Earnings Call: Q3 2019

Nov 13, 2019

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 Andre 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, Matias Zachert and our CFO, Michael Thompson. With me, please take notice of our Safe Harbor statements. And after collecting some feedback from some of you, we have decided not to only briefly set tone today with Matias just presenting 3 charts. We assume most of you will have had a look the presentation already. And therefore, we dedicate more time to your questions. So, Matthias, please go ahead. Welcome to all of you to our third quarter conference call. I move to page number 3 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, 1, 2 years ago that this would be an ongoing process and we continue executing on this. This relates to the proven chemicals divestiture quite a CO2 intensive business. We indicated to you that we will depart from South Africa and we would address the chrome value chain And as far as the first step is concerned, I would like to say that here, mission completed. As far as current is concerned, the signing was also announced in August during third quarter and 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 organomethalex 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. So 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. But if you look into the details of the numbers We did well in three segments and nearly compensated the weakness that, of course, was pronounced in the automotive industry and thus burdened our engineering materials segments. As far as the leading positions in our non auto Chemical Industries are concerned. We performed very, very nicely and this becomes visible if you look at the respective segment report the ongoing investments in the bottlenecking projects that we started 2 years ago are more and more coming through and are contributing to earnings. And last but not least, we have been ranked as number 1 in the European Dojones 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. And of course, the reasons are none to you. We have passed on a declining raw materials And of course, especially one segment, AII, this is over the last 10 years and always happening where you see from one quarter to the other that sometimes there's a swing in margins, it happened in Q2 and therefore, it happened in Q3 in the other direction. Nothing to worry about these standards. Of course, challenge is clearly also the scene auto and agro market weakness, which is holding on. And of course, we continue terminating the low margin contracts which we are visible already at the beginning at the beginning of the year in Specialty Additives. Now I turn over to the Organometallics repositioning. And here we've given highlights on page 4, we have basically 3 catalysts, which we analyzed and detailed 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. And therefore, we are very, very enthused about our and the mining catalysts. We see growth opportunities here in the future. We see our industrial cost curve as a very competitive one. And the technology that we have, we consider as a very good one. Thing looks entirely different if we look at our tin and gallium catalysts. And therefore, here, we have decided and worked out 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 P and C and expect that closing will occur in just a few months end of the year. With this, we would then lose round about 1,000,000 of sales, which has very, very little single digit EBITDA contribution. We will step from that point onward for 2 years period into a pure tolling agreement and then see what's PMC takes this decision afterwards. With this, however, we believe that the base business aluminum catalysts will be the business of roundabout 100,000,000 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 So I think numbers are known to you everywhere headline. Sales pretty stable. You see more flow generation now in 2019 coming through, as indicated, EBITDA margin relatively stable as well. And 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 over the last few quarters. But as far as current trading is concerned, when we look into Q4, it's exactly on track with what we had expected initially. So as far as guidance is concerned, we speak to our guidance and, Q4 is anticipated to be slightly and I pronounce slightly better than Q4 of last year. And 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. And we received the first question from Tom Wrigglesworth from Citi. Your line is now open. Good afternoon, Matthijs. Thanks very much for the opportunity to ask questions. Just 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 a business that you have to, maybe look at further, adjusting if volume conditions remain weak And secondly, on the restructuring charges, I'd like a bit of help, please. You previously guided to EUR 30,000,000 to EUR 60,000,000 of construction charges for this year. And then you've highlighted, I think, GBP 20,000,000 for the, organometallics business, but that still kind of leaves me short of around EUR 20,000,000 to EUR 30,000,000 of restructuring charges. Could you just run us through where the restructuring charges have taken place this year, and which businesses? Hi, Tom. Welcome. Thanks to have you on the call. So 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, pretty tough. And of course, on the major transformational change, which will last not only 1 years, but several years to come due to technology changes, regulatory pressure, etcetera, etcetera. We see clearly positive signs from the e mobility sites, which will get more volume attention also from next