Earnings Call: Q2 2019

Aug 2, 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 Wiehmond, Head of Investor Relations. Please go ahead. Thank you very much, Ms. Bayer. A wonderful good morning to everybody from Cologne, and many thanks for joining our Q2 call. As always, I have our CEO, Matthias Zachert and our CFO, Michael Pontzen, with me. Please take notice of our safe harbor statement. And with that, I'm happy to hand over to Matthias for a brief presentation afterwards, as always, the Q and A. Matthias, please go ahead. Good morning, everybody. I will start the presentation on Page 4 with highlights and challenges. Highlights, another quarter where you can see that strategic transformation of our portfolio is paying off. We have 3 segments that could perform on par or better versus previous year and this dynamic is visible in the Q2, we will consider that this momentum will be maintained in the second half of the year. And with this, we compensated definitely the weak automotive sector. Group financials are, as far as half year figures are concerned, on par with previous year level, which I think is a strong message as well. Share buyback program has been completed by now. Challenges, definitely automotive sector. Agro was weak in the 1st place as far as automotive sector is concerned. We've seen that second quarter continued with a tough trading environment. And as expected beginning of the year, we assume that the second half is not going to be better. Automotive therefore will be a very tough year 2019. We also see that the general momentum on the client side is clearly more cautious in its buying behavior. And this is of course not surprising if you look at the current sentiments in the markets out there. Now let's come to the figures and I move to page number 5. If you look at half year numbers on the right hand side and on the quarterly numbers on the left hand side, one can basically say that as far as sales are concerned, we are relatively stable. Of course, we face volume contraction and that will also be a theme for the second half of the year. But basically as far as synergies are concerned, implementation is on track. And as far as currency is concerned, we fortunately have driven by the U. S. Dollar a positive momentum which bottom line therefore compensates the volume decline. And with this, I would like to hand over to Michael, who will address segment by segment. Michael? Thank you, Matthias. Good morning from my side as well. Yes, as Matthias said earlier, we saw the same pattern in the second quarter like in the first quarter. We have 3 out of our 4 segments performing robust or better than previous year and one which was performing weaker, which proves the overall quality of our portfolio, which we have in place as of today. Jumping into Advanced Intermediates, you recognize that we proved a very strong performance as well in the second quarter, despite the still weak ag market. Both EBITDA and margin improved nicely, thanks to improved volumes in both business units. Looking at the first half, you recognize that EBITDA was up by more than 10% and we are hitting a margin now of above 19%. And that is true and driven by both business unit. First AII being rock solid, thanks also to the debottlenecking, which we did in the past couple of years and obviously the wide product range serving all kinds of industries. And secondly, the continuous recovery of Saltigo throughout the year as well driven by the contracts which we secured end of last year. 2nd, specialty additives. Specialty Additives proved a stable development in the 2nd quarter. Volumes were down like in the first quarter and again for the same two reasons mainly. 1st, the termination of towing agreements and second, the very weak auto market hitting primarily our business unit Rheinschemi. On the other hand, we had a very good momentum in the bromine business and the flame retardant business and some support from currency and synergies, which mitigated the negative volume effects, while EBITDA was stable in the second half and which was as well true for the second quarter, let's say stable for the first half and stable in the second quarter. Looking into Chemicals. Performance Chemicals is taking further steps in the right direction to improve. EBITDA improved by some 3% and margin was up also. We have to distinguish in this segment to the different business unit. On the one hand side, we have 2 very strong business unit acting in highly regulated markets, which are MPP and LPT, both with operational growth and nice EBITDA improvement. Then we have next to it IPG, which is doing not too bad in a difficult market environment also with a slight improvement on EBIT DA. The 4th business unit though is mitigated, more or less all these positive effects and that is leather. On the one hand side, we are still having a difficult market environment in the organic leather chemical business as well driven by the slow demand in auto. But more pronounced, we saw the difficulties which we have in our South African activities, namely the chrome ore chemicals, but more pronounced the chrome ore activities in South Africa. We had to record again illegal strikes in our mind why EBITDA was dragged down in that business unit, which had the negative impact on the overall segment. Nevertheless, in the first half, we improved EBITDA by some 4%. Last but not least, Engineering Materials. In Engineering Materials, you know HPM is the much larger business unit and we have that strong and high exposure to the outdoor industry in that segment. And keep in mind, we are still comparing to a very strong first half twenty eighteen. So volumes were down 11% and EBITDA was down by 20%. Still margin levels are not too bad given that