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.
Yeah. Thank you very much. Warm welcome for everybody and many thanks for joining our Q3 call. As always, I have our CEO, Matthias Zachert, and our CFO, Michael Pontzen, with me. Please take notice of our safe harbor statement. After collecting some feedback from some of you, we have decided to only briefly set tone today with Matthias just presenting three charts. We assume most of you will have had a look at the presentation already, and therefore we dedicate more time to your questions. Matthias, please go ahead.
Welcome to all of you to our third quarter conference call. I move to page number three and would like to address highlights and challenges of the running quarter. First, we have advanced nicely on our portfolio management, which we highlighted to you one, two years ago that this would be an ongoing process and we continue executing on this. This relates to the chrome chemicals divestiture, quite a CO2-intensive business. We indicated to you that we will depart from South Africa, and we will address the chrome value chain. As far as the first step is concerned, I would like to say that here, mission completed. As far as Currenta is concerned, the signing was also announced in August during the third quarter, here all preparations for going to the closure is in full preparation, full swing, which we expect for next year.
Today, we announce the realignment of our organometallics business. It's one business that we highlighted we would find ways to fix the profitability, and this is definitely a step in this direction. I will make some further comments just in a moment. As far as earnings are concerned, we delivered on our communication that I gave to you in August with the second quarter, that we would be slightly below previous-year quarterly performance. If you look into the details of the numbers, we did well in three segments and really compensated the weakness that of course, was pronounced in the automotive industry and thus burdens our Engineering Materials segments. As far as the leading positions in our non-auto chemical industries are concerned, we performed very nicely, and this becomes visible if you look at the respective segment reporting.
The ongoing investments in the bottlenecking projects that we started two years ago are more and more coming through and are contributing to earnings. Last but not least, we have been ranked as number 1 in the European Dow Jones Sustainability Index. Something that I will also further elaborate when we will see us on Friday. Challenges, of course, slight pressure, but only slight pressure, overall on prices and volumes. Of course, the reasons are known to you. We have passed on declining raw materials and of course, especially in 1 segment, AII. This is over the last 10 years and always happening. We see from 1 quarter to the other that sometimes there is a swing in margins. It happened in Q2, and therefore it happened in Q3 in the other direction. Nothing to worry about. This is standard.
Challenge is clearly also the severe auto and agro market weakness, which is holding on. We continue terminating the low-margin contracts, which were visible already at the beginning of the year in Specialty Additives. I turn over to the organometallics repositioning, here we've given highlights on page four. We have basically three catalysts, which we analyzed in detail. We have now had enough time to sort out our industrial cost curve position. We had enough time to get good understanding what our customer wants, where we are competitive, where we are less competitive, therefore we are very enthused about our aluminium catalysts. We see growth opportunities here in the future. We see our industrial cost curve as a very competitive one, the technology that we have, we consider as a very good one.
The thing looks entirely different if we look at our tin and gallium catalysts, and therefore here we have decided and worked hard in the last basically 12 months to find a partner, which we found with PMC. It's, I think for us, the best home, and therefore we will sell this business to PMC and expect that closing will occur in just a few months end of the year. With this, we would then lose around about $60 million of sales, which has very little single-digit EBITDA contribution. We will step from that point onwards for two years period into a pure tolling agreement and then see what PMC takes as decision afterwards.
With this, however, we believe that the base business aluminium catalysts will be a business of around about $100 million in size with the profitability of industry standards. Ladies and gentlemen, let me now turn over to the guidance of the company next to the quarterly numbers. I think numbers are known to you everywhere. Headline, sales pretty stable. You see more cash flow generation now in 2019 coming through as indicated. EBITDA margin, relatively stable as well. Ladies and gentlemen, please let me inform you, macroeconomic times are not improving. We don't see that. We see that the auto market is still in no recovery, and therefore we expect that Q4 trading is following the trend of the last few quarters. As far as current trading is concerned, when we look into Q4, it is exactly on track with what we had expected initially.
As far as guidance is concerned, we stick to our guidance, Q4 is anticipated to be slightly, and I pronounce slightly better than Q4 of last year. With this, very speedy, we would like to open up the floor for your questions.
Ladies and gentlemen, at this time we will begin the question and answer session. Anyone who wishes to ask a question may press zero followed by one on their touch-tone telephone. If you wish to remove yourself from the question queue, you may press zero followed by two. If you're using speaker equipment today, please lift the handset before making your selections. Anyone who has a question may press zero followed by one at this time. One moment for the first question, please. We receive the first question from Tom Wrigglesworth from Citi. Your line is now open.
