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 André Simon, Head of Investor Relations. Please go ahead.
Thank you very much, Judith, and a warm welcome to everybody on the phone to our Q3 Conference Call from my end as well. I hope you and your families are fine and healthy. As always, I have our CEO, Matthias Zachert, and our CFO, Michael Pontzen, with me. Please take notice of our safe harbor statement. We assume most of you have had a look at the presentation already. Therefore, we have decided to only briefly set the tone today with Matthias highlighting some key aspects of the quarter. We dedicate more time to your questions. With that, I'm happy to hand over to Matthias. Matthias, please go on.
Ladies and gentlemen, a warm welcome from my side as well, and I move to the one-page key message slide and would like to provide a little bit of color on Q3 and how we look on full year. In Q3, we delivered on expectations, but all in all, it was, as communicated early on August, a weaker quarter. Please take note that the third quarter was impacted by plant maintenance. Our big plant in Antwerp stood still for two months. Of course, this left its mark in the P&L. Please also take note of the fact that the tailwind, which we benefited from in Q2, unwound due to contractual pass-through clauses in Q3, and therefore, also impacted third quarter. I'm sure that some of you have noted already, we focused on cash optimization on working capital in Q3.
We reduced sequentially our inventories by a little more than EUR 100 million. Of course, the lower your inventory, the less you produce, and that left its mark in the P&L as well. I heard that some of you had questions on Advanced Intermediates. Don't be concerned. This is the normal quarterly delay. We saw the positive raw material impact in Q2. We passed it on contractually in Q3, therefore, you will see that Advanced Industrial Intermediates will rebound in Q4. Now to the further key messages I would like to pass on to you. First, we saw sequentially volumes returning. We basically sold more than EUR 100 million incremental volumes in Q3 vis-à-vis Q2, which is a clear positive. Many of the industries are stabilizing on a low level and are moving up. China definitely leads the pack.
We saw from August onwards growth versus previous year. This is a strong sign. It's the biggest chemical market in the world. It's important that this moves upwards. Second statement, if you look at year-to-date margin developments, we stand at 14.4%, and this despite one of the steepest economic downturns we have seen over the last decades. If we finish somewhere around 14%, it would be the second-best financial performance ever, and this despite the deep economic recession. I think this is a solid sign of the change in structure, in portfolio that we have worked upon over the last several years. Also noteworthy that we operated Q3 at a utilization rate of only 69%. The last time we operated at this level of utilization was in second quarter 2009. In those days, we were just hardly able to post more than EUR 110 million EBITDA.
Now, more than 10 years later, at this level of utilization, we are at round about EUR 200 million EBITDA, absorbing the one-timers I've indicated before. I think this gives you a clear sign of the change in structure that we have undergone over the last several years. The newly created segment Consumer Protection stands out and shines. The third time in a row, we are able to increase profitability in absolute terms and also increase our margin versus previous year. I think this segment will do well, going forward in the next two years and will become an even stronger pillar in our overall company configuration. Next to operational focus and financial focus, we also work on ESG targets. We've communicated to you last year that we want to be climate neutral by 2040, where we set clearly a landmark in the European chemical industry.
We have worked on further targets like water improvement, where we conveyed new targets this morning. I'm happy to say that not only the Dow Jones Sustainability Index, who was ranking us number one in Europe last year, has recognized and rewarded this. Now also the reputed MSCI ESG Index has upgraded us from BBB to A. On Monday last week, we finished our reviews of the business, and the management board eventually discussed the guidance. Obviously, if you are in November, you should narrow the range. We decided on narrowing the range and felt comfortable with a corridor of EUR 820-EUR 880. On Friday, however, we unfortunately had the unplanned chemical outage when we ramped up our caprolactam sites in Antwerp, and now we had to take it off stream.
This is sad because the polyamide markets are tightening in Europe. As we are just coming out of a standstill of two months, our working capital, our inventories were depleted. For that very reason, we had to announce force majeure on Friday, Saturday. A, because of having no stocks on hand and B, not being able to produce. We will basically have something like a EUR 10 million hits due to loss of sales, which is really unfortunate, because the market is right now really picking up, which is a positive surprise to all of us. Of course, we will incur idle costs. I would like to recommend to all of you, please take that into consideration in your models. I don't see that we will be in this upper end of the guidance.
