Wonderful good morning to everybody from my side, 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. With that, I am happy to hand over to Matthias. Please go ahead.
Good morning to everybody. Monday morning, 8:30 A.M. Let's start an exciting week. I go through the presentation starting on page number four. Key highlights for LANXESS third quarter are definitely the agreed divestments of the remaining 50% that we still hold in ARLANXEO. By now, we have handed in, or notably, Aramco has handed 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, our assumption is that by end of the year, also here, green light will come from China, so that the esteemed closing will happen December 31st.
As far as third quarter is concerned, we saw some headwinds here and there, especially from automotive industry. In all, despite steep increases in raw materials, operational performance is on spot, I would like to allude 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, 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 PA66, 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, also here, achieved again a strong listing. As a matter of fact, in the European index, we scored number three out of the top companies.
Only 11 companies were able to entitle to this ranking. As far as financial highlights are concerned, page five, you see that we could post a nice sales increase. We were in the position to basically one-on-one roll over raw materials to the customers. As far as EBITDA is concerned, we had a slight increase to EUR 277 million. Nice development on EPS pre as well. As far as seasonal reduction of net debt is concerned, that was visible in Q3. Most likely, we will see another, more significant decrease in Q4. With this, I would like to make some statements to our joint venture agreement that we signed on the weekend, Saturday, page six. The Canadians cannot only play extremely good ice hockey. We have 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 in our brine Smackover formation that we have in Arkansas, they could potentially here come to a nice extraction of lithium, because lithium is also part of the brine content in the soil. For that very 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. We'll, of course, implement a pilot plant. Should, however, all of this be successful, then we will agree on building respective plants in the three sites and extraction towers that we have in El Dorado. That can be, as a matter of fact, nice. Page number seven.
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 one and the other end industry. 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. I would say we have a tough year. Nevertheless, despite Performance Chemicals, despite agro 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 Intermediates is concerned, here, AII was basically overcompensating the shortfall in Saltigo. Here, one of the worst quarters we've reported so far over the last 2-3 years.
We think that Q4 should be the first time where our measures that we've taken in Saltigo will lead to a better performance compared to previous year. The market at agro is still terrible, and we assume that 2019 will not be that good either. 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 here a fantastic division that will excel as we go ahead. Engineering Materials, urethanes, weak as we have indicated in Q2, but the HPM business is rock solid.
The integrated value chain is really performing nicely and of course we are putting more emphasis on the engineering compounds. All in all, group with an exposure to auto of around about 20% after ARLANXEO 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. Of course we put measures in place to improve the situation 2019 onwards. All in all, I think you can see that LANXESS is fully on track. With this, I hand over to our CFO, Michael. Go for it.
Thank you, Matthias. Good morning as well from my side. Looking into the financials on page eight, 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 third quarter by give and take EUR 120 million 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 nine with Advanced Intermediates. In Advanced Intermediates, AII remains strong. We saw strong price and volume increases and an uptick in our EBITDA. On the other hand, we saw Saltigo 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 Additives, 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 while we were able to push EBITDA further up to above EUR 90 million for the quarter. The opposite direction in terms of performance was shown in Performance Chemicals. Performance Chemicals remains weak. Still, we are comparing to a very strong Q3 2017 and we are now back on Q3 2016 levels. Nevertheless, the development was not good. We especially saw strong volume declines in our leather business unit driven by the one hand side, the side closure of our Argentinian asset end of last year and some strikes in our South African asset.
Turning to Engineering Materials. In Engineering Materials, we again saw a very strong quarter and like in Specialty Additives, the strongest quarter for the third quarter ever. In HPM, strong price increases, strong volume development and nice EBITDA development. In urethanes, we saw better momentum on pricing. 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.
I come with this to page 11. Industry trends we generally see intact. Of course, reference is made by everybody on geopolitical risks and all this craziness out there. All in all, we don't see like some of you have feared a hard landing in China. We see that tier momentum is softening. In the last two 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 2019 first quarter goes.
In Europe we see acceleration again of the WLTP weighing on the momentum right now on Europe. This is something that needs to be on the monitor, we, at this point in time, have no reason to be negative in our perspectives on Q4 and 2019, we consider that momentum will be softer. We also see more moderate developments in construction demands, also this is something we address. We often got questions on Rhine water level. Here in Leverkusen, Cologne, we have seen two weeks ago a situation where it was turning tight. We have done already for the last four to eight weeks, everything to go on the roads with various supplies and deliveries. All in all, we could mitigate the situation. Fortunately, over the last two weeks and also on this weekend, it has rained cats and dogs.
I was out and got completely soaked up with the rain. We now see that the water level in the Rhine is going in a right direction. Compared to basically two weeks ago, we are now at 30%, 40%, 50% increase, as far as the level is concerned. That looks more positive. Based on all this information, when we look down into our order book, we confirm EBITDA 2018 exactly where we've guided in summer. All good on our side. With this, we open the floor for your questions.