overall very weak environment, be it for the first half of the year or the second quarter of the year. The good thing though for the next months to come, even though we do not really expect a change in market environment is that comps will come down because as we all know and recognize the decline in auto and the weakness in China started somewhere in late summer last year. That's from my side. Matthias, back to the guidance. Yes. Thanks, Michael. So I move to page number 10. And here, as usual, first comments on macroeconomic outlook. Macro risks clearly are not lower, but rather increasing. And I think this is visible in the capital markets as well, a reflection through increased volatility. As far as end industry is concerned, again, we see no recovery in automotive ahead. Q3 would be another tough quarter for the automotive sector, whilst the comparable base in the 4th quarter should improve and therefore contraction rates that we have seen in the 2nd quarter and should see also in the 3rd quarter should be clearly different in the Q4 because the Q4 had been extremely tough already in last year's trading. Agro, of course, is also a sector that we continue will continue on a quite troughy level. As far as LANXESS is concerned, we clearly stick to our guidance, €1,000,000,000 to €1,050,000,000 We have in the second quarter clearly discussed this intensively with our business. And therefore, we understand underlying trading and have however taken already some measures in order to safeguard the numbers that we have communicated to you. And therefore, cost containment is one element that that is in place and will continue to support our underlying performance. As far as quarters are concerned, we look at still a very solid quarter last year with a bench of €277,000,000 Our assumption is that the trading in July, August will be softer than last year. Therefore, we should come out slightly below previous year quarter. Whilst in Q4, our look at the underlying trading is that we would be slightly above Q4 last year due to the internal measures that we are implementing, but also because we assume that trading will not further deteriorate versus current trading in Q2. With this, ladies and gentlemen, we move to the question and answer session. So please go ahead. And the first question is from the line of Peter Spengla with SVB. Yes, good morning. Thank you for taking the question. I have three questions. On Performance Chemicals, the first, the results were quite good, but there are ongoing problems with the leather chemicals complex. So you said earlier that you are investigating several negative effect on the laser business in Q2? And then you mentioned synergies from Chemtura. Can you indicate how high synergies and cost savings were in the first half? And what can we expect for the second half? And the last question, did you have significant inventory write downs in the second quarter? Thank you. Yes, we will take the questions 1 by 1. I will take the first one and Michael will address the other 2. As far as Performance Chemicals is concerned, we basically guided last year already that 2018 was a very tough year and therefore 2019 should be on par because further deterioration is hardly possible. I think in the 1st and second quarter you see that. Now specifically on the Q2, Leather quite honestly was a mere disaster. Here with a strike illegal strike leading to complete idle costs and no profits, but rather losses that were visible here, the entire business unit was dragged down. And therefore, as far as 3rd and 4th quarter is concerned, it cannot get worse. It can only get better. As far as solutions are concerned, I clearly indicated this is something that we are working on. And once we have found a solution, we will give a communication on this. Further specifications will not come on this call. With this, Michael, please the other 2. Good morning, Peter. First, with regards to the synergies, we guided that we expect for the full year 2019 some €20,000,000 to be recorded throughout the year. As you know, we're not guiding now on a quarterly basis, but this €20,000,000 for the whole year still holds true. With regards to your question on inventories, there were no inventory write downs in the Q2. And on this, I would like to drill a little further. The times of inventory write offs where we had double digit implications on a quarterly basis quite regularly are over. That was the time when we had the rubber in our P and L and this is history. As far as other businesses are concerned, look at businesses in Saltigo, look at our Biocides business, the regulated chemistry, raw materials simply don't matter in this area. And for that very reason, despite volatility in Q2 on some raws, there was no need for any inventory correction. I hope that also underlines that portfolio has simply changed. Thank you very much. Most welcome. Next question please. And the next question is from the line of Laurence Alexander with Credit Suisse. Good morning. Two questions. Could you give a little bit of a sense for what you're seeing in construction markets around the world and specifically for the bromine business, the trends that you're seeing in terms of the ability to capture in your business lines the rising prices in elemental bromine? Are you getting squeezed by that, capturing it, seeing some margin expansion because you can piggyback on it? Can you give us a flavor for how that works? Of course, we will. As far as construction is concerned, it's not great, but it's not a disaster either. So, it's we have looked moderately on the construction business. And as far as bromine is concerned, I think we addressed that in our financial statements. Bromine is doing well and business has developed nicely, pricing