Earnings Call: Q3 2020

Nov 5, 2020

Ladies and gentlemen, Thank you for standing by. Welcome, and thank you for joining the lines of this conference call. I would now like to turn the conference over to Andre 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 Sakhates 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 Matija highlighting some key aspects of the quarter. This call. So ladies and gentlemen, a warm welcome from my side as well. And I move to the, so one page key message slides 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. But please take note that the 3rd quarter was impacted by plant maintenance our big plant in Antwerp stood still for 2 months. And of course, this left its mark in the P and L. Please also take note of the fact that the tailwinds which we benefited from in Q2 unwind it due to contractual pass through clauses in Q3 and therefore also impacted Third Quarter. And 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 100,000,000 And of course, the lower your inventory, the less you produce, and that left its mark in the P and L as well. I heard that some of don't be concerned. This is the normal quarterly delay. We saw the positive raw material impact Q2. We passed it on contractually in Q3. And 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 100,000,000 incremental volumes in Q3 visavisq2, which is a clear positive. Many of the industries are stabilizing on a low level and are moving up. And China definitely leads the pack we saw from August onwards growth versus previous year. And this is a strong sign. It's the biggest chemical market in the world. So it's important that this moves upwards. 2nd statement, if you look at year to date, margin developments, we stand at 14.4. And this despite one of the deepest economic downturns we have seen over the last decades, If we finish somewhere around 14%, it would be the 2nd 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 that we operated 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 110,000,000 EBITDA. Now more than 10 years later, At this level of utilization, we are at roundabout EUR 200,000,000 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 3rd 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 few 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 a new targets, this morning. And I'm happy to say that not only the John Sustainability Index who was ranking us number 1 in europe last year, has recognized and rewarded this now also the a reputed MSCI ESG index has upgraded us from BBB Flat to single A. On Monday last week, we finished our reviews of the business and the management board eventually discussed the guidance. And obviously, if you are in November, you should narrow the range. So we decided on narrowing the range and felt comfortable with the corridor of $820,000,000 to $880,000,000 on Friday, however, We unfortunately had the unplanned chemical outage when we ramped up our couple of timesites in end work. And, now we had to take it off stream. This is set because the polyamide markets are tightening in Europe. And as we are just coming out of a standstill of 2 months, our working capital or 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. So we would basically have something like a 10,000,000 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. And of course, we will incur idle costs. So I would like to recommend to all of you, please take that into consideration in your models I don't see that we would be in the upper end of the guidance. We would be in we shoot for being around mid range, but with a standstill and lost volumes, you should take around about 10,000,000 of the midpoint. Which I think is still focused then on consensus where consensus stands right now. But 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. So with this, I think we have a precision to to guide you accurately. And with this statement, I open up the floor for all your questions. Please go ahead. Ladies and gentlemen, at this time we will begin the question and answer session. You. Session. First question is from Thomas Viguelwehr, Citi. Your line is now open. Good morning. It's Michael. And Andre, thanks very much for the presentation opportunity to ask questions. First one, if I may, on can you just re could you or could you refresh us as to what success looks like in 3 to 5 years for Commander's, you know, where where could this go? And then I know because I was on your website the other day. You don't charge yet, but 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, you know, for his 5 years down the line. Second question, is, just the, you know, how performance exiting the 3rd 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 there was if you could give us a little bit more color around the specialty additives kind of run rate and exiting 3rd quarter? Thank you. Alie, welcome, Tom, and it's nice to hear your voice. So I will address Commander's first. In the figure, investor relations, a document which we dispatched, we have included 2 pages on commodities because we set 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. So when you look at the commander 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 8 times higher? 