LANXESS Aktiengesellschaft (LXS) Earnings Call Transcript & Summary

Thank you for joining our LANXESS Q2 Results 2026 Conference Call. [Operator Instructions]. I will hand over to Eva Husmann, Head of Investor Relations, for opening remarks.

Thank you, Tim, and welcome, everyone, today's call. Thank you for joining. Before we start, as always, please take note of our safe harbor statement. And with me today are, as always, LANXESS CEO, Matthias Zachert; and CFO, Oliver Stratmann. And after a brief overview, we will be happy to take your questions. With that, let me hand over to Matthias.

Thank you, Eva, and welcome to all of you, and thanks for joining our Q2 call on the performance that we have delivered. I turn your attention to Page #4, where we give an overview here, notably on the sequential improvement that we have indicated to you in our May conference call. So you see that we -- on EBITDA are spot on, a strong increase sequentially. This is also reflected in the cash flow. Normally, the second quarter is still a softer quarter on cash flow generation, but we've clearly stated to you that this is the KPI we will focus on in order to improve as much as possible. And I think second quarter gives proof to this. The driver for that was definitely net working capital. Normally, in Q1, Q2, we increase net working capital, which then again is being reduced in Q3 and Q4. For second quarter, you clearly see that net working capital was managed tightly, especially on the inventory side. As far as net financial debt is concerned, we here show you that over the last few years, we consistently reduced, and that will definitely be a topic in the forthcoming quarters where we strive for further improvement on the net financial debt side. The following page gives you an overview on sequential developments on price and volume. And you can clearly see that the second quarter '26 is a good and strong turning point. Operationally, we improved on pricing and on volume. Of course, some percentage points are here definitely coming from the Middle East situation. But overall, the second quarter is operationally a strong one. Let me point your attention to Page #6. Last year, we have indicated that we will address our cost structure further wherever needed. And we also gave reference that some further cost savings will be driven by Saltigo. And here, we will adjust some of our capacities that we consider will not be needed in the years to come. With this, we will take out structural costs while keeping the operational capabilities and technologies that we need for this very focused business. As far as portfolio is concerned, we are a strong recognized player in the agro custom-made business. So we are in the area of 70%, 80%, clearly exposed to the agrochemicals business. That will definitely be a core pillar of our sales in Saltigo going forward, but we will strive in the years to come to increase the current percentage in pharma and other specialty business from the current 20% to 40% -- to 30% and potentially 40% in 5 years from now. Let me now come to Page #7. I think all of you have taken note of the fact that we issued a bond classical liability management. I think Oliver and his team have found the right week for making liability management. So EUR 500 million with a tenor of 5 has been issued to replace the bond that we have due in October. We found very strong investor demand. The order book was several times oversubscribed so that we could tighten the coupon to 4.375%. Yes, well done, Oliver. Well done, Ulrike and his team. With this, I turn the attention to Page #8. As far as macroeconomic environment is concerned, all of you know that the macroeconomic uncertainties persist. We do have some headwinds mainly from the U.S. dollar that has weakened year-on-year. And based on this, we confirm our outlook or our guidance for full year between EUR 450 million and EUR 550 million. We do expect that we will get some further support operationally from our lower cost base. There will be some positive support coming from antidumping as well. And on back of that, we provide you the quantitative guidance for Q3 of EUR 130 million, EUR 150 million. This is basically in line with the guidance for the second quarter. So let me give you some qualitative guidance on Q3 as well. We do expect that the normal seasonal development for Q3, where Q3 normally sales-wise is a bit softer than Q2 on the performance as such. Third quarter should be above previous year, but not as strong as Q2 '26. And I think with this, you have everything it takes to also get comfortable on the full year guidance. This is what we would like to present to you. And now we open up the floor for your questions, please.

[Operator Instructions] We will now begin with the first question from Martin Roediger from Kepler Cheuvreux.

Three questions, if I may. First question is for Page 6 in your handout, the strategy realignment of Saltigo. In 2012, Saltigo's strategy changed in favor of agro on account of pharmaceuticals. Matthias, that was during the time when you have been at Merck KGaA. For several years, this strategy at Saltigo was quite successful. Now you reversed that strategy, getting pharma specialties up from 20% exposure to 30% to 40%. What makes you optimistic that this move will be successful? Secondly, can you talk a little bit about the exit rate at the end of Q2, the business in July and the order book in August? I'm interested in the momentum in demand. Is it steady? Or did some customers indicate to you that they prepare for some destocking in Q3? And the final question is for Oliver. The expected cost savings of EUR 65 million in full year 2026, which we all know are more back-end loaded. How much of that was achieved in H1 already? Because the workforce is reduced by 214 people since the end of 2025, so there must have been some savings achieved in the first half already.

