Earnings Call: Q2 2018

Aug 2, 2018

Ladies and gentlemen, thank you for standing by. My name is Emma. I'm your Chorus Call operator. Welcome and thank you for joining the 2nd Quarter 2018 Results Conference Call. I would now like to turn the conference over to Andrew Zeman, Head of Investor Relations. Please go ahead. Yes, thank you very much. And a warm welcome to everybody on the phone to our Q2 2018 conference call from my end as well. Very happy to have, our CEO, Matthias Dachert and our CFO, Michael Pontzen with me. And before I hand over, please take notice of our Safe Harbor statement. And with that, I'm happy to hand over to Matthias Sajid for a brief presentation and afterwards, as always, the Q and A Matia. Please go ahead. Welcome to LANXis. Welcome to Second Quarter. All good on our side. Despite quite heavy headwinds on currencies and raw materials. We were successful in passing all of that onto the market as far as roles are concerned and we mitigated currencies, respectfully. As far as divisions are concerned, we had some modest volume developments in advanced intermediates. Basically, driven by still weak agro industry. But as far as Advanced Industry Intermediates is concerned, volumes were rock solid and we rolled over raw materials already within this quarter. As far as Specialty Additives are concerned, we are very happy to report the strongest quarter so far. And volumes were modest because in the meantime, we have or are on the process of closing 3 production sites. Anka Week is offline. The same holds true for our South American plant which we announced last year for closure. And we are currently in the process of taking off a very small site in Mexico, which already is has stopped production. So volumes were because of this not really taking up, but we are cleaning up as indicated our production network. And that of course is going to rock the P and L in the years to come. As far as performance chemicals is concerned, here definitely on the segment side, modest developments, the trends of Q1 and Q2 has continued in Q2, but in Q2, you saw the steepest profitability contracting. This should not be the same going forward, also due to measures we have taken in the meantime. As far as our engineering materials are concerned, volume strong, pricing strong, And of course, once the MDIs and TDIs get a little longer, we will definitely start to rejoice also in the euro things. All in all, we advance very, very nicely with the synergies that we execute as promised, sometimes even faster and we feel very comfortable with the announcements we've made in this regard. Law lights persisting weak agro markets, but I think we We sailed nicely through this difficult times. And as indicated, we have no reason to believe that we shouldn't start seeing an improvement also in our Saltigo business in Q4 onwards. Currency remains a burden, but this should, of course, especially on the U. S. Dollar side, be less of an issue, we consider that Q3, Q4 will be more on the level versus 2017 second half of the year. With this, I go to Page 5, EBITDA for new LANXESS, increased nicely to 290. EBITDA margin at around 16%. You will now see going forward that due to the dis consolidation of Anank's CEO, margin level and resilience of our profitability will be different than in the years before. New lengths will shine through. Seasonal increase in net financial indebtedness due to working capital, dividends, bonus payments, I think this is something that people are aware of. And this of course should be definitely better elements in the second half when cash flow is then due to increase again. Michael and Oliver did a successful liability managements, which were basically released the P and L of $15,000,000 of interest and of course, this is something we have managed in the meantime. Michael, get it to the next level. Thank you, Matthias. Good morning as well from my side. Before we jump into page number 6 to run you through the financial KPIs, just a technical remark. And as you know, and we told you in the past quarters that since this quarter, we will report a lung as so called discontinued operations. You will still will find some more information on it on page number 30 in the presentation. And obviously in our half year report. But in a nutshell, basically, we'll find a P and L where the past is restated and the same is true for the cash flow statement. So you can compare previous year numbers with this year numbers That is not true for the balance sheet. So the 31st December numbers are not restated. So therefore, it's really hard to compare year end numbers with the 30th June numbers because 30th June do not include a blank sale. 31st December do include a blank sale. But looking at the numbers, you recognize that they improved nicely. Top line grew by some 7%, driven primarily by price and portfolio effects still volume were slightly up. And we had some headwinds from currency because the U. S. Dollar was weaker by $0.09 which did weigh on the sales and on EBITDA. Nevertheless, we were able to further increase EBITDA in same store for EPS. Net financial debt is at around 1,000,000,000 at this point in time. As said, it's hard to compare versus 31st December, but you will recognize in the cash flow statement that we have the typical seasonal effect, which leads to an increase of net financial debt, in the middle of the year. Net working capital for new Linksys today is at 1,000,000,000 at 31st December, 1.9, but don't forget, in the 1.9, you will find a lung sale If you deduct a lung CO, you will recognize and you will obviously find that in the cash flow statement that in the first half of the year, we increased our working capital which is, again, a usual seasonal pattern. Looking into the segments, starting with advanced intermediates. Advanced intermediates had a very good quarter. Prices were up strongly. We were able to pass on