8 Etote, I don't know. So it has gone up by 800%, which is remarkable. And if you look at the number of companies that are now active on the platform, we've moved up by 300% We've now more than 50,000 products on this platform. So this in itself shows, that commodities has established established itself as leading chemical platform in Europe. And we have traction and this is the most important thing on platforms you need traction. And this is there. Now if we look at a platform, it normally takes 4 to 5 years to really show if the business model works or not. So the jury is still out But you have seen that now the biggest global chemical distributor in the world, the Rent Tuck has signed a strategic corporation with Columbus. And I think this is also a strong proof to the pudding, that this platform is somewhat interesting, attractive. So but the next 2 years will be decisive. Now that we have traction on the platform, we will now have to introduce monetization models. And 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. So monetization models we are now working on and we will start introducing them in 2021, most likely in the second half of the year. And 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. So that's the one element getting tremendous on net monetization features. If I now think 5 or 10 years down the road and should we achieved to really have success with commanders also in the forthcoming 2 to 3 years. Then at some point in time, LANXESS will reduce its 100% ownership in the completely ring fenced legal entity. And where our eventually holding will be, is yet to be decide but it doesn't need to be a majority position, but we will always be invested in the from because we want to have access to a digital go to market place. And with this, I think I've covered all aspects of your question. Now on Specialty Additives, I fully agree with what you are saying. Bromine is doing well. This gave the business the business division's relative stability. Of course, we suffered in Q2 and Q3 all so from E and 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 Ranchimi with its big exposure to the automotive industry. And the lubricant additives, I mean, they're really hit by aviation. We have literally no sales to the aviation industry anymore because things are not flying and you are not flying most likely. And the second industry, of course, here on look at we have 1,000,000, 1000000 sales on the automotive industry. We just see them recovering right now, but third quarter was still pretty soft. And for that very reason, the overall segment was soft in Q3. And with this, I think I've addressed All of your questions. Yes, thanks very much. Just very quickly and forgive me, forgive my ignorance. So you still got 100% have come on this you didn't share any of the economics with Brenntag, in the partnership? No, no. I mean, at this point in time, we agreed that we team up and that we, work together and learned together and Brandtak went out last Friday, I think, and made the announcements that they are entering into a strategic partnership with, with commanders. But this did not lead to a participation in commander. At this point in time, we would like to keep the platform to ourselves because if we are successful, of course, the Brantac will learn how this platform is, how successful and potentially one day they will then enter also holding in commodities, but 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. And right now, we believe in the success of commanders. Thank you very much for Taz. 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. I appreciate your introductory remarks that maybe we shouldn't over analyze any given water and intermediates. So when you take a step back, how do you think this asset has navigated the crisis And can you just give me a reminder as to the ambition you have for it going forward? And then the second question around capital allocation. I saw you recently put 1,000,000 into the pension. So you're obviously conscious of those liabilities in the context of looking at potential M and A, can you give us a sense how much firepower you think you actually have for that And I'd be a bit remiss to ask 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. So I take them 1 by 1 as far as advanced industrial intermediates was 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 2nd most robust business in our portfolio. So I stressed beginning of the year, consumer protection will be shining or will shine, stability versus previous year or growth. Were my comments. I said advancement immediately will be down, but compared to all other segments, they will have the 2nd best stability in our portfolio, then I positioned Specialty Additives as 3rd, and engineering materials as 4th in the ranking. I clearly stick to this statement And I think at the year end, you would 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, 1 quarter we take sometimes margins of 19, 20, 21%. You've seen that in 2020, by the way. I think it was the 2nd quarter where we had a sky high margin. Now in the 3rd quarter, you see the opposite if you would simply add 1,000,000 to the profitability of the segments, the margins would look completely different. And therefore, what you would see in Q4, we saw now a modest margin in Q3. You would see a rebound in Q4. This is the pattern of the last several years. And therefore, I feel strong about advanced industrial intermediates. This is the area where we are going through a nice debottlenecking. This division has grown over the last several years by more than 1,000,000 in EBITDA. It's a super cash converter. And it tests from its market position and from its industrial cost curve. Simply very, very, very strong position. So I feel very good going forward. Now the funding, the voluntary funding that we set 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 agencies. So if you increase or decrease 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. And, you know, that right now liquidity costs money. You don't get money. And 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 and L. And therefore, it is any funding of pensions is in current times round about 80 basis points, 100 basis points accretive, to the P and L. I look at the CFO we are at 1.3 percentage points on pensions. So it's even more than 100 basis points. It's 100 60 seventy basis points, positive. And therefore, this was a financial decision we took. And now to your last question, so, we have ample firepower I think it stands somewhere depending on where you see the rating and rating agencies between 1,000,000,000 and 1,000,000,000 depending on what financial models you're using. So therefore, you can see that we are in a strong financial position to also look at M And 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 liquids. And therefore, we see that the environment is as such that our portfolio has proven to be strong. Our financial position is strong. The markets the financial markets are strong And 