been done in an incredible speed. Now we have focused on chemicals and leadership position. And now we will get the maximum out and that there is a potential for us to grow in terms of profitability and cash, it's obvious. We will do that with our investments that we have. There will be no extraordinary investments needed. We will just operationally max-out. Now we come to simple mathematics when we talk about Envalior. You gave the hint to the Standard & Poor's report again. I have it in front of me. You made reference to the Standard & Poor's reports issued to the market on the 13th of December 2024. If you look at the prognosis of Standard & Poor's, and by the way, they are normally always more conservative than management is guiding, their reference on EBITDA to 2025 is EUR 380 million to EUR 420 million. In '26, references made at an EBITDA EUR 475 million with EUR 525 million. Debt being at either [ EUR 3.7 million ] net debt and [ value as cash ] or [ EUR 3.9 million ]. If you now multiply roughly EUR 500 million by 12, for instance, and strip -- subtract [ EUR 3.9 million ] And then you take very simply 40% out of that, you come to the value, which reflects something that we have considered as a base case assumption. I hope with this, we clarify everything.

Your next question comes from the line of Andres Castanos-Mollor from Berenberg.

I would like to discuss energy costs in 2024, the impact it has had in your P&L. And also wondering if in Q1, you have had energy impacts year-to-date, negative, I assume? And if they are turning already? And from Q2 onwards, do you expect an improvement here?

When you saw in energy that costs moved up in January, February, restabilized and then now, in March, are going down. So the year started off with an increase in energy. And now we have to see where energy will go for the entire year. It will definitely be one that we will track very closely. Is that -- is that clarifying everything?

It is helpful. Can you comment on hedging or if the changes you need to pass-through pricing or energy cost are being effective, mitigating your sensitivity so far?

Well, I would say this has definitely changed compared to a year of '23 where we were unhedged and still we are adjusting our contracts. If you now look at our energy position, I would roughly give the guidance, it's the rough guidance, 1/3 is hedged, 1/3 is contractually protected, 1/3 is open. And that should give you the indication that energy up and down will no longer be a fundamental driver for volatility going forward.

Your next question comes from the line of Chetan Udeshi from JPMorgan.

Thanks for giving that breakdown of what you think is the prebuying in Q4. I was just curious, your Q1 guidance is [ 130 ]. And if I look at your full year guidance, it implies a step up, when I said step up from that run rate. And we did see that in 2024, by the way. But I guess the context was quite different where you were improving utilization, et cetera, through '24. I'm just curious, based on your order book, based on your visibility that you have today, can you already see that step up, nice step up in Q2? Or at the moment, the visibility is still fairly limited to talk about Q2?

Well, Udeshi, you would like to have the breakdown by quarters, and most likely next question will be on month. We would like to give you clear color on Q1 and clear color on full year guidance. And with this, I pass on the board to Oliver, keep on rolling.

Yes. Chetan, the way I think you should look at Q1 is that we've provided a pretty granular guidance. We're saying that we're expecting a 25% to 35% growth that you quoted with the midpoint, which means to me that from a percentage perspective, the growth in the remaining quarters needs to be way lower than that. And we have, at this early point in time of the year, already provided a pretty precise bandwidth here for the full year that, again, as Matthias outlined, includes a growth rate in the midpoint, apples-to-apples of 10%. So that should suffice to go ahead and model what should come out of the year.

[Operator Instructions] Your next question comes from the line of Martin Evans from HSBC.

Going back to Matt's question, I don't think it was answered on Specialty Chemicals. Apologies, this might just be semantics, but at the Roundtable, you sort of introduced this idea, if you're able to become a Specialty Chemical company because obviously, you like the idea of the high multiple. And then today, you said the transformation in Specialty Chemicals company is completed. So big picture, if we stand back, and I think I know what you're saying, and you're not saying that you're there obviously because the margins, the returns on invested capital for the group, particularly outside consumer, are quite weak. I'm looking at Specialty Additives and Advanced Intermediates. I think what you're saying is there's not going to be much more M&A or you're reasonably happy with the portfolio, and you're just waiting for the good times to roll, which, based upon your sort of relatively cautious comments on the macro, could be several years away. So is that correct? On M&A, at least, there's not going to be any more major disposals or acquisitions? Because looking at those returns on your so-called Specialty businesses, it raises the question of how much more capital you're going to put into them if these returns are sort of sub-10%? Perhaps you could help me understand this Specialty Chemicals.

