Earnings Call: Q3 2018

Nov 12, 2018

Wonderful. Good morning to everybody from my side and many thanks for joining our Q3 call. As always, I have our CEO, Matija Zacher and our CFO, Michael Pontzen with me. Please take notice of our Safe Harbor statements. And with that, I'm happy to hand over to Matias. Please go ahead. Good morning to everybody. Monday morning, 8 30, let's start an exciting week. I go through the presentation, starting on Page number 4. Key highlights for LANXESS 3rd quarter are definitely the agreed divestments of the remaining 50% so that we still hold in Arling CEO, by now, we have handed in or notably Aramco has sent it in the key files in order to get antitrust approval. All of that is running well. Final one is outstanding in China. All other jurisdictions have approved in the meantime and our assumption is by end of the year. Also here, green light will come from China so that the esteemed closing will happen December 31. As far as third quarter is concerned, we saw some headwinds here and there, especially from Automotive Industry, but all in all and despite steep increases in raw materials, operational performance is on spots and I would like to look to the results of Specialty Additives that despite headwinds on raws posted its strongest performance ever. We came out with several innovations notably in our polyamides value chain and are now fully on track to further expand volume wise, but also through new innovative grades most likely being capable to take some market share of PA 66, but also entering with further products in the lightweight and electric vehicle domain. We take pride in stating that We further improved on our sustainability performance and also here achieved again a strong listing, as a matter of fact, in the European index, we scored number 3 out of the top companies. Only 11 companies were able to entitle to this ranking. As far as financial headlines are concerned, financial highlights are concerned on Page 5. You see that we could post a nice sales increase and we were in the position to basically one on one rollover raw materials to the customers. As far as EBITDA is concerned, we had a slight increase to two 1,000,000. Nice development on EPS pre as well. And as far as, seasonal reduction of net debt is concerned. That was visible in Q3. Most likely, we'd see another more significant decrease in Q4. With this, I would like to make some statements to our joint venture agreements that we signed on the weekend Saturday, Page 6, the Canadian cannot only play extremely good ice hockey. We've also been approached and discussed over the last several months with a engineering company that is fully focused on lithium extraction. They have a unique technology and approached us because they knew very well that our brine smackover formation that we have in Arkansas they could potentially here come to a nice extraction of lithium because themes also parts of the prime content and the soul. And for that, the reason we have discussed came to terms over the last few months and signed a joint venture agreement with standard lithium. This is still early stage. We are currently making a feasibility study will, of course, implement the pilot plans. Short, however, all of this, be successful then we will agree on building respective plants in the 3 sites and extraction towers that we have in El Dorado that can be, as a matter of fact, nice. Page number 7, we basically like other chemical companies who have reported by now, can confirm that underlying trading is not as strong anymore as it used to be in Q1, Q2. We see more headwinds in some in one in the other and industry. But overall, we see that things are not that bad. Despite headwinds, I think you see that, in all our segments, we developed reasonably well, excluding Performance Chemicals here. Would say we have a tough year, but nevertheless, despite Performance Chemicals, despite our group industry being pretty weak still and we don't see a change at this point in time. I think all segments were able to perform nicely. As far as advanced intermediate is concerned, here, AII was basically overcompensating the shortfall in Saltigo. So here, one of the worst quarters we've reported so far over the last 2 to 3 years. We think that Q4 should be the first time where our measures that we've taken in Saltigo will leads to better performance compared to previous year, but the market at ARGrow is still terrible. And we assume that 2019 will not be that that would either, but from Saltigo perspective, our assumption is that we have seen the worst in this business, Advanced Industrial Intermediates performed extremely strong, volume wise, price wise, more to come next year due to the debottlenecking we are doing. Specialty Additives punched hard and, we now see that synergies are still to come, but already today, we are performing very strongly. And I think we have built a fantastic division that will excel as we go ahead. Engineering Materials, Eurothanes