increasing raw material prices. Volumes at AII were good. We saw declining volumes in Saltigo because the X cycle is still not very favorable. We managed to keep EBITDA stable on Q2 'seventeen high level beside the ag weakness and the headwinds from currency. So all in all, a very good quarter for Advanced Intermediates. Specialty Additive posted the strongest quarter ever. We recorded a very good business momentum. We drove prices further up. Volume were on the previous year, high level beside the side consolidation Matias was referring and besides the strong headwind from currency because obviously in the former Contura business, we do have a relatively large exposure to the US dollar. Nevertheless, EBITDA was up Given the good momentum, which we saw in the segment and obviously the synergies we were able to achieve throughout year over year and sequentially. Turning to page number 8 Performance Chemicals performance chemicals was weaker than expected. Prices were only up slightly. Volume was good in 2 business unit, LPT and MPP. In business unit, leather volumes were down given the fact that we closed our ZARATA site in Argentina end of last year. EBITDA was down as well, drove driven by some different elements, be it on the one hand side, a very high second quarter 2017, we're comparing ourselves with, but also effects from raw material some currency. We still saw a very weak home pricing environment. We saw some uptick in freight and energy costs. So all in all, we saw a decline in EBITDA, but as Matthias mentioned earlier, that decline should not accelerate over the next quarters to come. Engineered Materials posted a great quarter. Strong price increases we were able to fully pass on increasing raw material prices. We had strong volume and not only a volume, but as well mix effect. That all helped to mitigate the burden from currency to further write EBITDA and margin up to a very, very good level of above 20% at that point in time. So all in all, you see that 3 of our segments did have a very good quarter. One segment performance chemicals because of the reasons I mentioned to you. But what's going on the next half year to come, Matias will guide you through. Thank you, Michael. With this, I move to Page 9. To the outlook of our company. And here, let's comment on the macroeconomic trends first of all. I think all of us read newspapers. We have a lot of volatility on political statements whilst we consider that the industry trends are intact potentially a little softer in the second half, but overall intact and positive for the chemical industry. AGRO, we continue to allude to a weak 2018 year due to self help, of course, Saltigo would improved from Q4 onwards, but the agro industry from our point of view should then be modestly better in 2019 volume wise compared 2018. As far as lengths this is concerned, we up our guidance because we feel strong on our underlying performance. What we have done in the last few quarters should come through in second half but also in 2019. So on the basis of this, we are clearly expecting our performance to be rather in the upper end of our guidance compared to the statements we've made in the previous quarter. So with this, ladies and gentlemen, we open our Q and A session, and we expect hopefully, a very interesting interaction also on the road when we meet all of you. You. Next question comes from the line of Tom Rigglesworth with Citi. Please go ahead. Good morning, gentlemen. Thank you very much. Your presentations. Two questions. Firstly on specialty additives. Could you break out the portfolio effect I appreciate that Kymptura is still in there for the price and volume dynamic because I'm interested to know, what the exit rate for margins would have been for this business given that 2Q is normally the seasonally weak period for bromine and where you think the margin where you think the margin can go from here given that we're in uncharted territory? And the second question on Advanced Intermediates. Could you just confirm what the growth the volume growth was ex Saltigo so we can get a better sense of what the underlying growth rate is for that business? Well, Tom, On Advanced Intermediates, we don't break up business units by business units. So what we report at divisional level is what we report. The only indication that we have provided so far is that, on the intermediate side, AII did well pricing volume wise whilst the TIGO on the volume side, was not positive. I think this is a trend which we will see in course of 2018, but then in 2019, we expect that TIGO will start to show volume picking up again. Now on Specialty Additives, here, again, we don't break out product lines. We don't break out, the specialty additives into respective business units. The only point I would like to highlight, you're totally right, normally pricing in 2nd quarter 3rd quarter on bromine in China is seasonally weaker. This we see also in course of 2018. Whilst, however, the level of the bromine price compared to last year is clearly higher. This has to do with environmental closures of competitors. This has to do with more scarcity on bromine in China which automatically should structurally upgrade pricing. All in all, however, you see that in Specialty Additives, not only the brominated frame retardants are doing well. We did very nicely push pricing on the loop adds, an element that we didn't do last year. So this is something we are addressing this year as raw materials have escalate in Q1 and Q2 twenty eighteen. So different like 2018, we are addressing a raw and push it onto customers. And of course, what also is nicely coming through are the cost cutting initiatives we initiated last year also for plant closures. And this is of course something that we will continue executing because we still need to unlock some of the synergies we have promised on the cost of goods sold. So further activity will happen