Well, thank you, Martin, for your attendance and for the questions you raised. Let me address the first 2, and Oliver will take the third one. On Saltigo, I mean, 2012 is quite some time ago, more than a decade. We've developed nicely. We've performed nicely in the agrochemical industry, but the agrochemical industry does change as well and has changed over the last 2 to 3 years. We've seen that on the competitor side for the big agro companies, new competitors from China and India have established themselves. We therefore see in this market segment definitely for new blockbuster for innovation, good prospects for the future, no doubt about that. As far as generics are concerned, they are under tougher pressure than we were seeing in 2010, 2012 and the several years afterwards. So what we are doing here is simply a derisking. We like pharma, we like specialties. We like electronic chemicals. And with our technology that we have in Saltigo, we can supply these industries as well. They are known for being high margin and good growth industries as well. And therefore, the focus or the big competence on agro doesn't change. We simply would like to adjust here the strong exposure that we have in agro. And we still have the majority of sales in agro, but no longer with something like 70%, 80% exposure. It's basically the driver behind. Now on your question on third quarter. I think what I've said before on the guidance should clarify everything. We don't see that in July and August, the order book is massively going down. It's absolutely not the case. But we see in July and August, the normal seasonal development, meaning that July, August are not as strong in trading as May, June, for instance, are. So we see some softening. This is embedded into our guidance and into what I said before, and please read the guidance accordingly. And with this, I'll pass on the words to Oliver.

Matthias, thank you. Martin, many thanks also for the question. Look, we intentionally said that the majority of the EUR 65 million is really back-end loaded. We did have some savings already in the first half, but you also referred to the number of employees that was reduced. And this is a point in time view, of course. So it doesn't mean that all of these colleagues have left the company already in the beginning of January. And I hope for your understanding that I am hesitant to quantify quarter-by-quarter the savings. Please take with you that the majority of EUR 65 million will really come in the second half and will support us there in reaching our goals.

The next question is from Chetan Udeshi from JPMorgan.

Thanks for giving us third quarter guidance. Not many have chosen to do that. I was -- my question was on pricing, especially in AI because it seems like LANXESS started with a bang in terms of big price announcements at the beginning of the conflict. But what we've actually seen in terms of realized price is a bit of a whimper in a way. And my question to you, is there a lag in terms of price realization? Because I'm a bit surprised that your AI earnings are actually down year-on-year, given all the conflict-driven shortages, prebuying panic, that should be typically a good environment, I would have thought to be able to raise prices and improve margins. So clearly, we've not seen that. So I'm just curious if there is a lag in that business in terms of getting the raw mats fully passed on. And the second question I had was to the extent you can help us, what is your current situation with the Rhein water and sourcing? It seems for now, it's good. But do you have a view whether it can get worse if it doesn't improve in 2 weeks, 3 weeks? Any color there would be quite useful.

Well, Chetan, thanks for joining and for your questions. I will take them one by one. So on AI or Advanced Intermediates, let's start with the following clear statement. We've delivered on our guidance in Q2. We are spot on market expectations. When you are saying AI is lower in performance, then my feedback to you is the quality of earnings. In the other segments, which are regarded as stronger or higher priced through the multiple, then the quality of earnings of the segments has improved. And therefore, that's better read not as a negative, but rather as a positive. But now to your question, AI, we have 2 business units. Advanced Industrial Intermediates, where price increases were clearly flagged on our Internet. This business unit did well on pricing. The neighboring business unit, Inorganic Pigments didn't do well in the second quarter. And for that reason, compensated some of the good improvements that AII has shown. The second element you need to take note of, both businesses in Intermediates are more energy intensive than the rest of our group. And of course, energy in the second quarter went up strongly impacting the profitability of the segment as well. I hope that clarifies your question on Intermediates. Now on the Rhein. Yes, I apologize that we as a company have talked about the river and the water that is in it, but that's what we have to deal with. So far, our teams have operated extremely well. I'm really impressed by what they've done. Fortunately, we've taken very early around about 4-5 weeks ago already the decision to reserve a lot of capacities for rail and road. So that is needed if you need to redistribute from water to other transportation means. And therefore, we feel strong about what we have. And nevertheless, of course, we still need shipments on the river Rhein. And so far, we have no force majeures. So far, we get all the raws that we need. We have also a good indication for the next 1 to 2 weeks. But of course, this is something that is clearly on our agenda now. So all in all, we feel good about what we have done so far. We think that we are well prepared for the weeks ahead, but it's something that is clearly on the radar. And if there's a force majeure, force majeure means this is a surprise and that hits you when it occurs. We don't see it at this point in time, but we are working on that as I've indicated before. So that's basically what I would like to say. The one thing, however, that I would also like to stress out of 2018 situation when the last time we had a low water level in the Rhein. We, of course, took respective measures so that we are far more flexible than we were in 2018. At that point in time, many of our sites could only -- or plants could only be supplied through water transportation. We've invested around about EUR 10 million in the years afterwards to basically make sure that all important plants have at least two ways of being supplied, sometimes even three ways so that you can basically flexibilize the transportation means from water to road or rail. And that's the reason why today, even at lower levels of the river Rhein, we have so far managed extremely well the current situation. I hope that answers both questions. And if not, please come back.