year, but notably 2021 onwards due to regulatory changes. But we are prepared for a stagnation in the automotive industry and even erosion. So, 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. So we've seen, for instance, that underlying performance versus previous previous year turned into slight improvements. And therefore, overall, the industry, I would address as still in clear trophy situation. But as far as our expectation is concerned, we are fully on track. Now as far as measures are concerned, Tom, I think we've seen and shown this over the last several years if we see under capacities for too long of a period, we will always address that. So that would be a that should be no surprise to you if we take measures whenever needed. And Michael. Come on. Address, exceptionals. Hey, Tom. Welcome everybody. With regard to exceptionals, there are basically 3, 4 major buckets. Once obviously, still some expect exceptionals, which we're booking in these specialty area related to the Kaltura integration. And the second is, obviously, in the chemicals area now with regards to different measures we're undertaking. And the 3rd bucket that's the rather larger one you find on M and A and the M and A related exceptionals come in like we discussed organometallic, we discussed Chrome, we discussed Korenta that obviously comes along some M and A cost. And last but not least, we have our digitization initiative, which does as well consume some of our exceptionals. Yes, I would just like to add on on this. You've seen in third quarter, the current are coming through. That was a project where we have invested a lot but we get a lot. So M and A related, chrome, chemicals was running for quite some time with its intensity and third quarter. And now you see today delivery on organometallics. So if you do M and A, you should not be surprised to incur certain costs for, all the advisors and work that we are doing. But I think all of what you have seen goes in the right direction. Great. Thank you very much. Most welcome. Next question please. The next question is from Martin Rodriguez, Kepler. Your 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? And the second question is, minor one. And as you certainly have, I mean, locked in the deal with TMC Group, can you disclose the enterprise value you receive for the tin based organ Metallics business? Thanks. Well, Martin, you should not assume that we are here on the big hiring models, but you sometimes take in certain jurisdiction changes as far as contractors that are not on your P and L and current employed employees are concerned. And we've made certain changes in some jurisdictions where we changed from contractors or had to change from contractors to insource people and 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 and 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. So therefore, I appreciate that you appreciate that we agreed on it. But just as a reminder, that business was not a very high margin business, just the opposite, very low single digit EBITDA So you should not assume Monster income from that sale. Next question please. The next question is from Knud Hinkel, Pareto Securities. Your line is now open. Yes. Good afternoon, everybody. Thank you for taking my question. 2, I have, firstly, on organic metallics, can you elaborate a little bit on the different economics of economic, with you to the different materials. So why is position on the cost curve so different for these different divisions? And that would be my first question. 2nd question, on numbers. And, here, you've guided for depreciation as high as 50,000,000 for the full year. If I'm not mistaken, you are at 3, 356 after 9 months. So that leaves for the last quarter, a little bit more than 1,000,000 of depreciation, which is much lower than what we've seen in the first recorders, maybe you can explain the difference of the year? Thanks. Yes, well, let me address The first one, Michael will take the second one. So if you look at the different catalysts, A, you have different a deepness or a different strength in the value chain in the aluminum 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. So here we are simply more competitive in the Aluminum 1 from the production cost curve. 2nd, as far as scale is concerned, in Aluminum, we are bigger than in tinned. The third is as far as the end product is concerned, alimony 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. Therefore, we don't make a difference. And that's the reason why we plan to exit this as well because both businesses, the tin and scallium are you need a microscope to identify the EBITDA and and I get older. So if glasses and when I start reading and microscopes, I don't have it all. And 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. So that's basically in a nutshell, the reason for the differentiation and Mike will address depreciation. Thanks, Knud. Yeah, with regards to D And A, the let's say underlying run rate per quarter is give and take 100 $10,000,000 to $120,000,000. It also depends to some extent on the exchange rate because as we have nowadays lots of assets as well in the U. S. They're denominated in the U. S. Dollar. With a stronger dollar, we have a higher run rate of D and A. So the $350,000,000 give and take is, of course, to some extent, an effect on D And A of the FX So if FX remains as strong as it is, the number for the year end could indeed be maybe around 460, but that no, let's say, major deviation on the overall number, which we're having. And the second is, obviously, we're spending still more CapEx than we have as D And A this year. We are a little