Ladies and gentlemen, at this time, we'll begin the question and answer session. Anyone who wishes to ask a question may press star followed by one on their touch-tone telephone. If you wish to remove yourself from the question queue, you may press star followed by two. If you are using speaker equipment today, please hit the handset before making your selections. Anyone who has a question may press star followed by one at this time. One moment for the first question, please. The first question is the line of Martin Rödiger 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, electric vehicles, innovation, higher compounds exposure, or what is the driver behind it? 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? The third question, can you explain to me why the minorities are less than 50% of the discontinued earnings from ARLANXEO? Thank you.
Well, let me take the first question, then 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. Third quarter came in nicely, 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, 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. Engineering Materials, especially HPM, would do solid in Q4. My assumption is that also the urethanes, which disappointed in Q3 as we guided due to the force majeure we saw in the isocyanates and the monomers in the U.S.
We think that this is going to improve in Q4. Also, fortunately, we see that the MDIs and TDI pricing is visibly improving for us. The tightness that we've seen in Q3 is not there as before. On cash flow, Michael will make the clarification. I simply would like to clearly indicate 2018 is still a year and 2019 will see this as well, where we clean up. We do want to get to the savings and synergies. Of course, this still absorbs one-time costs and cash in order to improve EBITDA and cash conversion in the years to come. Michael?
Good morning, Martin. Looking into the cash flow statement, you saw the big swing and the changes in other asset and liabilities. Here there are basically two main drivers in that quarter. One is obviously the exceptional bookings, which we had in 2017. In 2017, we had a much higher number than we had in 2018. We had a booking of variable compensation, which was higher in 2017 than in 2018. That was the major driver, which put back, let's say, the profit before taxes, because they were booked as exceptionals 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 ARLANXEO further. There are some costs allocated to that separation.
The agreement with Aramco is that these costs, which are carried with us at LANXESS, are being rewarded, That leads to the fact that some millions are being back granted from ARLANXEO to us.
It's not a 50/50 contribution, which is being received by Saudi Aramco. We have a higher share given the fact that we have some cost with regards to the separation.
Thank you.
The next question is the line of Patrick Rafaisz of UBS. Please go ahead.
Thank you. 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. Nevertheless, EBITDA was flat, which would also suggest some lack of operating leverage for the industrial bit of the portfolio. Can you comment on that, please? 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. 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 impact here? Thank you.
All valid questions. Let me take them one by one, Patrick. Advanced Intermediates, you're fully on the spot. The 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, very strong pricing, a very strong EBITDA contribution. It has been, however, completely eaten up by Saltigo contribution or lack of contribution, better. Saltigo 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 will see from everything that we know as of today that Saltigo will improve Q4 versus Q4 last year, as indicated already a few months ago. That's as far as your first question is concerned. Joint venture characteristics.
Standard Lithium has the technology, extraction technology. They have a pretty sophisticated technology, developed, patented. I think if you go to their internet site, 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 7:00 A.M. as well. The business model is the following. We have in El Dorado our three plants, west, south, and middle plants, and in all three plants, we're extracting bromine or brine. We basically will, if the pilot plants comes out with the results that Standard Lithium has tested, we would then basically contribute the lithium rights that we have or the lithium extraction that we have in El Dorado into the joint venture.
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 bromine, and they would extract the lithium out of it, and we would then share the profitability in a fair manner. Of course, as we are the owner of land and infrastructure, we would get the majority of the profitability. Standard Lithium would contribute the technology, and should everything turn out, we will of course then build respective extraction units. That's basically the business model. We have only opportunities to win. There's nothing that is a downside for us. This can be only a very nice upside, 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.
On River Rhine, of course, here notably the Leverkusen plants would be impacted like Covestro. We would both have with visible production in Leverkusen. All of us are working tightly together, but normally fourth quarter is a quarter where here you have winter season, autumn season. Two weeks ago, we had a lot of focus on one, two 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 calmed down, and again, is substantially better than it has been a few weeks ago. I hope that clarifies all your questions, therefore I would like to open the floor for the next question, please.
The next question is from the line of Georgina Iwamoto of Bank of America. Please go ahead.
Hi. Thanks for taking my questions. Firstly, just on the Chemtura synergies, could you give us an update, please, on where these are compared to your initial expectations? Also, can you comment maybe on any potential for further synergy delivery next year? Then my second question was on 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? Thanks.
Well, let me say the following. Michael will 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, in a focused, decent manner, if possible, with a certain acceleration. This is something we will only make clear once we've closed our books for full year. Michael, on synergies?
Yeah. Georgina, as Matthias said, we will report the details when we disclose full year results next year in March. We're very good at track to achieve the envisaged EUR 30 million for this year. For next year, we expect another EUR 30 million to come, and the year after, the remaining EUR 10 million to get to our target of EUR 100 million.
On the construction, notably in the emerging markets, we see that construction has softened. That has impacted our pigments business as well. That's the feedback. Again, no collapse, no dramatic change, simply softening. We've guided for here a softer environment. All of that is embedded in our guidance. Next question, please. It's early in the week.