is good. We see from the supply side and the flame retardants that competition is benign. And for that very reason, I think all of the comments that we can convey on the Q2, the flame retardants business by and large not only for bromine, but also for the phosphorus business contributed nicely. And therefore, we are assuming also for the second half that these favorable trends is going to continue. Thank you. You're most welcome. Next question, please. And the next question is from the line of Martin Evans with HSBC. Yes, morning. Just with reference to cost savings and restructuring and so on, I noticed there's a useful decrease in the exceptionals due to lower restructuring costs. Do you feel that you've now sort of broken the back of what you wanted to do in terms of realignments and cost initiatives, because there seems to be less reference to it in this particular release? Or are you still very much at the relatively early stages of realigning the the portfolio and looking at the efficiencies of every operation and so on? Thanks. Well, definitely, Martin, But very clear statements in the current environment, I think it's the best time for going through line by line, P and L by P and L, side by side, function by function in order to address efficiency. If you don't do this now, I think you are not operationally oriented. In tougher times, you should always use tougher times for optimizing structures further. And there are still a few elements outstanding. I think earlier on, Jefferies indicated or made reference or Mr. Spengler referenced leather. Leather, we will address. Organometallics is due to be addressed still in this year. We basically made comments on this. And that, of course, should improve profitability, improve margins. And therefore, you should assume that on cost efficiency measures, we will continue or potentially accelerate. As far as portfolio is concerned, I think you have seen that we work on the portfolio consistently in order to upgrade. And that is a theme we continuously work on. And therefore, you will see that also in the months, quarters, years to come. Good. Thanks very much. You're most welcome, Martin. Next question, please. Next question is from the line of Patrick Hoppers with UBS. Thank you and good morning everyone. Three questions, please. The first is on Advanced Industrial Intermediates. You mentioned volume growth here as well. Can you add some more color what was driving the volumes in AII? And then secondly, the cash flow and net working capital that proves to help a bit in the second quarter. What should we expect in the second half for your working capital? And the last question is a follow-up on the previous one on the cost and cost containment you mentioned. Is there a number you can put on that? Or what kind of cost takeouts are you targeting for this year? Thank you. Well, as far as Patrick, as far as AI is concerned, I think we've announced over the last 12, 15 months a variety of projects and have even communicated on them in our respective quarterly announcements. And we communicated at the same point in time that these capacity increases are being done through de bottlenecking, which is favorable, because you normally have a better margin once you bring these volumes to the market. We also said that most of these debottleneckings being done in AII are already contractually agreed. And that is predominantly driving the volume increase and it also helps on the margin as you can see. AII was a strong contributor in Q1, has been again a strong contributor in Q2 and will be a solid ship also in the second half of this year. What is further on improving is of course the Saltigo business. Also here we referenced towards incremental contracts that we have. And we fortunately also took the decision deliberate decision last year to get into Saltigo other fine chemicals outside of the agro sector. Chemtura offered us also the possibility to basically use the Saltigo platform to in source raw materials that Cantura had to buy from the open markets. Saltigo has a very broad technology base and therefore, we simply try to somewhat diversify the end markets of Saltigo. This is not huge, but 5 to 10 percentage points change do help in a trophy agro environment. Michael will take the cash flow question and I will come back on the cost containment. Patrick, with regards to your cash flow question, allow me 2, 3 answers to it. 1, with regards to the net working capital development, we told you in the Q1 call that we started the year and throughout the Q1, we were at relatively high inventories level, and we have a usual seasonality throughout the year that we see an uptick or a volume increase in the first half and usually a volume decline in the inventory in the second half. Still we said in the first Q1 call that we want to not allow the volume increase to happen like it did in the last year and that is what we managed that you find as well in the cash flow statement. So the cash out for inventories was much lower than in Q1 Q2 last year. For the remainder of the year, as said, the usual seasonality for the whole working capital is that you should see a cash in from changes in net working capital. 