We shoot for being around mid-range, but with a standstill and lost volumes, you should take around about EUR 10 million of the midpoints, which I think is still focused then on consensus, where consensus stands right now. For all transparency, I think this is valuable information for your models. As far as Q4 is concerned, I think we look into November now with a solid order book, and December anyhow is always a modest month. With this, I think we have a precision to guide you accurately. With this statement, I open up the floor for all your questions. Please go ahead.
One moment, please, for the first question. The first question is from Thomas Wrigglesworth, Citi. Your line is now open.
Good morning, Matthias, Michael, and André. Thanks very much for the presentation. Opportunity to ask questions. First one, if I may, on CheMondis. Could you refresh us as to what success looks like in three to five years for CheMondis? Where could this go? Then I know because I was on your website the other day, you don't charge yet. When you look at the active companies participating, do you think about a revenue per user type of model? I'm just trying to think about how we might dimensionalize the kind of the revenue opportunity three to five years down the line. Second question is just how performance exiting the third quarter is in Specialty Additives. I know that there's been a number of end market challenges there, but we are seeing bromine prices in spot markets pick up.
I was wondering if you could give us a little bit more color around the Specialty Additives kind of run rate and exiting third quarter. Thank you.
Early welcome, Tom, and nice to hear your voice. I will address CheMondis first. In the bigger Investor Relations document which we dispatched, we have included two pages on CheMondis because we said during 2020 when we were on the road virtually, that we would give some further color at the end of the year, so we did. When you look at the CheMondis slides that we included in the deck, you basically see that in the last 12 months, this platform has developed incredibly well. The amount of transaction has not doubled, not quadrupled, but what do you say? For eight times higher. It has gone up by 800%, which is remarkable. If you look at the number of companies that are now active on the platform, we've moved up by 300%.
We have now more than 50,000 products on this platform. This in itself shows that CheMondis has established itself as leading chemical platform in Europe. We have traction, and this is the most important thing on platforms. You need traction. This is there. If we look at a platform, it normally takes four to five years to really show if the business model works or not. The jury is still out, you have seen that now the biggest global chemical distributor in the world, Brenntag, has signed a strategic cooperation with CheMondis, I think this is also a strong proof to the pudding that this platform is somewhat interesting, attractive. The next two years will be decisive. That we have traction on the platform, we will now have to introduce monetization models. Either this breaks the platform.
If it does not, of course, the platform starts to have revenue, and hopefully one day, once it's really scaled, profits. Monetization models we are now working on, and we will start introducing them in 2021, most likely in the second half of the year. This will not be big sales, but the bigger and the longer the platform is successful, of course, the stronger the growth rate should be, and that will be the next big step. That's the one element, getting CheMondis on monetization features. If I now think five or 10 years down the road, and should we achieve to really have success with CheMondis also in the forthcoming two to three years, then at some point in time, LANXESS will reduce its 100% ownership in the completely ring-fenced legal entity. Where our eventually holding will be is yet to be decided.
It doesn't need to be a majority position. We will always be invested in the platform because we want to have access to a digital go-to market place. With this, I think I've covered all aspects of your question. Now on Specialty Additives. I fully agree with what you're saying. bromine is doing well. This gave the business divisions relative stability. Of course, we suffered in Q2 and Q3 also from E&E and construction going down, but construction has stabilized and even moving up now in some of the regions. The two businesses that were suffering and that were leading to a negative hit in Q3 was basically Rhein Chemie with its big exposure to the automotive industry. The Lubricant Additives, they're really hit by aviation.
We have literally no sales to the aviation industry anymore because planes are not flying and you are not flying, most likely. The second industry, of course, here on lube adds, we have EUR 130 million sales on the automotive industry. We just see them recovering right now, but third quarter was still pretty soft. For that very reason, the overall segment was soft in Q3. With this, I think I've addressed all of your questions.
Yeah. Thanks very much. Just very quickly, and forgive my ignorance. You've still got 100% of CheMondis. You didn't share any of the economics with Brenntag in the partnership? Or have you?