weak as we have indicated in Q2, but the HP business as rock solid. The integrated value chain is really performing nicely. And of course, we are putting more emphasis on the engineering compounds. So all in all, group with an exposure to auto of roundabout 20% after Alank's CEO is out. We are doing, I think, well. We can compensate for many shortfalls that we see either in industries, agro or auto, but also digest a pretty weak performance chemicals year 2018. And of course, we put measures in place to improve the situation to 2019 onwards. So all in all, I think you can see that LANXis is fully on track. And with this, I hand over to our CFO, Michael over it. Thank you, Matias. Good morning as well from my side. Looking into the financials on page number 8, You see that in that challenging environment, which is still earmarked of the rising raw material prices, we were able to pass on the rising raw material prices to our customer, leading to give and take a 4% increase in our top line we managed to have as well a slight uptick in our EBITDA, but given the fact that we passed on raw material prices with a relative stable EBITDA, we saw a slight decline in margin which is simple mathematics. The other numbers on earnings went up EPS pre for the group and for the LANXESS numbers, EPS, net financial debt was knocked down in the 3rd quarter by give and take 120,000,000. And net working capital was managed to keep stable. And the expectation for the fourth quarter is like we saw in the past years. That in the fourth quarter, net working capital should come down. When we look into the segments, we see a different development throughout the different segments. Starting on page number 9 with Advanced Intermediates, In Advanced Intermediates, AI remained strong. We saw strong price and volume increases and an uptake in our EBITDA. On the other hand, we saw Altego with like Matthias said, a terrible ag market, which remains terrible. And therefore, a further weakening of EBITDA. Nevertheless, we were able to maintain the overall EBITDA level of that segment in that more challenging market environment. Specialty Additive, we saw a very strong quarter. In fact, we saw the strongest quarter ever for that segment and it is now the strongest quarter in our portfolio. We saw price increases where we were able to pass on the higher raw material prices And we saw further improvement in our integration of the former Chemtura Businesses, which generated synergies, why we were able to push EBITDA further up to above 1,000,000 for the quarter. The opposite direction in terms of performance was shown in Performance Chemicals. Performance Chemicals remains weak. Still we're comparing to a very strong Q3 2017 and we are now back on Q3 2016 levels, but nevertheless, the development was not good. So we especially saw strong volume declines in our leather business unit driven by the one hand side, the site closure of our Argentinian assets end of last year and some strikes in our South African asset. Turning to Engineered Materials And Engineering Materials we again saw a very strong quarter and like in specialty additives, the strongest quarter for the 3rd quarter ever. In HPM, strong price increases, strong volume development and nice EBITDA development And in Eurothanes, we saw better momentum on pricing. So the EBITDA in engineering materials was driven by the strong operational performance. That's in a nutshell through the segments, and now Matthias is running you through our guidance. So I come with this to page number 11. Industry trends, we generally see intact Of course, reference is made by everybody on geopolitical risks and all the craziness out there. But all in all, we don't see like some of you have feared a hard landing in China. We see that Tia Momentum is softening, but in the last 2 weeks, basically who was watching, statements being made. I think China will do everything the government there will do everything in order to make sure that underlying demand remains positive. At least we are seeing it like this. Even though we definitely would like to confirm that we factor in a tougher environment in automotive. Let's see where 20 19 first quarter goals. If we in Europe, we'd see acceleration again after WLTP weighing on the momentum right now on Europe. This is something that needs to be on the monitor, but we at this point in time have no reason to be, negative in our perspectives on Q44 and 2019, but we consider that momentum will be softer. We also see a more moderate development and construction demands, but also this is something we address. We often got questions on Rhine, water level. Here in Levacruz in Cologne, we have seen 2 weeks ago a situation where it was turning tight. We've done already for the last 4 to 8 weeks everything to go on the road with various supplies and, deliveries. So all in all, we could mitigate the situation Fortunately, over the last 2 weeks and also on this weekend, it has rained cats and dogs. I