2nd, with regards to operating cash flow, you will as well probably recognize there is relatively high tax payment in the second quarter. I always say it's hard to really predict when payments are done with regards to the tax. On a yearly basis, you should find the same number like you find in the P and L. But within or in that €75,000,000 there is an extra payment of some €30,000,000 €35,000,000 which is related to the Allancio transaction. If you recall, we told you August last year that there will be an extraordinary cash tax payment at some point in time in 2019 and that some point in time was due early April this year. And the 3rd element, which is hitting Q2 every year is the bonus payment, which you find in the other changes in the operating cash flow. And these two elements are kind of extra things, which are hitting obviously the operating cash flow in the second quarter. Thanks, Michael. So in short, the operational cash flow in Q2 improved. If you add back the roundabout €35,000,000 of extra taxation due to capital gains that we achieved through the Anankseo divestiture, clearly operational cash flow would be nicely up. And expectation that we have, Q3 Q4, you will see a stronger momentum on cash flow versus previous year. With this to the 3rd question, cost containment, a company of our size, I mean, we are around about SEK 7 1,000,000,000 in size and we have a cost structure where without restructuring measures on the non personnel costs, you can clearly address the organization and basically say, okay, guys, let's buckle up a little bit. We will continue with our focus on the business, but definitely the message in the organization has been conveyed. Ladies and gentlemen, let's buckle up. It would be rougher and we want to deliver full stop. Next question please. Thank you. And the next question is from Georgina Dimoto with Barclays. Sachs. Hi, good morning, Matthias. Good morning, Michael. Nice to speak to you. I've got three questions. The first is on the margin in Specialty Additives. I would have thought that with kind of supportive bromine pricing, Chemtura synergy extraction and the roll off of those tolling agreements, the lower margin business, the margin would have been a bit higher for the division overall. So can you maybe talk through why that wasn't the case year on year? And then if you can also maybe talk us through the 11% volume decline in Engineering Materials and how you see that going forward for the second half of the year? And with the kind of still relatively high margin for the division, do you think that that's stable at the kind of 17%, 18% level? And then finally, if you could maybe give us an update on the progress in your lithium project? Thank you. Hello, Georgina. Thank you for attending the call and going through all our respective segments, I will address them 1 by 1. Taking a cathetersparibus assumption, all things being equal, your statement on Specialty Additives margin is completely correct. But things are different quarter on quarter and it's not like for like. So what we've seen in the second quarter in Specialty Additives is definitely that our Rhein Chemie business was suffering due to automotive industry. We had some clearly more idle costs. And we had some implications negatively also in our Loop Add business, where we had also margin contraction. Bromine offset that or was at the same level, profitable level, as previous year. And that, of course, mitigated the improvement in margin. But overall, I think we kept the same kind of in absolute terms EBITDA level that as previous year and that is also something that should be visible in this segment in 3rd Q4. On Engineering Materials, we guided in Engineering Materials, especially for auto sector to be very tough. And let's face it, Q2 in the automotive sector was a disaster. And we assume that this weak trading is going to be maintained in the 3rd Q4, whilst comparable base in Q4 is definitely easier to catch. So, if I look into the automotive sector specifically, we said we saw in Europe a double digit contraction. We had seen softening, of course, in China. We have seen kind of stability in North America, but Europe was badly hit in the Q2 and this is our base case assumption also for the Q3. The good thing about Engineering Materials in the Q4 is, if you look specifically in the comments we made 2018 when we made reference towards Q4, we stated that urethanes did badly because we had lack of supply on the monomer MDI specifically, this will be different in Q4. And therefore, urethanes in this segment, we clearly expect better performance than previous year. And as far as our HPM business is concerned, in absolute EBITDA terms, not in terms of margin, absolute EBITDA terms from what we see will also be an okay performance. And that is basically what we embed in our full year guidance. Non lithium, I mean, let's stay cool, let's be humble. We are working on it. We are progressing on putting together the different modular elements for the pilot plants. Things are on track. And I think at the Q4, we will then see when the pilot plant is assumed to be ready. We will look at what comes out of it. But at this point in time, project continues, things are on track, people are busy and try to complete according to plan. Thanks, Matthias. That was really helpful on the division. Thanks. Thank you. Next question, please. Next question is from Ketan Odesi with JPMorgan. Yes, hi, thanks. A couple of questions. Firstly, on the impact from firstly, can you clarify whether the strike in South African mine, is that over now? That's number 1. Number 2 is related to that. What was the earnings impact in the second quarter, if you could quantify the number? And the second question was just more looking into the sort of the midterm outlook. If there is no auto volume growth, which seems to be more of a sort of base case at the moment, How would Lanczos offset that environment in terms of growing earnings even without no underlying growth in the auto volumes? Yes. Thank you for your two questions. On leather, I confirm this was the mine that is basically delivering chrome ore and therefore this definitely impacted second quarter. You raised the question, what's the earnings level? Odeshi, there were no earnings, as simple as this. And therefore, I again