No. At this point in time, we agreed that we team up and that we work together and learn together. Brenntag went out last Friday, I think, and made the announcements that they are entering into a strategic partnership with CheMondis. This did not lead to a participation in CheMondis. At this point in time, we would like to keep the platform to ourselves, because if we are successful, of course, Brenntag will learn how this platform is, how successful, and potentially one day they will then enter in also in holding in CheMondis. Our preference is, at this point in time, to develop it further, because should we be successful, the value of the platform will move up. Right now, we believe in the success of CheMondis.
Thank you very much, Matthias. Very clear.
Most welcome. Next question, please.
The next question is from Matthew Yates, Bank of America. Your line is now open.
Hi. Good morning, everyone. Matthias, I appreciate your introductory remarks that maybe we shouldn't overanalyze any given quarter in intermediates. When you take a step back, how do you think this asset has navigated the crisis? Can you just give me a reminder as to the ambition you have for it going forward? Then the second question around capital allocation. I saw you recently put EUR 100 million into the pension, so you're obviously conscious of those liabilities. In the context of looking at potential M&A, can you give us a sense how much firepower you think you actually have for that? I'd be a bit remiss if I didn't ask if there was any indication about any progress you're making on finding interesting opportunities in this downturn. Thank you.
Very valid questions, Matthew. I take them one by one. As far as Advanced Industrial Intermediates is concerned, I think I stressed that either in March or latest in May, that my view was on 2020, that Advanced Intermediates will be the second most robust business in our portfolio. I stressed at beginning of the year, Consumer Protection will be shining or will shine. Stability versus previous year or growth were my comments. I said Advanced Intermediates will be down, but compared to all other segments, they will have the second-best stability in our portfolio. I positioned Specialty Additives as third and Engineering Materials as fourth in the ranking. I clearly stick to this statement, and I think at year-end you will see that exactly this ranking will be achieved from everything that I know as of today.
We fortunately have an Advanced Industrial Intermediates, the big business units pass through clauses. They are always leading to volatility from one to the other quarter. One quarter, we take sometimes margins of 19%, 20%, 21%. You've seen that in 2020, by the way, I think it was the second quarter where we had a sky-high margin. Now, in the third quarter, you see the opposite. If you would simply add EUR 10 million to the profitability of the segment, the margins would look completely different. Therefore, what you would see in Q4, we saw now a modest margin in Q3. This is the pattern of the last several years. Therefore, I feel strong about Advanced Industrial Intermediates. This is the area where we are going through nice de-bottleneckings.
This division has grown over the last several years by more than EUR 100 million in EBITDA. It's a superb cash converter, and it has from its market position and from its industrial cost curve, simply a very strong position. I feel very good going forward. Now, the funding, the voluntary funding that we did on pensions, this does not reduce our firepower because at the end of the day, it's considered as a quasi-financial liability by the rating agency. If you increase your net debt and fund your pensions, it's a wash. We have funded our pensions due to the big amount of liquidity that we have on the balance sheet. You know that right now, liquidity costs money. You don't get money. If you fund your pensions, you don't pay any more 40 basis points.
You basically make an investment in reducing your interest penalty in your P&L, and therefore, any funding of pensions is in current times, around about 80 basis points, 100 basis points accretive to the P&L. I look at the CFO, we are at 1.3 percentage points on pensions, it's even more than 100 basis points. It's 160- 170 basis points positive, and therefore, this was a financial decision we took. Now to your last question. We have ample firepower. I think it stands somewhere, depending on where you see the rating and rating agencies, between EUR 1 billion and EUR 2 billion, depending on what financial models you're using. Therefore, you can see that we are in a strong financial position to also look at M&A, which we are doing. I've indicated in August that we have basically started to monitor the markets again.
We were cautious in Q2, but are now open to also inorganic growth because we see that the financial markets are resilient. We have not seen that after March, April, financial markets closed up. They are liquid. Therefore, we see that the environment is as such that our portfolio has proven to be strong. Our financial position is strong. The financial markets are strong. For that very reason, we have decided to look around, but with our discipline that we've proven in the past, and therefore, should something occur in the next several months or 2021, don't be surprised that we go for inorganic growth as well. This I hope that all our questions are answered.