Can I clarify on your comment on energy price impact on margin in AI because energy price is still quite high in Q3. And I remember at some point in the past after 2022, you had those energy pass-through clauses. So will those help you to regain some of the margins back in Q3 and Q4? Or is it tough right now to raise prices fully to pass on all of the cost increases because of weak demand?

Well we have -- Chetan, we have on energy, as I think Oliver has highlighted last quarter. In last quarter call, we have increased our protection here through contracts, but also through financial hedges. So roughly 50% is being addressed through contracts or derivatives. So that is definitely mitigating the situation. Nevertheless, energy prices remain high, will put pressure or have put pressure on Q2 earnings and will definitely weigh on earnings in Intermediates in the third quarter. But as you have seen from the guidance, if you're softer on Intermediates, you can be stronger on Additives and Consumer Protection.

The next question is from David Symonds from BNP Paribas.

Two from me, please. Can I firstly ask about the share purchases in Q2 by management? They were quite substantial. Is your view that the industry has reached a turning point here? Because there's clearly an Iran situation, which is benefiting in the short term. But for those kinds of share purchases from management, it's quite a vote of confidence. I'm wondering if you're feeling more confident on the outlook for European chemicals in general. And then on a slightly more specific note, Specialty Additives was the standout performer in Q2. We saw bromine prices rallying very hard and they've now faded. And we've also had some of the peers in lubricants talking about a weaker second half than they saw in the first half and especially in Q2. What's the outlook for Specialty Additives in the second half? And would you expect that very strong performance to fade? Or were there more sustainable factors in the lubricant additives stuff and the bromine price?

Well, thank you, David, for your questions. I will address them one by one. And I'll start with share purchases by management. All of us have bought stocks. And I think this is a clear message that all of us believe in the company, believe in the potential of the company, and we believe in what we are doing. We know that, by and large, chemicals sector has been under a lot of pressure by the capital markets. A lot of investors are looking into artificial intelligence and semiconductor defense, et cetera, et cetera. So chemicals is not all vogue. But clearly, we, as a management team, think, okay, that's a situation we understand. We acknowledge what the capital markets favor or trends are. But we think that the industry and especially ourselves has a lot of potential. And that's the reason why we took the liberty of buying stocks. And I would like to stress that at least for Hubert Fink and myself, we did not have to buy for any incentive programs. This was a personal decision. And also Oliver bought not for incentive programs, but because it was a personal decision. Now on Specialty Additives, let me clarify a little bit the situation. What you say between the lines is that Additives profitability increase has been pushed strongly by the bromine price spike that we have seen. I clearly would like to state, this is not the case. Of course, higher bromine prices are nice. But if you look at the profitability development of Additives in Q2, it was coming from all 3 business units. The lubricants business unit had a strong performance vis-a-vis a soft previous year quarter and Q1 was also softer. And therefore, Lub Adds really performed nicely in Q2, also helped by Rhein Chemie. Rhein Chemie is the smallest business unit, but came out comparably strong vis-a-vis the poor quarters it had in the last 12 months. The Polymer Additives business also did well, not only in brominated products, but also in the phosphor area where we are a very strong player as well. So the Specialty Additives performance in Q2 is carried or supported by all 3 business units. For that very reason, we are not now softening strongly our tonality for Q3. No, no, no. When you look at the comments I've just made on Advanced Intermediates, the question that Chetan raised, I basically have alluded to the fact that there will be 2 divisions in our portfolio, Consumer Protection and Additives that should, in third quarter, again, be visible contributors to the performance despite bromine prices in China going down visibly. So that should clearly give you the answer to your questions. I hope that is clear enough, David.

Yes. If I could just press you for some more detail on the first question, so the potential you see for the sector. Is that linked to some of the forward indicators we're seeing on construction activity? Is it linked to EU protectionism potential? Could you maybe give some more specifics on sort of what you're seeing that you think has changed?

You're referring now to what precisely? To our purchase on shares?

Well, you mentioned that you see great potential for the sector. It would be good to just dig into a little bit on what you think is?