Next question comes from the line of Andreas Heine of MainFirst. Please go ahead.
Thank you for taking my question. I would like to start with Performance Chemicals. It was indeed very weak, but looking on 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 digits, and the rest doing fine. Is that describing the picture rightly? Could you give some flavor what we can expect in Q4 from the net working capital rundown? It has increased quite a bit, also in relative terms, so in days of sales outstanding. Is that something where you can improve that in Q4, or is that impossible? Maybe also one question on Saltigo. 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 Saltigo is profitable on EBITDA line. Could you confirm this, please? Thank you.
Michael will take networking capital. I will address first and third question. Let's start with Performance Chemicals. What you're indicating is pretty on the spot. The major shortfall is definitely on leather, and that will continue in Q4. Performance Chemicals, our view on Q4, it's another very bad quarter. It will show clear decrease in profitability percentage-wise, absolute terms as well. 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, further measures are being taken. Point one. Point two, inorganic pigments didn't have a great year year-to-date. Q4 will also be weak, but we are working here also 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 two business units do well. No discussion. For that very reason, we are making sure that MPP biocides will be further developed. 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 2019, because here we turned pretty tight and some products are in allocation modus. That's being said on Performance Chemicals. As far as Saltigo is concerned, the agro industry, all in all, are all reporting, if it's U.S. companies or European companies, are all reporting bad numbers. We've not seen any positive tone coming from the big three, big four companies. I can confirm that we are still positive, but I use the word I need to take my microscope out to see it.
I am getting older every day, so my eyes are getting weaker. I need a big microscope to see the profitability of Saltigo. That should change Q4. It will still be Mickey Mouse contribution, but it will be more than last year. Therefore, I think we have put all measures in place in Saltigo to see a turn in momentum in 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 Saltigo coming back to show a fundamentally strong segment in Advanced Intermediates and also Specialty Additives. Michael, Net Working Capital?
Yes. Good morning, Andreas. With regards to Net Working Capital and percentage of sales, that number should come down as well, through Q4, 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 annual CapEx in the fourth 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. We expect Net Working Capital in total to come down and get back to levels and percentage of sales, which are comparable to previous years.
Thank you.
The next question is the line of Knud Hinkel of Equinet Bank. Please go ahead.
Yeah. Good morning, everybody. Thank you for taking my two questions. The first one on leather. Mr. Zachert, you mentioned that it's not so close to your heart anymore, the leather business. Maybe you can share what options you are considering for that business. Secondly, on Saltigo, as far as I know, a German chemical, headquarter not too far away from you, sold a precursor, a business in the U.S. You said, during the capital market day that you would also consider to reinforce Saltigo by acquisitions. My question would be, why it didn't fit your portfolio because it went to private equity as far as I know. Thanks.
Can you please repeat your first question? It's not quite clear. Did you say Lisa or leather?
Leather business. Sorry.
Can you repeat your question then, please?
Okay. Yeah. Just what option do you consider for the weak leather business? Do you consider a sale? I guess it's hard to find a buyer in that environment. Or do you consider a complete shutdown of the business? That would be the question.
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. Here on the leather business, notably, we see in leather, of course, the weakening automotive chain. This has to do with organic leather. That's the one area where we simply saw weakness in end industry. 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. 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. On your second question, as far as Saltigo is concerned, I think we've clearly stressed that the market is weak. We've put self measures in place to improve it. We are looking outside what possibilities are existing in North America and in Asia. Of course, we are looking into all opportunities. I am 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. 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.
If you would like to ask a question, please press the star followed by the one on your telephone. The next question comes from the line of Georgina Iwamoto 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. Can you give an idea of what the underlying volume growth is outside of the plant closures? Also, how much longer we should expect to see negative volume growth on the back of your restructuring activities? 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? Finally, in bromine, in the market, some of your peers have mentioned that there's a shortage of bromine in China.
I was wondering if you can give an idea of what you're seeing from the supplies perspective, and 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, therefore I appreciate that you have realized the upbeat tone in the music. We are upbeat on the company as well. Let me address all three questions. Volume. Basically you saw flat volumes in Specialty Additives, and this is driven by the fact that we have now three plants being off stream, which were partly still on stream last year. All three plants, if you here blend that out, you would see a positive volume growth in the area of two to three percentage points. As far as pricing is concerned, I can basically confirm that we had to increase pricing in all business lines. We pushed prices up in the lube additives. We had to due to the raw material spike. The same we had to address in the phosphor value chain.
As far as the bromine 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 bromine, you can assume that we like pricing also here and just make sure that the pricing is appropriately to market prices. Therefore, in all respects, I think Specialty Additives, despite headwinds on raws, 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.
If there are no further questions in the room or in the cities, I am looking forward to see all of you on the roads. I will be heading to New York. Michael will also be on the West Coast. We will then be in London. Thank you for your time. 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 LANXESS. Bye-bye.