Thank you. Can I just ask a quick follow-up? Along the same lines, you mentioned financial markets are liquid. You spoke earlier in the call about a pleasant surprise on some of your end markets picking up. Under what circumstances would you restart the share buyback that you did earlier in the year?
Well, this is something that is on our resource allocation list. Of course, if we consider that the M&A market is not sound and opportunities are not there, we would definitely rethink the share buyback.
Thank you very much.
You're welcome.
The next question is from Andrew Stott, UBS. Your line is now open. Unfortunately, we lost his line. The next question is from Andreas Heine, MainFirst Bank Aktiengesellschaft. Your line is now open.
Thanks for having the opportunity to ask questions. I have several, all very small. On your M&A, just for clarification, usually you talk about bolt-on or mid-size, and the definition of that is maybe different from company to company. I would assume anything with bolt-on or mid-size is where you do not need equity. Maybe you can comment on this. Secondly, you were referring that you reduced inventory that had a negative impact on the P&L. Is that more or less equally split about across the segment, or was one segment more affected than the others? On the battery material and lithium project, any ideas you can share with that, what the strategy midterm might be? The last one, caprolactam, you said market is tightening.
Is that only the upstream part of the caprolactam, or do you see this also in the downstream polyamide and polyamide compounding business? Thanks.
All valid questions, Andreas. Let me take them one by one. M&A, bolt-ons are basically acquisitions, something in the hundred millions, EUR 100, EUR 200, EUR 300, but below half a billion. Mid-sized acquisitions like Chemtura, this was a mid-sized acquisition, company size roundabout EUR 1.6 billion to EUR 2 billion. Big transformational acquisitions are, in our definitions, acquisitions where we buy at least half of the turnover of our company. If you do this, then you are engaged in the integration, not only for the next 12 months. Normally here, the integration takes you up to two years, sometimes even three years, depending on the complexity. This is how we define M&A. On inventory rundown, the two segments being impacted the most were obviously Engineering Materials due to the HPM plant maintenance and Advanced Industrial Intermediates.
On your third question, lithium, well, I said in the last conference call, we need open borders. Then after borders are opened, they give us around about three months for running and testing the process, looking if we need to work on the technology, and simply learn. As you know, believe it or not, borders are still closed, and with the unclear presidential situation in the U.S., my personal assumption is borders will not open until presidency is being decided. We need open borders so that engineers can really work on the pilot plant, on the process, on the technology. We need open borders from Canada to the United States. We need also that our Germans can travel. I have my central power task force here, the chemical engineers that basically do the key engineering work for top sites worldwide.
They cannot enter, and they are here in the U.S. Before I invest money in big extraction units, I want to have my engineers really checking, validating everything so that we invest on best conscious decisions. It is what it is. Corona is there. We have, as you know, unfortunately, borders closed, which never happened, I would say, in the last several decades. Now on caprolactam, what is tight, what is not tight. As a matter of fact, I'm surprised how strong the rebound was. I was pretty negative on the automotive industry still in summertime. The rebound is now visible also in Europe. We had to announce a force majeure in downstream because we cannot source in Europe polyamides. It's tight.
This gives you proof to the pudding that the automotive industry is replenishing their inventories because they are pretty run down as well. That's the reason why we had to announce force majeure. If the polyamide market would have been long, we could have sourced from competitors polyamides and do the compounding then with external polyamides, but we don't get anything here in Europe because the market is tight. This in itself is a positive news going forward. Of course, it's now unfortunately a negative news to our customers, because we have always been a very reliable supplier, which they recognized and rewarded. It's very unfortunate. We do everything that we can to get capro back on stream. With this, I think all four questions have been answered, Andreas.
Yeah. Thanks a lot.
Next question, please.
The next question is from Andrew Stott, UBS. Your line is now open.