bit faster with regards to spending the D and A than last year. That does as well have a little impact and these two impacts are the major driver for the D and A number. Next question please. The next question is from Oliver Schwarz, Wabock Research. Your line is now open. Thank you. Two questions from my side, please. Firstly, Ryan Kemmy, it seems like Ryan Kemmy is continues to struggle to achieve margins, that are in tune with what your achieving for your divisions or business units. I know that Ryan Chemier has history with LANXESS once being up for divesture and then due to the change in management, there was a different strategy implemented at Heinekemi. In the light of the current development, would you still consider Ryan Camille 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 projects your projections you made. In the light of change in the reporting, especially IFRS Six see an impact and the resilience of your performance in 2019, which is more, let's say, a trough year than than a peak year, I guess. Yeah. Do you plan on going back to that guidance and maybe tweak it a little. Very valid question. And I think Both one, I would rather like to address on Friday, in our Capital Markets Day event. So If you don't mind, I would be very, very aggregated on the first one and basically referred to to Friday on our second one. But Ranshimi has been always under since the spin that we did in 205, it's always been a pillar in our portfolio it's an international leader and you need to differentiate right now. I mean, they hold position number 1 and where they compete. You need to distinguish between 2 business lines here, the tolerance additives business, which is superb, in a unique little niche positions. And therefore, things are running perfectly well. Even better than last year. The problem right now is definitely the Rubber Additives business, and that is a the separate business line, which of course has next to our polyamide value chain. The biggest exposure to automotive sector. And 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 all to Rangshimi. And we will now make sure that this is not, lingering on our divisional profitability, which compared to last year in the Additives segment could reach 19.5% as you have spotted in the third quarter results. So overall, there must be some other very good businesses and specialty additives that overcompensated the weakness in Rhein Chemie, and even as to some extent, the weakness that we had in our lubricant additives. And again, on the margin, let's come back to this on Friday with delight. See you on Friday then. Thank you. The next question is from Peter Srinha Digital Bank. Your line is now open. Thank you very much. Good afternoon. I have two questions. First on the Corinda sale. If I remember correctly, can I assume that your net financial debt will decrease by around 1,000,000 after receipt of the proceeds from the sale in Q2 in 20 20? And the second question is on your COGS, which have risen in Q3. So 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. Hi. Good afternoon, Peter. First question, with regards to Currenta, yes, that is pretty much the direction, which you should assume we gave the EV for the equity, which was 1,000,000. We gave an indication of the tax rate to be expected and that number sounds pretty reasonable to me. The second with regards to Cox, indeed, if you take a look into our P and L, give and take, the $10,000,000 decline in EBITDA you find in the gross margin. And 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. So that effect you find in the gross margin for the group and that effect you find then in the EBITDA. So it's one of many effects, but yes, the utilization rates was a couple of percentage points lower than it was last. Year. Okay. Thank you very much. The next question is from chetan Udeshi from JPMorgan. Your line is now open. First question was on sorry, First question was on guidance. Can you maybe confirm if the midpoint is still relevant when you talk about slightly higher for Q4, just just to be in the right ballpark. 2nd question was the pension provisions have gone up and the collection 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? And then just on this debottlenecking brownfield CapEx. Can you remind us how much of that is already being spent by end of this year and how much is left to spent next year. So in other words, will the CapEx next year start to go down or will it remain at current levels? Thank you. Yes, Chetan. I would take number 1 and number 3, Michael, would take pensions. So on guidance, I reiterate what that's what I've said in Q2. Our guidance is 1,000,000,000 to 1,000,501,000,000,000 and it's it's literally impossible to make a point landing. So where I see today, the guidance is basically in our range. And midpoint, I would rather like to state it in the following way We want to deliver last year's EBITDA, which was 1016. And I indicated to you in August, we work hard to make sure through cost measures, cost containment, that we land there. I would be, surprised if we would be, a lot above this I would rather be, very clear that the 10 16 is what we want to achieve. I don't think we would be 1,000,000 above this. So that is the guidance. It has been the guidance beginning of the year. We are working on that and do our 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 2018. And the reason for our stability in advanced intermediates is that these great project are now coming on stream. They will continue coming on stream next year. And 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, Chatham. Michael? Yes. As exciting, I