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. Thank you. So can I just ask a quick follow-up? Along the same lines, you mentioned financial markets, a 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. And of course, it's if we consider that the M and A market is not sound and opportunities are not there, we would definitely rethink the share buyback. Thank you very much. Your next question is from Andrew Scott Stutt UBS. Your line is now open. Unfortunately, we lost his line. So the next question is from Andrea Steiner, MainFirst Bank, Achim De Zager. Your line is now open. Thanks for having the opportunity to ask questions. I have several old, very small on your M and 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 both the moment size is where you do not need equity. Maybe you can comment on this. Secondly, you're referring that you reduced inventory, if it had a negative impact on the P and L, is that more or less equally split about, across the segment or was one segment more affected than the others? And then on the battery material and lithium project, any ideas you can share with that would be a strategy midterm might be. And the last one, Caprol, and you said market is tightening. Is that only the upstream part of come for lifetime, or do you see this also in the downstream polyamide and polyamide compounding business? Thanks. All the questions, Andreas, so let me take them 1 by 1. M and A, Both ons are basically acquisitions, something in the 100,000,001 100,000,000, CHF 100,000,000, CHF 100,000,000, CHF 100,000,000, CHF 100,000,000, CHF 300,000,000, CHF 100, CHF 100,000,000 but below EUR 500,000,000,000. Mid sized acquisitions would be, well, Mike and Toura, this was a mid sized acquisition, company size roundabout 1000000000 to 1000000000. Big transformational acquisitions are in our definitions, acquisitions where we buy at least half of the turnover of our company because 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 2 years, sometimes even 3 years depending on the complex So this is how we define M And A. Now on inventory rundown, the two segments being impacted the most where obviously engineering materials due to the HPM plant maintenance and advanced industrial intermediates. On your third question, lithium, what I said in the last conference call, we need open borders. And then after borders are opened, give us round about 3 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. I my personal assumption is borders will not open until presidency is being decided. So we need open borders so that engineers can really work on the pilot plant on the process on the technology and we need open borders from Canada to the United States. We need also that our Germans can travel. I mean, I have my central power task force here, the chemical engineers, that basically do the key engineering work for top sites worldwide. And 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. And we have, as you know, unfortunately, borders closed, which never happened, I would say, in the last several decades. Now on capital, 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, but the rebound is now visible also in Europe. And that we had to announce a force majeure in downstream because we cannot source in Europe polyamides. It's tight. And this gives you proof to the pudding that the automotive industry is replenishing their inventories because they are pretty rundown as well. And that's the reason why we had to announce force 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 polyasmights, but we don't get anything here in Europe because the market is tight. This in itself is a positive news, going forward. But of course, it's now unfortunately a negative news to our customers because we've always been a very, very reliable supplier, which they recognized and rewarded. And it's very unfortunate. So we do everything that we can to get a couple back on stream. And with this, I think all four questions have been answered Andreas. The next question is from Andrew Stott, UBS. Your line is now open. Good afternoon. Apologies for Elliot. This is the joys of working from home. Just a couple of questions for me. So 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 3rd quarter is, I guess, even more positive given that you've grown margins when your volumes slightly down. So when I think about the 22.6 percent 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. So 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, what Can you give me an idea of the type of leverage that you have to an improving environment? I mean, of course, there's no guarantee of that improving environment, but just to understand the operational leverage Well, Andrew, first, good to hear your voice, and now to your questions. On Consumer Protection, I would say if you look into 2nd quarter, we posted a tremendous volume growth and I stated some of this volume growth of course is is taken off Third And Fourth Quarter. So, if you look at the entire year, this division and you would normalize the ordering of customers, you would see volume growth quarter every quarter as a matter of fact. Now to your, margin question, I mean, this segment will be a 20 plus margin division. And and test the potential to grow further. I think this year we will potentially end up in the range of 22, 23 percentage points. So here, this is the division that should volume wise grow. And B, the highest margin division with highest cash generation. Now 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 Biosites business, MPP in 2021, even though for MPP with disinfection, etcetera, We assume that the business will grow in 2021, but will it be margin wise stable because in this year, we've had round about 4,000,000 dollars, $5,000,000 of marketing costs that we didn't incur because we had no fares where we participated. We had no marketing initiatives where we participated. So this next two travel costs were saved. Our assumption is that in the second half of 2021, people can travel. Again, fares can be organized again in order to ignite future sales. So roundabout 1,000,000 will come back to our current