was out and got completely soaked up with rain. So we now see that the water level in the Rhine is going in a right direction. So compared to basically 2 weeks ago, we are now at 30, 40, 50% increase as far as the level is concerned. So that looks more positive. And based on all this information, when we look down into our order book, we confirm EBITDA 2018 where we've guided in summer, all good on our side. And with this, we open the floor for your questions. Ladies and gentlemen. You. First question is from the line of Martie Modiger of Kepler Cheuvreux. Please go ahead. Hello, good morning. I have three questions. Firstly, can you explain why the volumes in engineering materials were up by 7% despite the high exposure to the automotive industry in this segment. I remember you have 45% exposure here. Is the reason lightweight materials, electro vehicles, innovation, higher compounds exposure, or what is the driver behind it? And is this strong performance in Q3 in this segment a sign that also business should perform well in Q4 despite all the headwinds we have. The second question is on operating cash flow. That was slightly down in Q3 year over year despite the increase in EBITDA, despite lower working capital impact, And despite lower cash taxes, can you please elaborate on that? And the third question, can you explain to me why the minorities are less than 50 percent of the discontinued earnings from Alank CEO? Well, let me take the first question and Michael will take second and third one as far as engineering materials is concerned, I think the growth trend that we have indicated on the end compounds We guided between 3 and 5 percentage points. 3rd quarter came in nicely, but this also has to do sometimes with simply bigger lots being distributed and requested by the customer side. We had in Q1, Q2 a situation where Momentum was strong, so we saw good order intake. We also assume that Fourth Quarter is going to be a decent one, most likely not at the same kind of growth rates. But engineering materials, especially HPM would do solid in Q4. And my assumption is that also the Eurothanes which disappointed in Q3 as we guided due to the force measures we saw in the either cyanates the monomers in the United States. We think that this is going to improve in Q4. And also fortunately, we see that the MDIs and TDI pricing is visibly improving for us. So the tightness that we've seen in Q3 is not there as before. On cash flow, Michael will make the the clarification, I simply would like to clearly indicate, 18 is still a year and 2019 will see this as well where we clean up So we do want to get to the savings and synergies. And of course, this still absorbs one time cost and cash in order to improve EBITDA and cash conversion in the years to come. Michael? Good morning, Martin. Yes, looking into the cash flow statement, you saw the big swing in the changes in other asset and liabilities And here, there are basically 2 main driver in that quarter. 1 is obviously the exceptional bookings, which we had in 2017. So in 2017, we had a much higher number than we had in 2018. And then we had a booking of variable compensation, which was higher in 2017. Than in 2018. And that was the major driver, which put back, let's say, the profit before taxes because they were booked as exceptional or as the variable compensation as part of our operating result, obviously. With regards to the minority question, we are in the process of separating, Alan CEO further. And there are some costs allocated to that separation. The agreement with Aramco is that these costs are, which are carried with us at length is, are being rewarded. And that leads to the fact that some millions are being back granted from Alanko to us. So it's not a fifty-fifty contribution, which, is being received by Solia Aramco. We have a higher given the fact that we have some costs with regards to the separation. The next question is from the line of Patrick Rafaisz of UBS. Please go ahead. Thank you, and good morning, everyone. Also three questions from me. The first is on Advanced Intermediates. You talked about Saltigo still being weak, but you nevertheless recorded quite good volume growth, over the entire division. And nevertheless, EBITDA was flat, which would also suggest some lack of operating leverage for the industrial a bit of the portfolio. Can you comment on that, please? Then secondly, on the joint venture you announced, can you talk a bit about the business model you envisage here for this joint venture and related CapEx timelines. I know it's very early in the only feasibility study stage, but it would be great to hear a bit more on how you think of this? And then lastly, the Rhine water levels, you talked about, can you talk a bit about which segments or product chains could be affected here, even though the water levels are improving in the fourth quarter. Should we model any any impact here? Thank you. All bullet questions, let me take them 1 by 1, Patrick. So advanced