Good afternoon, Matthias. Thanks very much for the opportunity to ask questions. Obviously you've stated very clearly there that things are tracking in line with your expectations. When was the earliest point do you think we could start to see some improvement in your automotive end markets? How are you thinking about that as that progresses into 2019? Is this a business that you have to maybe look at further adjusting if volume conditions remain weak? Secondly, on the restructuring charges, I'd like a bit of help, please. You previously guided to EUR 30 million-EUR 60 million of restructuring charges for this year, then you've highlighted, I think, EUR 20 million for the Organometallics business. That still kind of leaves me short of around EUR 20 million-EUR 30 million of restructuring charges.
Could you just run us through where the restructuring charges have taken place this year, and which businesses? Thank you.
Hi, Tom. Welcome. Thanks to have you on the call. Let me address the first two. Michael will take number 3. The automotive industry, basically, you get different signs. From nearly all customers, we get the feedback that the market is pretty tough and, of course, under major transformational change, which will last not only one years but several years to come due to technology changes, regulatory pressure, et cetera. We see clearly positive signs from the e-mobility sides, which will get more volume attention also from next year, but notably 2021 onwards due to regulatory changes. We are prepared for a stagnation in the automotive industry and even erosion. Therefore, I don't see right now that the automotive industry is changing overall. However, what we've seen in Q4 now is that, of course, indeed the comparable base in last year is pretty low.
We've seen, for instance, that underlying performance versus previous year turned into slight improvements and therefore overall the industry I would address as still in clear trophy situation. As far as our expectation is concerned, we are fully on track. As far as measures are concerned, Tom, I think we've seen and shown this over the last several years. If we see undercapacities for too long of a period, we will always address that. That should be no surprise to you if we take measures whenever needed. Michael, come on, address exceptionals.
Hey, Tom. Welcome everybody. With regard to exceptionals, there are basically three, four major buckets. One's obviously still some exceptionals, which we're booking in the specialty area related to the Chemtura integration. The second is obviously in the chemicals area now with regards to different measures we're undertaking. The third bucket, that's the rather larger one, you find on M&A and the M&A-related exceptionals come in like we discussed organometallic, we discussed chrome, we discussed Currenta. That obviously comes along some M&A costs. Last but not least, we have our digitization initiative, which does as well consume some of our exceptionals.
Yeah, I would just like to add on this. You have seen in third quarter Currenta coming through. That was a project where we have invested a lot, but we get a lot. M&A related chrome chemicals was running for quite some time with its intensity in third quarter. Now you see today delivery on organometallics. If you do M&A, you should not be surprised to incur certain costs for all the advisors and work that you are doing. I think all of what you have seen goes in the right direction.
Great. Thank you very much. Matthias and Michael.
Most welcome. Next question, please.
The next question is from Martin Rödiger, Kepler Cheuvreux. The line is now open.
Yes, good afternoon. Only two questions from my side. Firstly, I see that the number of employees has increased by 100 people in Q3 compared to Q2, driven especially by Engineering Materials and at the corporate level. Why do you expand your workforce, especially in these two segments? The second question is a minor one. As you certainly have locked in the deal with PMC Group, can you disclose the enterprise value you receive for the tin-based organometallics business? Thanks.
Well, Martin, you should not assume that we are here on the big hiring modus, but you sometimes take, in certain jurisdiction, changes as far as contractors that are not on your P&L and current or employed employees are concerned. We've made certain changes in some jurisdictions where we changed from contractors or had to change from contractors to insourced people. In one specific case, these people were in the production area, however, associated to our, as we call it, technology production, PTSE function, which is defined as a global function, thus in the corporate area, even though the people are completely production-related. It's a technicality, therefore I would not stress too much time on this matter. Michael?
Martin, with regards to the EV of the part we sell to the PMC, we agreed with PMC Group not to disclose the EV, therefore I appreciate that you appreciate that we agreed on it. Just as a reminder, that business was not a very high margin business, just the opposite, very low single-digit EBITDA. You should not assume monster income from that sale.
Thanks.
Next question, please.
The next question is from Knud Hinkel, Pareto Securities. Your line is now open.