would like to make the statement, this was a disaster, 2nd quarter leather. Now on the automotive sector, please take into consideration that roundabout only 20% of our portfolio is exposed to the automotive industry. So we have 80% that is in different end industries. And one of them is, of course, agrochemicals that have been weak for the last 3 to 4 years. And at some point in time, it will come out of the 12 sectors. So we have 2 sectors in our P and L that basically are at really bearish levels. Therefore, volume momentum has been very, very modest. But on agro, our assumption is that it's a question of time when it comes back. People continue to eat at least at home. I see that every day. And therefore, our assumption is very clearly that auto could be a tough business for the next quarters, but potentially even for 2020. But as far as our portfolio is concerned, 60% to 80% have room for underlying growth that should be positive for our company performance. I hope this answers your question. Thank you. Most welcome. Next question please. So the next question is from Robin Schreiber with Deutsche Bank. Yes, thanks operator. Good morning guys. I think you kind of already alluded to it actually. I was just wondering given the commentary you made around Q3 and Q4 and the weaker comps as well, how come you're not revisiting your guidance in particular at the top end? Thank you. Well, you see in Q2 that we have I mean, you've seen that the guidance we gave, I start differently. In Q1, we delivered exactly as communicated in March. In Q2, we exactly delivered according to what we indicated with Q1 numbers. So, I think as far as underlying business analysis is concerned, customer interaction, we have a good process and connectivity to our business. And therefore, we on the basis of this, we provide guidance. Now, if you look at the range, €1,000,000,000 to €1,000,000,000 €50,000,000 we've guided basically throughout the last two quarters that this is the range, but we consider mid point of this range to be the one that we are working on. And if there are changes in underlying trading, we try and this is operational performance or operational excellence, we try to mitigate through cost containment or adjustment on some projects. This is operational management and we are fully enthused and excited here in LANXESS to be fully on track and to execute on improving the company, improving profitability, improving market presence. And this is what we like. This is what is energizing us. And I think you've seen that over the last few quarters, years and could even see that when we run and sweat. I hope this answers the question. It does. Thank you very much. Next question please. The next question is from the line of Knut Hinkel with Pareto Securities. Yes. Good morning. Thanks for taking my questions. 2, I have 2. Just very broadly regarding your numbers, it seems that also volumes decreased, prices held up quite well in Q2. Do you expect increasing price pressure in the coming quarters so that there are some delay? Or do you consider your portfolio robust enough to withstand respective requests from the customers? And second question is on Rhine water levels. Other chemicals which are also located in the region set, there's no problem so far. Maybe you can share your perspective on that with us too. Thank you. Well, first of all, I am very happy that you have realized that pricing in Q2 has been relatively stable. I think this is something that is clearly showing we are no longer a rubber company. We are a company where we are in small midsized markets with a different portfolio, different set of products. And therefore, we were able to basically keep pricing at a reasonable level. Having said this, well, in tough environments, you are confronted with customers that want to have price decreases. But even in a good environment, you have customers that always debate your pricing. So, what we would like to offer as company is win win situation for our customers, but also for ourselves. And therefore, when raw materials go up, we have a portfolio where we would like to roll over pricing when raw materials go down, of course, through contracted contracts, but also customer interaction we adjust pricing respectively. On the volume side, we do assume that volumes will contract further predominantly driven by automotive sector also in Q3 and Q4. And please take note of the fact the tolling contracts that we terminated will also have an impact on volumes, which will then level off in Q1 next year. As far as Rhine Water is concerned, I'm pretty sure that all companies that had issues last year are working on have worked on this matter. We had no hiccup on Rhine Water last year. I stated even though that we will address that further so that we avoid any Rhine water statements in the quarters to come. I would like to send clear signals that the level of the river Rhine, the water level is nice. It's at 2 meters, so don't worry. 0.1, 0.2, we have looked into our procurement and basically have already adjusted critical raw materials for different sources, so that we also in a same situation of last year will have more flexibility and that gives us a level of comfort to stress to you that we don't expect to report any issue on water in the river Rhine. It's a wonderful river. Next question please. At this moment, we have no further questions. Lovely. We then thank you all for the attendance to our conference call. We wish you a wonderful summer and we are looking forward to seeing you on the street or speak to you in due course latest with Q3 numbers on LANXESS. Thank you very much. Bye bye. Ladies and gentlemen, this concludes the LANXESS conference call. Thank you for joining and have a pleasant day. Goodbye.