intermediates, you're fully on the spot, this segment, did well as a matter of fact, Advanced Industrial Intermediates was basically here taking a lot of praise and was making sure that everything that was positive in this segment was coming from Advanced Industrial Intermediates. Very strong volume, a very strong pricing, a very strong EBITDA contribution. It has been, however, completely eaten up by Saltigo contribution or lack of contribution better. Zotigo was falling versus previous year visibly, but this will change in Q4. Advanced Industrial Intermediates is going to rock the boat in Q4, as always, but we would see from everything that we know as of today that sort of TIGO will improve Q4 versus Q4 last year. As indicated already a few months ago. So that's as far as your first question is concerned, joint venture characteristics Well, standard lithium has the technology extraction technology. They have a pretty sophisticated a technology developed patented. And I think if you go to their Internet sites, they are pretty outspoken about this project. They see this as a fantastic opportunity. And my recommendation is if you want to get further insight, go to their publication. They went public this morning at 7 am as well. So the business model is the following. We have in aldo our 3 plants, West, South and middle plants. And in all three plants, we are extracting Brom or Brian. So we basically will, if the pilots plant comes out with the results that standard lithium has tested, we would then basically contributes the lithium rights that we have or the lithium extraction, that we have in El Dorado into the joint venture. So we would make sure that standard lithium can use our existing infrastructure that we have. They could access our raw materials. We would get, of course, the brom, and they would extract the lithium out of it. And we would then share the profitability in a fair manner, but of course, as we are the owner of Land and infrastructure, we would get the majority of the profitability. Standard Lithium, what contributes the technology and should everything turn out, we will, of course, then build respective extraction units that's basically the business model. So we have only we have only opportunities to win there's nothing that is a downside for us. This can be only a very, very nice upsides, but we keep feet on the ground because first of all, we need to see if the current assumptions turn indeed into positive, views based on the pilot plant that is being built. Now on River Rhine, of course, here the notably the liver cuisine plants, the liver cuisine plants would be impacted like Covestro, we would both have, with visible production in leverkusen. So all of us are working tightly together, but normally fourth quarter, is a quarter where here you have winter season, autumn season. So 2 weeks ago, we had a lot of focus on 1, 2 raw materials where the situation was tighter. Everything is now turning yellow, even green. And therefore, this is a topic that is no longer on my agenda, it has left the agenda of the board because we see that the situation has come down and again, is substantially better than it has been a few weeks ago. I hope that clarifies all your questions. And, therefore, I would like to open the floor for the next question, please. The next question is from the line of George Eharris of Bank of America. Please go ahead. Hi, thanks for taking my questions. Firstly, just on the KemTura synergies, could you give us an update please on where these are compared to your initial expectations? And also, can you comment maybe on any potential for further synergy delivery next year? And then my second question was on the the construction market. You mentioned the softness there. Could you give a bit more color on perhaps where that is regionally and the outlook for that market? Well, let me say the following, and Michael would pick up the ball on synergies. If you look at the exceptional guidance that we do on Q4, you can assume that we will make sure that we, get all cost savings that we are planning. And in a focused decent manner, if possible, with a certain acceleration, but this is something we will only make clear once we've closed our books for full year. Michael on synergies? Yes, Georgia. As Martia said, we will report the details when we disclose full year results next year, March we're very good at track to achieve the envisaged $30,000,000 for this year. And for next year, we expect another 30,000,000 to come and the year after the remaining 10 to get to our target of 100,000,000. So then on the construction, notably in the emerging markets, we see that construction has softened and that has impacted our Pigments business as well. So that's the feedback. But again, no collapse no dramatic change simply softening and we've guided for here softer environments. But all of that is embedded in our guidance. Next question please. Next question from the line of Andreas Heine of MainFirst. Please