Good afternoon, everybody. Thank you for taking my question, too. I have, firstly, on organometallics, can you elaborate a little bit on the different economics of organometallics, with view to the different materials? Why is the position on the cost curve so different for these different divisions? That would be my first question. Second question, on numbers, here you guided for depreciation as high as EUR 450 million for the full year. If I'm not mistaken, you are at EUR 356 after nine months. That leaves, for the last quarter, a little bit more than EUR 90 million of depreciation, which is much lower than what we've seen in the first three quarters. Maybe you can explain the difference a bit. Thanks.
Well, let me address the first one. Michael will take the second one. If you look at the different catalysts, you have different deepness or a different strength in the value chain. In the aluminium catalyst value chain that we have, we do have a variety of production steps. They are far lower or limited, reduced to basically one in the tin and gallium catalyst production. Here we are simply more competitive in the aluminium one from the production cost curve. Second, as far as scale is concerned, in aluminium, we are bigger than in tin. The third is as far as the end product is concerned, aluminium goes basically to the polyolefins and the tin goes to PVC, and therefore it's also a different market with different volumes, different margins, and this gives you just a little bit heads-up.
As far as gallium is concerned, it's basically negligible. We have a Mickey Mouse position here, and therefore we don't make a difference. That's the reason why we plan to exit this as well, because both businesses, tin and gallium, you need a microscope to identify the EBITDA, and I get older, so I have glasses and when I start reading and microscopes, I don't have at all. For that very reason, it simply doesn't make any sense. We want to have big numbers, double-digit margin numbers, then you don't need microscopes and glasses to identify them. That's basically, in a nutshell, the reason for the differentiation, and Mike will address depreciation.
Thanks, Knud. With regards to D&A, the underlying run rate per quarter is give and take EUR 110-EUR 120. It also depends to some extent on the exchange rate, as we have nowadays, lots of assets as well in the U.S., they're denominated in the U.S. dollar. With the stronger dollar, we have a higher run rate of D&A. The EUR 350 give and take is, of course, to some extent an effect on D&A of the FX. If FX remains as strong as it is, the number for the year end could indeed be maybe around EUR 460, that's no, let's say, major deviation on the overall number which we're having. The second is obviously we're spending still more CapEx than we have as D&A this year. We are a little bit faster with regards to spending the D&A than last year.
That does as well have a little impact, and these two's impact are the major driver for the D&A number.
Okay, thank you. Next question, please.
The next question is from Oliver Schwarz, Warburg Research. Your line is now open.
Thank you. Two questions from my side, please. Firstly, Rhein Chemie. It seems like Rhein Chemie continues to struggle to achieve margins that are in tune with what you're achieving for your divisions or business units. I know that Rhein Chemie has a history with LANXESS once being up for divesture, and then due to the change in management, there was a different strategy implemented at Rhein Chemie. In the light of the current development, would you still consider Rhein Chemie to be a core asset of LANXESS? That would be my first question. Second question would be more philosophical, perhaps, in regard to your midterm targets and the margin projections you made. In the light of change in the reporting, especially IFRS 16 impact and the resilience of your performance in 2019, which is more, let's say, a trough year than a peak year, I guess.
Do you plan on going back to that guidance and maybe tweak it a little? That would be my second question. Thank you.
Very valid question. I think, both one I would rather like to address on Friday in our Capital Markets Day event. If you don't mind, I would be very, very aggregated on the first one and basically refer to Friday on our second one. Rhein Chemie has been always under, since the spin that we did in 2005, had always been a pillar in our portfolio. It's an international leader, you need to differentiate right now. They hold position number 1 in where they compete. You need to distinguish between two business lines here, the Colorant Additives business, which is superb in a unique little niche positions, therefore things are running perfectly well, even better than last year. The problem right now is definitely the rubber additives business.
That is the separate business line, which, of course, has next to our polyamide value chain, the biggest exposure to automotive sector. As such, they are going through tough times right now as the automotive industry and the supplying industry are going through tough times. At some point in time, the automotive industry will definitely stabilize, and volumes will come back also to Rhein Chemie. We will now make sure that this is not lingering on our divisional profitability, which compared to last year in the additive segment, could reach 19.5% as you have spotted in the third quarter results. Overall, there must be some other very good businesses and Specialty Additives that overcompensated the weakness in Rhein Chemie, and even to some extent, the weakness that we had in our lubricant additives. Again, on the margin, let's come back to this on Friday with delight.
See you on Friday then. Thank you.
Next question, please.
The next question is from Peter Spengler, DZ Bank. Your line is now open.