guess, as the topics on Friday is pension. Okay. That was a joke. Yeah. Okay. With regard to the change in pen You're absolutely right. The interest rate in Germany, which is the major driver for our pension accrual decline further another 25 basis points. That is still a book value, yes? So we have to adapt 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 but 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 asset. So please don't forget or don't 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. The next question is from Oliver Schwarz from Robert 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? And the second question would be with total items at 1,000,000 after 9 months and 1,000,000 of that for digitalization M and A expenses, is it would it be fair to assume that we'll only see 7,000,000 run rate for the existing business and around about 1,000,000 earmarked for the disposal of the organometallics. Because that would be like those $7,000,000 for Q4 would be a bit lower than the run rate for the first 3 quarters. So I'm just wondering whether you're toning a bit down or have finalized some of the projects? Or is there more to come also in or shifted into 2020? Thank you. I would take lithium and Michael would take your questions on exceptionals. So on the Lithium project, there's nothing new. So the current timetable is unchanged. And therefore, there's nothing that needs to be added at this stage. And Michael, please please take exceptionals? Yes, Oliver, with regard to the exception notes, as you said, many of the exceptional notes are booked in the reconciliation line, like, and there's a certain trends 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 numbers because the majority or a large part of these exceptional are project related. And I was referring to the project with regards to the chrome chemicals part with regards to the OMS part, especially with regards to the Covanta part. And these are, of course, not running costs, but project costs. So therefore, you should not expect, let's say, given run rate, but project related, but with regards to the give and take, 1,000,000, exceptional bookings, for OMS, these you should most likely expect them in the fourth quarter. And 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 exceptional 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. So please have understanding for this. We are 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. I have basically 2 questions. The first is on specialty additives, which performed a better than I've expected in Q3. Could you elaborate whether this is also, let's say, kind of quarterly, out range to the positive and might be more, on the downside than in the next quarter? Or is it, sustainable? And how important was bromium priced in this particular quarter? The same question I have is on the special items. Can you elaborate how much of this 100,000,000 for this year will relate to cash outs and how much will be just impairments and other accounting. Yes. Heine, as far as, a Specialty Additives is concerned, I think I gave some color already to Q3. So Q3 did well basically because of the entire flame retardant set up. So flame retardants did well and of course, notably the brominated flame retardants. Of course, price, please take into consideration that price had been on the rise on brom over the last several years. So, but of course, at the end of the day, we are selling not raw brom, but our brominated flame retardant. So the entire flame retardant somebody should put this phone on mute because we are hearing that you are traveling. I wish you safe travels. And now back to your question, Andreas, the entire brominated value chain did work well and thus overcompensated the weakness, clear weakness in Rheinciemi rubber Additives was lubricants did by and large, okay. I would say that 3rd quarter was there was some, some volume momentum, some volume accounts with customers that wear especially strong that should not be considered as underlying next year. I think third quarter 2020 specialty Additives will have a tough comparable base. So we had here some extra earnings, single digits, But overall, the brominated and phosphorous 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 2 years, I think quite successfully. And Michael, come on, rock the 100,000,000. Hi Andreas. Thanks for the question. First, you will get an 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. And if you take and recall what we told you for the beginning of at the beginning of the year for this year, we told you, you should expect some 40,000,000 cash out for the, Kaltura integration related expenses and only a smaller expense to be taken. And that is what you exactly see in our accounts. So 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 1,000,000, which we're guiding, the majority does carry some cash outs, but with regards to the 20,000,000, we we're guiding now on the OMS business. Here, the majority are write downs, which will not carry a major, cash outs. Next question please. Currently we have no further questions. As a kindly reminder, Well, ladies and gentlemen, if there are no further questions, we close the call and again, we would like to highlight and analyst events on Friday, starting in the morning, and we've worked hard over the last few weeks and basically months to make it a worthwhile trip for you. And, we are excited to present more about LANXis 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 LANXis. Bye bye from Cologne. Ladies and gentlemen, this concludes the LANXESS conference call. Thank you for joining and have a pleasant day. Goodbye.