go ahead. Yes, thank you for taking my question. I would like to start with Performance Chemicals. So it was indeed very weak, but looking on and the split of the businesses you have, I would expect that most of that is dedicated to leather with several reasons you have provided and inorganic pigments only let's say single digit on the rest doing fine. Is that describing the picture rightly? And then could you give some flavor what we can expect in Q4 from the net working capital rundown. It was in has increased quite a bit also in relative terms. So in days sales outstanding, Is that something where you can improve that in Q4 or is that impossible? And maybe also one question on Saltigo. So you report for quite some time that it's getting weaker and it's good to know that Q4 is, doing somewhat better. I would still expect that Seltogou is profitable on EBITDA line. Could you confirm this, please? Thank you. So Michael will take networking capital. I will address first and third questions. So let's start with Performance Chemicals. What you're indicating is pretty on the spot. So the major shortfall is definitely on leather and that will continue in Q4. So Performance Chemicals, our view on Q4, it's another very bad quarter that will show clear decrease in profitability percentage wise, absolute terms as well. So here, not very nice, but let's look at it. Leather is just a disaster. We are working on it, and we will make sure that here for the measures are being taken, point 1, point 2, inorganic pigments, didn't have a great year, year to date. Q4 will also be weak, but we are working here also on on actions to mitigate the situation. And I'm looking into 2019, for inorganic pigments, with measures that should then improve the situation going forward. The other 2 business units do well. No discussion for that. Very reason, we are making sure that NPP Balsight will be further developed And I think reference was given to you in the last analyst roundtable. The same holds true for our water purification business where we will, as a matter of fact, bring new capacities on stream second half twenty nineteen. Because here we turned pretty tight and then some products are in allocation models. So that's being set on Performance Chemicals as far as the Tigwa is concerned, yes, the agro industry, all in all, are all reporting it's U. S. Companies or European companies are all reporting bad numbers. And we've not seen any positive tone coming from the big 3, big 4 companies. I can confirm that we are still positive but I use the word I need to take my microscope out to see it, getting older every day. So my eyes are getting weaker. I need a big mic core scope to see the profitability of Saltigo, but that should change Q4. It will still be Mickey Moss contribution, but it would be more than last year. And therefore, I think we've put all measures in place in Saltigo to see a turn in momentum 2019 versus 2018, but the last few quarters were not nice. And my expectation is that advanced intermediates will become the strongest segment again. Of course, we are competing between Specialty Additives and Advanced Intermediates, but I think Advanced Intermediates has all the potential with AII being rock solid improving next year even. And Tigo coming back to show a fundamentally strong segment in advanced intermediates and also specialty additives. Michael Networking Capital? Yes. Good morning Andreas. With regard to network equivalent percentage of sales, that numbers should come down as well, through 4 because we not only have the seasonality in our inventory levels, but we do have as well our seasonality when it comes to payables and receivables because as you know, we are spending, give and take, 40% of our overall CapEx annual CapEx in the 4th quarter. That will lead to a higher number of payables, which will help on the net working capital, plus usually the month of December is a rather weak month given the overall number of business and the number of holidays, which will have an impact on receivables. Why we expect net working capital in total to come down and get back to levels in percentage of sales, which are comparable to approve this year. Thank you. The next question is from the line of Kenneth Hinkl of Equinix Bank. Please go ahead. Yes, good morning, everybody. Thanks for taking my two questions. The first one on Liza. Mr. Taher, you mentioned that not so close to your heart anymore as a visa business. So I would maybe you can share what options you are considering for that business. And secondly, on Saltigo, as far as I know, a German chemical, not headquarter, not too far away from you, a sold and procured a business in the U. S. And you said during the Capital Market Day that you would also to the, to reinforce Saltigo by, acquisitions. So my question would be, why didn't fit your portfolio because it went to probably actually as far as I know. Thanks. Can you please repeat your first question. It's not quite clear. Did you say