Good afternoon. Apologies for earlier. It's the joys of working from home. Just a couple of questions for me. The first is on Consumer Protection, and what we saw in Q3 specifically. The first half is easier to understand because the revenues were so good. The third quarter is, I guess, even more positive given that you've grown margins when your volumes are slightly down. When I think about the 22.6% EBITDA margin and carry that into 2021, is there any reason why I shouldn't extrapolate? Are there any sort of one-off positives on costs, for example, or pricing that I need to think about? That's the first question on margin for that division. The second question was coming back to Engineering Plastics.
If I think about 2021 and beyond, and some of the cost changes you've done over the last couple of years, can you give me an idea of the type of leverage that you have to an improving environment? Of course, there's no guarantee of that improving environment, but just to understand the operational leverage there. Thank you.
Well, Andrew, first, good to hear your voice. Now to your questions. On Consumer Protection, I would say if you look into second quarter, we posted a tremendous volume growth. I stated some of this volume growth, of course, is taken off third and fourth quarter. If you look at the entire year, this division, and you would normalize the ordering of customers, you would see volume growth every quarter as a matter of fact. Now to your margin question. This segment will be a 20+ margin division, and it has the potential to grow further. I think this year we will potentially end up in the range of 22- 23 percentage points. Here, this is a division that should volume-wise grow, and be the highest margin division with highest cash generation.
If I look at Saltigo and LPT, they will grow by volume, with new capacities being developed, coming on stream. The same holds true for the biocides business, MPP, in 2021. For MPP with disinfection, et cetera, we assume that the business will grow in 2021, but will be margin-wise stable. In this year, we've had roundabout EUR 4 million-EUR 5 million of marketing costs that we didn't incur because we had no fairs where we participated. We had no marketing initiatives where we participated. This next two travel costs were saved. Our assumption is that in the second half of 2021, people can travel again, fairs can be organized again in order to ignite future sales. Roundabout EUR 5 million will come back to our current planning assumptions in the material protection business.
Therefore, we will be more flattish for one year, even though normally this business has grown over the last four or five years, year on year, something like 10 percentage points. That's the normal growth rate and profitability of our MPP business unit. Of course, this year we had a little booster because we still had sales and big sales also in the disinfect area, but we had less costs because of travel restrictions and fairs being abandoned. That should give you, I think, broad answer on your first question. Now on margin operational leverage. I think you've seen what we've done over the last few years in terms of margin improvement. In 2013, we stood somewhere at 7% when Southern European countries suffered, so steep decline, high volatility. As far as our communication strategy implementation was concerned, we said we will upgrade.
You see that now, even in a tough downturn, we are basically year to date in the corridor that we envisioned for 2021, so around this lower end 14%, and this despite the toughest recession we've ever seen. Assuming 2021 would be a normal year, which most likely it's not going to be, but assuming a normal year, we would see the strongest rebounds in Engineering Materials because this division has been hit brutally due to automotive exposure. Second division rebounding would be Specialty Additives, and third division rebounding would be Intermediates. If we are operating here at 70% utilization group-wise, this is pretty low. If we just get 10% more volumes back, which would not be massive, you would see, of course, a big booster. Consumer Protection has not suffered. Utilization is normal. We could have more capacities, which are coming now in 2021, 2022.
Here it would be the normal operational growth in Consumer Protection that you could underlying-wise anticipate. I hope this clarifies all questions. Next question, please.
The next question is from Chetan Udeshi, JP Morgan, your line is now open.
Hello, can you hear me?
We can hear you loud and clear.
Yeah. Just maybe one question I had. You mentioned previously that you've been surprised by how quickly the European automotive market has recovered. Maybe just based on your conversation with your customers in the auto market, have you seen any change in order patterns or sentiment post the second round of lockdowns that we are seeing? Maybe not as extensive as the first one. Any change in sort of sentiment or order patterns more recently? Thanks.
It's early to tell. The lockdowns have just started one, two weeks ago. I think, how I look at it, the economy is open. Governments have realized you cannot close down the economy. This is simply too expensive. Governments around Europe have realized this. What kind of implications this is going to have on the consumer spending is yet open. I personally don't see that this is going to have an impact short-term for this year. We have to monitor rather for Q1 next year if year volume contraction on the consumer side is coming through. My personal point of view is, I think not only politicians, industry leaders, but also the consumer has somewhat adapted to the situation. My personal take is really, I think this is a marathon, coronavirus. In a marathon you need to be careful with your energy.