Thank you very much. Good afternoon. I have two questions. First, on the Currenta sale. If I remember correctly, can I assume that your net financial debt will decrease by around EUR 620 million after receipt of the proceeds from the sale in Q2 2020? The second question is on your COGS, which have risen in Q3. Can you elaborate about the utilization of your facilities, especially in Engineering Materials? I would imagine that the utilization rate there has decreased recently. Thank you.
Michael will take both questions. Herr Spengler.
Good afternoon, Peter. First question with regards to Currenta. Yeah, that is pretty much the direction, which you should assume we gave the EV for the equity, which was EUR 780 million. That number sounds pretty reasonable to me. The second, with regards to COGS, indeed, if you take a look into our P&L, give and take the EUR 10 million decline in EBITDA you find in the gross margin. That is driven for the overall group. Basically, on the one hand side, we have a negative volume effect. We have a positive currency effect, and we have a negative effect from a lower utilization for the group.
The lower utilization is driven, let's put it like this, to some extent, and that you will find in the cash flow statement, because our businesses or we as a group, started to work on our inventory levels in the second half of the third quarter. Why the increase in inventory, and you find that, as I said, in the cash flow statement, is much lower than it was in the third quarter last year. That effect you find in the gross margin for the group and that effect you find then in the EBITDA. It's one of many effects, but yes, the utilization rate was a couple of percentage points lower than it was last year.
Okay. Thank you very much. Next question, please.
The next question is from Chetan Udeshi from JP Morgan. Your line is now open.
Yeah. Excuse me. First question was on guidance. Can you maybe confirm if the midpoint is still relevant when you talk about slightly higher for Q4, just to be in the right ballpark? Second question was, the pension provisions have gone up, and just a reflection of the lower interest rates, but does that have any bearing on the costs next year for service pension costs that go to your EBITDA line? Just on this debottlenecking brownfield project CapEx, can you remind us how much of that is already being spent by end of this year and how much is left to be spent next year? In other words, will the CapEx next year start to go down or will it remain at current levels? Thank you.
Yeah. Chetan Udeshi, I will take number one and number three. Michael Pontzen will take pensions. On guidance, I reiterate what I've said in Q2. Our guidance is EUR 1 billion to EUR 1 billion to EUR 1.050 billion. It's literally impossible to make a point landing. Where I see today, the guidance is basically in our range. Midpoints, I would rather like to state it in the following way. We want to deliver last year's EBITDA, which was EUR 1,016. I indicated to you in August, we work hard to make sure through cost measures, cost containments that we land there. I would be surprised if we would be a lot above this. I would rather be very clear that the EUR 1,016 is what we want to achieve. I don't think we would be millions above this. That is the guidance.
It has been the guidance beginning of the year. We are working on that and do our professional work that we will deliver on this. On brownfield investments, it's something that we will comment on Friday. It's, I think, a very interesting development. You've seen that we have started to bring on stream additional capacities in Advanced Industrial Intermediates. I referenced to this already 2017 and 2018. Reason for our stability in Advanced Industrial Intermediates is that these great projects are now coming on stream. They will continue coming on stream next year. We would like to explain more on this matter so that some excitement is left to you for Friday. We will explain some further topics on this on Friday when hopefully we will also see you here in Cologne, Chetan. Michael, pensions?
Yeah. As exciting, I guess, as the topics on Friday is pension.
Okay.
That was a joke, yeah. Okay. With regard to the change in pension, you're absolutely right. The interest rate in Germany, which is the major driver for our pension accrual declined further, another 25 basis points. That is still a book value. We have to adopt it, but there are no changes in the cash flow nor in the service cost, which go hand in hand with that development. What goes, because the changes are recorded in the OCI.
What goes hand in hand is that we have, at least to some extent, counter-position on the asset part of our balance sheet, which are the deferred tax assets. Please do not forget, or do not only assume or adopt your pension accrual, but please keep in mind that there is a pension asset sitting on the left-hand side of the balance sheet, which does the theoretical outflow of cash related to the pension accrual, reduce that cash outflow.
Thank you.
Most welcome. Next question, please.
The next question is from Oliver Schwarz, from Warburg Research. Your line is now open.
Thank you for taking my next two questions here. Can you give us an update on your lithium project, please? The second question would be, with total exceptional items at EUR 73 million after nine months and EUR 55 million of that for digitalization M&A expenses, would it be fair to assume that we'll only see EUR 7 million run rate for the existing business and around about EUR 20 million earmarked for the disposal of the Organometallics? That would be like those EUR 7 million for Q4 would be a bit lower than the run rate for the first three quarters. I'm just wondering whether you're toning a bit down or have finalized some of the exceptional projects, or is there more to come also or shifted into 2020? Thank you.