Liza or leather? Leather leather business, sorry. Can you repeat your question then, please? Okay. Yeah, just what option do you consider for the weak leather business? So So the do you consider a sale? I mean, I guess it's hard to find a buyer in that environment or consider a complete shutdown of the business. So that would be the question. So I think we've been very clear on, we are not selling problems, we are fixing problems. And afterwards, we see what we will do. So here on the leather business, notably, I mean, we see in leather of the weakening, automotive chain, and this has to do with organic leather, So that's the one area where we simply saw weakness in end industry. And we have confirmed that. We have stated that and therefore, leather has been impacted in this regard as far as the organic side is concerned. Organic leather is still okay. Cash contributive But overall profitability has gone down also on the organic leather side. Now Chrome, we have taken steps to improve it and we will take further steps. This has to do simply with costs, we are taking capacities out, we are taking costs out, and we will work here on making sure that the situation is being addressed and improved. Now on your second question, as far as the TiVo is concerned. I think we've clearly stressed that the market is weak. We've made now we've put health measures in place to improve it. We are looking outside what possibilities are existing North America and in Asia. Of course, we're looking into all opportunities. I I'm aware of what is being sold in the markets. You can assume that we look into things that are interesting to us. And if they are not interesting, we are not pursuing them. I'm not therefore addressing specifically the asset that you have mentioned, but we clearly can say If we would have considered this as interesting, we would have been potentially also mentioned as a potential acquirer, we did not consider this asset as attractive for us. So we were not pursuing it. Okay. Thanks. The next question comes from the line of Georgina Amato of Goldman Sachs. Please go ahead. Hi, good morning, everybody. Firstly, thankful for your very upbeat music at the start of the call on a Monday morning. I've got a couple of questions and they're all around specialty additives. I was hoping we could look a little bit closer into the top line. So can you give an idea of what the underlying volume growth is outside of the plant closures and also how much longer we should expect to see negative volume growth of your restructuring activities. And then on the good pricing that we saw in this segment, can you give an idea if that was across both lubricant additives and flame retardants or if it was one more than the other? And then finally, in bromine in the market, some of your peers have mentioned that there is a shortage of bromine in China. I was wondering if you can give an idea of what you're seeing on a supply from the supplies perspective and then whether this is the usual winter season impact or if there's some other effect going on? Thank you. Thanks, Georgina. Well, on Monday morning, you have to be upbeat with the music. And therefore, I I appreciate that you have realized the upbeat tone and the music, we are upbeat on the company as well. Let me address all three questions. Volume, basically you've saw flat volumes in Specialty Additives. And, this is driven by the fact that we have now 3 plants being upstream, which were partly still on stream last year. So all three plants, if you Here blend that out, you would see a positive volume growth in the area of 2 to 3 percentage points. As far as, pricing is concerned, I can basically confirm that we have increased we had to increase pricing in all business lines. So we push prices up in the loop adds. We had 2 due to the raw materials spike, the same we had to address in the phosphol value chain as far as the brom is concerned, of course, we absorb our own raw materials, but due to the tightness in flame retardants in China and due to the tightness of brom, you can assume that we like pricing also here and just make sure that the pricing is appropriately to market prices. And therefore, in all respects, I think, facility additives, despite headwinds on roars, was able to perform very nicely as far as absolute EBITDA is concerned, but of course, we are happy that margin improved as well. I think with this, all questions have been addressed also on the music. There are no further questions at this time. I hand back to the presenters for closing comments. So if there are no further questions, in the room or, in the cities by looking forward to see all of you on the road I would be heading to New York. Michael will also be on the West Coast. We will then be in London And, thank you for your time, and we are looking forward to finish the year on track. And to then open 2019 another year of transformation and acceleration. Thank you so much from all of us. Thank you so much from Nexus. Bye bye.