Easily martin -- yes, Martin very easily, when we say that portfolio transformation to Specialty Chemical company is over, we mean that big M&A activities, you should not expect for us to get up in our margins. What we wanted to stress clearly, and we stated that in line with the URE divestiture, once this is completed, we have no longer polymers in our portfolio. Thus, we have now found our chemical home. And that's our reference to the transformation on chemicals is now completed. We have found our portfolio. But now of course, the next step is to get the maximum out of it and to get the troops fully in the direction on getting profitability and the further cash flow conversion up. That's the direction. But you should not assume that we are satisfied with the '24 profitability or margin level. No, no, the journey is starting now. That's the job now of the next 2 years.

And you did say on this -- on Specialty Chemicals, you're going to -- is all to do with leadership? I think it was the phrase. What does that mean?

We have -- if you look at all our business units, and we've gone from 14 business units a few years ago. Now with the Urethane sales or divestiture, we are going down to 9 business units. And all of these business units are market leaders or belong to the top 3 market leaders worldwide. This relates to our Intermediates division. It relates to Additives. It relates to Consumer Protection. So they are all in a leadership position. But now, of course, they need to get their act together in terms of cost conversion or cost competitiveness, cash conversion, the go-to-market approach, the proximity to customers and eventually, [ the shoots ] then up and be benchmarked versus peer margins, which are substantially higher than what we have today. And please take note of the fact, we used to be at 14%, 15%. And we definitely want to get back there as a specialty chemicals company for the next years to come. We would not like to stay there but improve further. Thanks all for your questions and let's please go ahead.

We will now take our final question for today, and your final question comes from the line of Georgina Fraser from Goldman Sachs.

Matthias and Oliver, I've got two questions left. Just following up on your latest comments, Matthias, about wanting to improve the margin over time. Could you give us an update on how you're seeing asset utilization rates today? And how long you think it would get back to that normalized margin corridor? And if there's any comments that you could make about how a lower natural gas price in Europe, for example, would impact your view, that would be very helpful. And then my second question is, could you give us a little bit of color on the demand environment that you're seeing in the United States? It seems to be a little bit more positive for LANXESS than what we've been hearing from peers recently. So would love to hear what you're seeing there. And if you could remind us which of your segments are most exposed to the region.

Well, thank you, Georgina, on all 3 questions. Utilization, I mean, we have been in the around 60s in '23. We've now moved up to -- close to 70 in '24. If you listen to the German Chemical Association, the report is that, all in all, the pharmaceutical and chemical industry is between 70 and 74 percentage points. So blend out farmer, then you basically see that we are somewhat where the industry is. Confirmation you have seen by the German Chemical Association, that 70 is [indiscernible] . Normal utilization rates are reported in the industry at 80, 85 percentage points. So we are far from a normalized level. And therefore, if we return to normal utilization being at 80, 85 percentage points, I think you would see another significant visible improvement in the chemicals sector, of course, also for us. Now on your second question, gas. We are not a big direct gas consumer. At the end of the day, gas determines electricity pricing. I mean it's one of the drivers at least. And here, energy pricing in total is one which is important for the process industry, the chemical industry. And therefore, that is something that we have on our radar. I made an earlier comment on energy that this is something where we have taken a different approach like in the past. So we go for hedging, we go for contracts and we only have 30% remaining in the spot market. So that's the area that can lead to volatility, but definitely modest compared to '22 or '23. As far as United States is concerned, we made positive comments in '24 on the United States. '25, I remain humble because there's so much daily or weekly announcements being made that can change the picture completely. We currently see that the United States, at least the industry, is in a wait-and-see models. And I think we have to look into the next 1, 2 months how eventually all the announcements will either be implemented in trades or not. And I think then it's a little bit easier to make a clear guidance as far as the United States region is concerned. The businesses that are more pronounced in the United States is definitely the Additives space and the Consumer protecting -- Protection business, if you exclude Saltigo. So they definitely have stronger footprint asset wise in the United States, Intermediates is more European and German based. So with this, I see that all questions have been answered. Oliver, the IR team and I would be on roadshow in the coming days. We look forward to seeing you all. And take good care until then. Best regards from Cologne. Best regards from LANXESS. Bye-bye.

Bye.

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