You need to be focused, you need to be disciplined, you need to be trained. The first 10Ks have been done, but there are still 30.2 and 195 m to go. You need to be prepared to make here simply the long distance run. The one thing I can tell you, as you know, LANXESS has trained over the last several years, half marathons. The team is fit, energized, and prepared to run through this crisis.
Understood. Maybe if I can squeeze in one follow-up, there have been a few M&A questions already asked. My question is more philosophical in a way. How do you think about the multiples that LANXESS will be willing to pay in a transformational deal? Is there a particular band or ceiling that you wouldn't want to go? Thank you.
Well, we've communicated our financial matrix on M&A, I think two to three years ago. We basically are not stubborn on this. It gives us a frame. With this, I think we are pretty transparent. Of course, we will always adjust, and rethink if strategic rationales are imminent and very positive. At the end of the day, there needs to be a strategic rationale and there needs to be a financial rationale. If the financials are not there, then even if the strategy appeal would be sound, we would not do it. Both strategic and financial matrix have to be in sync.
Very clear. Thanks.
Thank you. Next question, please.
The next question is from Markus Mayer, Baader Helvea. Your line is now open.
Yeah. Good afternoon, gentlemen. Two questions from my side as well. First one is again on the inventory reductions at Advanced Intermediates, which have triggered the idle cost. The question is more on why then was this basically due to your expectations on lower raw material costs, or has this to do with weaker the demand environment you're expecting for the fourth quarter? That's my first question. The second question is on the Specialty Additives division. Next year, I think in March, the new European directive for halogenated flame retardants in monitors come into play. Was there any change from the European Union? What are the positive and negative effects you expect at your side?
On the second question, as far as regulatory is concerned, we don't see any impacts. We made an analysis on all changes in regulation, and this is something that we basically monitor at board level. I personally monitor that on a quarterly basis, and officially through the board, we go twice a year and look at all regulatory changes. There's nothing of materiality that impacts us for 2021. Now, on the inventory side, basically we ran down the inventories because this followed our schedule on planned maintenance, and that was driving the inventory rundown. It's a little bit more difficult to make bigger planned maintenances in the fourth quarter, because normally, if it's snowing, icy, et cetera, for safety reasons, that is not highly recommended. Small standstills and stuff like this, we try to do either in August time or in December time, when it is not significant.
Bigger standstill, bigger planned maintenances, we normally do when we have also stability on weather conditions, and the like. As far as the market is concerned, Q4, as far as we see today, will be clearly a quarter with lower contractions. We will be below previous year level, but you will not see a EBITDA decline of 28%. This will clearly narrow. Why am I saying this? Because so far, as we have seen, markets and industries are improving. You will see versus Q3 a rebound in Advanced Intermediates. Additives will be somewhat on the same level as Q3. Consumer Protection should grow versus previous year, Consumer Protection in a seasonal way has always Q4 a soft quarter. You will see versus Q3 that like in the past, the quarter will be a modest quarter or more modest quarter.
It should still post growth versus previous year. Seasonally here, the strong quarters in Consumer Protection are notably the first two, because of industry pattern. As far as Engineering Materials is concerned, if the force majeure would have not occurred, you would have seen another rebound, Q4 versus Q3. With the force majeure, I rather assume that profitability would be somewhat in the area of Q3, unfortunately. This is how we look at the fourth quarter momentum, and I think with this, I have been very detailed in the elaboration.
Indeed. Thank you so much.
I thank you for your participation. Next question, please.
At the moment, we have no further questions. As a short reminder, if you would like to ask a question, please press zero and one on your telephone keypad.
As there are no question, ladies and gentlemen, we thank you for your participation, and we are looking forward to having you on a virtual road show in the forthcoming days. Michael and myself will take several meetings, and therefore we are looking forward to speaking to you. I send my best wishes on behalf of the entire LANXESS team to you, and keep your optimism, stay straight, and stay healthy. Bye-bye.
Ladies and gentlemen, this concludes the LANXESS conference call. Thank you for joining, and have a pleasant day. Goodbye.