I will take lithium and Michael will take your questions on exceptionals. On the lithium project, there's nothing new. The current timetable is unchanged, and therefore there is nothing that needs to be added at this stage. Michael, please take exceptionals.
Yeah. Oliver, with regard to the exceptionals, as you said, many of the exceptionals are booked in the reconciliation line. There is a certain trend, like you see as well in our reported EBITDA and exceptional. You don't have a linear development quarter-over-quarter. You have a certain seasonality in these number because the majority or a large part of these exceptionals are project-related. I was referring to the project with regards to the chrome chemicals part, with regards to the OMS part, especially with regards to the Currenta part. These are of course not running costs, but project costs. Therefore you should not expect, let's say, a given run rate, but project-related. With regards to the give and take EUR 20 million exceptional bookings for OMS, these you should most likely expect then in the fourth quarter.
Very clear. Thank you.
Again, we are not standing still. If we find good projects, either on the cost side in automotive exposed businesses or in form of good portfolio moves on buy and sell, we always incur exceptionals, and therefore we would not shy away because of a guidance on OTC costs. That would always go along, of course, with the communication of a project that is completed. Please have understanding for this. I think we are working on a lot of good projects, which we have completed in the last several years. All of you know them and you should be convinced that we will continue doing this. Next question, please.
The next question is from Andreas Heine, MainFirst. Your line is now open.
Yeah. I have basically two questions. The first is on Specialty Additives, which performed indeed better than I've expected in Q3. Could you elaborate whether this is also, let's say, kind of quarterly outrange to the positive and might be more on the downside than in the next quarter? Is it sustainable? How important was bromine price in this particular quarter? The second question I have is on the special items. Can you elaborate how much of these EUR 100 million for this year will relate to cash outs, and how much will be just impairments and other accounting stuff?
Yeah. Herr Heine, as far as Specialty Additives is concerned, I think I gave some color already to Q3. Q3 did well, basically because of the entire flame retardant setup. Flame retardants did well, and here of course, notably the brominated flame retardants. Of course, price, please take into consideration that price had been on the rise on bromine over the last several years. Of course at the end of the day, we are selling not raw bromine, but our brominated flame retardant. The entire flame retardant Somebody should put his phone on mute because we are hearing that you are traveling. I wish you safe travels. Now back to your question, Andreas. The entire brominated value chain did well and thus overcompensated the weakness, clear weakness in Reichshoffen rubber additives, whilst lubricant additives did by and large okay.
I would say that third quarter there was some volume momentum, some volume accounts with customers that were especially strong that should not be considered as underlying. Next year, I think, third quarter 2020, Specialty Additives will have a tough comparable base. We had here some extra earnings, single digits. Overall, the brominated and phosphorus value chain did already the entire year 2019 pretty nicely and therefore we've communicated that we are repositioning here the business, working hard to get margins up, and we've done that over the last two years, I think, quite successfully. Michael, come on, rock the EUR 100 million.
Hi, Andreas. Thanks for the question. First, you will get a complete update, like usually when we report full-year numbers about the table of expected cash-outs and synergies like we gave you in the past couple of years. If you take and recall what we told you at the beginning of this year, we told you should expect some EUR 40 million cash-out for the Chemtura integration related expenses, and only a smaller expense to be taken. That is what you exactly see in our accounts. There is a deviation between the booking of expenses and the cash-out, obviously. With regards to the overall, let's say, give and take EUR 100 million, which we're guiding, the majority does carry some cash-outs.
With regards to the EUR 20 million we were guiding now on the OMS business, here the majority are write-downs which will not carry major cash outs. Next question, please.
Currently, we have no further questions. As a kind reminder, if you wish to ask a question, please press zero followed by one on your touchtone telephone.
Well, ladies and gentlemen, if there are no further questions, we close the call and again, we would like to highlight we welcome all of you to our investor and analyst event on Friday, starting in the morning. We've worked hard over the last few weeks and basically months to make it a worthwhile trip for you. We are excited to present more about LANXESS, and we are looking forward to see you on Friday or on the roads when we do our road show. All the best. Thank you for your time and participation. Bye-bye from LANXESS. Bye-bye from Cologne.
Ladies and gentlemen, this concludes the Lanxess conference call. Thank you for joining, and have a pleasant day. Goodbye.