planning assumptions in the Material Protection business. And therefore, we will be more flattish for 1 year Even though normally this business has grown over the last 4, 5 years, year on year something like a 10 percentage points, That's the normal growth rate and profitability of, our MPP business units. But 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 fares 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 20 13, we stood somewhere at 7% when Southern European countries suffered. So steep decline, high volatility. And as far as our communication strategy implementation was concerned, we said we will upgrade And you see that now even in a tough downturn, we are basically year to date in the corridor that we envisioned for 21. So around this lower end 14% and this despite the toughest recession we've ever seen. Assuming assuming 21 would be a normal year, which most likely it's not going to be. But assuming a normal year, we would see the strongest rebound in engineering materials. Because this division has been hit brutally due to automotive exposure. 2nd division rebounding would be Specialty Additives. And 3rd division rebounding would be intermediates. I mean, 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 And consumer protection has not suffered. I mean, utilization is normal. We could have more capacities, which coming now in 2021, 2022. But here, it would be the normal operational growth in consumer protection that you could underline 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 all the patterns or sentiment post the second round of lockdowns that we are seeing maybe not as sensitive as the first one, but any change in sort of intermittent order patterns more recently? It's early to tell. I mean, the lockdowns have just started 1, 2 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. And so governments around Europe had 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 your 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 adopted to the situation. And my personal take, is really, I think this is a marathon, coronavirus. And in the marathon, you need to you need to 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 ten Ks have been done, but there are still 30 or 30.2 and 195 meters to go. So you need to be prepared to make here simply the long distance run. And the one thing I can tell you, as you know, Linksys has trained over the last several years half marathons. So the team is fit, energized and prepared to run through this crisis. Understood. And maybe if I can squeeze in one follow-up and there will be a few M and A questions already asked. My question is more philosophical in a way, how do you think about the multiple that Lancashis would be willing to pay, in a transformational deal? Is there a particular band ceiling that you would be wouldn't want to go. Thank you. Well, we've communicated our financial matrix on M And A, I think, 2 to 3 years ago. We basically are not stubborn on this. But it gives us a frame. And with this, I think we are a pretty transparent Of course, we will always adjust and rethink if strategic rationales are imminent and very positive. But at the end of the day, there needs to be a strategic rationale and there needs to be a financial rationale. And if the financials are not are not there, then even if the strategy appeal would be sound, we would not do it. So both strategic and financial matrix have to be in sync. Thank you. Next question please. Your next question is from Markus Mayer, BARDA Javier. Your line is now open. Yes. Good afternoon, Richard and two questions from my side as well. First one is again on the inventory reductions at the time industrial advanced intermediates, which has triggered the annual cost. The question is more on why it was this basically due to your expectations on your raw material costs or has this to do with weaker demand environment here you're expecting for the fourth quarter? That's my first question. And the second question is, on the specialty additives division. Next year, I think in March, the new European directive for all allocated Framatons and monitors come into play, was there any change from the European Union, on what are the positive and negative effects you expect at your side? So 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 mean, I personally monitor that on a quarterly basis, and officially through the board, we go twice a year and look at all regulatory changes. And there's nothing of materiality that impacts us for 2021. Now on the inventory side, no, basically, we ran down the inventories because this followed our schedule on plant maintenance. And that was driving the inventory rundown. It's a little bit more difficult to make bigger plant maintenance, in the fourth quarter because normally, I mean, if it's snowing, IC, etcetera, for safety reasons that is not highly recommended. Small standstills and stuff like this, we tried to do either in August time, or in December time, when it is not significant, but bigger stands to bigger plant maintenance. We normally do when we have also stability on weather conditions and the like. As far as the market is concerned, I mean, 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. So 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 but consumer protection seasonal in a seasonal way has always Q4 a soft quarter. So 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. But seasonally here, the strong quarters in Consumer Protection are notably the first two. Because of industry pattern. And 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 a force majeure, I rather assume that profitability would be somewhat in the area of Q3, unfortunately. But this is how we look at the 4th 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 there are no questions, ladies and gentlemen, we thank you for your participation, and we are looking forward to having you on a virtual roadshow in the forthcoming days. Michael and myself will take several meetings And therefore, we are looking forward to speaking to you. I sent 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.