and course once implemented, we will communicate on this, but all of that should be pretty healthy for the P and L. I think with this, we have addressed all questions. Next one, please. Thank you. Next question comes from the line of Christian Faitz with Kepler Cheuvreux. Please go ahead. Yes. Good morning, gentlemen. Thanks for taking my two questions. First of all, can you please talk about current trends on the demand side for your overall business into Q3? Which trends do we see regionally and important customer industry such as Automotive for Building Construction. Do you see any pronounced Samalal this year? And then second of all, can you please elucidate the performance of echo within advanced intermediates a bit? Would you believe that the negative trend continues into Q3, as particularly in Europe, the drought situation might have led to some more or limited spraying actually enhanced channel inventory problems and as such demand for your active ingredients? Thanks. Well, Mr. Faitz, your first question, I think, is addressing 10 questions in 1. So this is a interesting approach I will start with a second, which will be easier to answer. On agro trends, the on-site I think provided in the presentation, we assume that Q3, Q4 will be soft in the industry. And our assumption is that 2019 will be better volume wise. As far as Saltigo is concerned, we've taken our measures, A, on the cost side, B, on the contractual setup, And here, our assumption is that both will contribute to an improvement from Q4 onwards this year. It's not going to be a gigantic, but we from internal assessments and from everything that we are seeing, we assume that TIGO will start to show financial improvement from Q4 onwards. Now as far as your first question, which is Mr. Tak, can I just please on the on your answer? Would you have had the same few 6, 7 weeks ago, or has the demand situation from Eco Chemicals worsened, due to the fraud situation? That was actually my question. Well, the fraud situation is not going to improve the situation on the agro industry, but at the end of the day, it's not going to make this huge difference compared to our assessments that I've just provided to you. Europe is not the only market for agro. They are quite more significant markets elsewhere in the world as you well know. So the European drought or heat season is definitely not improving the agro situation as we see it, but it's not going to fundamentally change the outlook we've given. And by the way, our outlook, is the outlook for the entire company factoring in everything that we see as of today. Now on the first question, Samalal, as this point in time, all feedback we are getting from the business, there is no sudden summer, contraction. So the summer due to August is always more modest more mild, but this is a seasonal pattern that we have seen versus last year or in the years before. And therefore, as far as industry trends are concerned, I've conveyed, I think the in our guidance that we see industry trends and texts, we see very good momentum in North America. We see an ongoing good momentum also in Asia. We see modest growth as before in Europe the auto industry might be slightly softer in the second half compared to 1st half. But all in all, what we see in terms of second half industry performance, we are confident for the chemical industry and we are even more confident for our company due to the measures we have internally taken. Okay, great. Next question please. Your next question comes from the line of Patrick with UBS. Please go ahead. Thank you and 3 questions for me, please. The first would be on cash flow and can you talk a bit more about the change in other assets and liabilities and what exactly happened there? Then secondly, staying with specialty additives, you mentioned the closures and the site network optimization impacting volumes. Can you give us a bit more color here? How much that impact was how long you think that will continue and how you see organic growth underlying excluding these closures? And the last question, a more general one on in a portfolio context, you've owned Camtura for a year now, more or less, and you acquired organometallics and the USA in business. How do you think about these business currently for portfolio context. Are you happy with where you stand, for the time being or would you consider launching strategic reviews here anytime soon? Thanks. Well, Patrick, I would take number 2, number 3, and Michael will address the cash flow statement immediately as cash is dear to our heart. It should be priority number 1. Absolutely. And all means, Matias. So yes, Patrick, the changes in changes in other assets and liabilities are primarily driven by the exceptional booking, which we did in the last year. Therefore, you have a huge deviation. You recall in to 2017, we booked some $160,000,000 give and take on total exceptional that was obviously not cash related. And therefore, you find a relatively low number in the second quarter of 2017. The relative high number in the 2nd quarter in principle is basically driven by the fact that we pay out our bonus in the second quarter. And that is driving that number. In general, there are basically always 3 elements who drive that line. 1 is bonus payment. 1 is effect from restructuring bookings or exceptional bookings. And the third is swings, which come from hedging activities. Matias? So then I address Specialty Additives. You raised the question on volumes and production network, how long is this going to continue impacting the volume. For this short wrap up on what we've done so far. So we announced in the second half of last year that we will stop the production in Anchavic, which basically is producing for loop ads In the fourth quarter, I think we announced the restructuring and closure of our plant in Rioclaro. And today, I've indicated, and with this, to some extent, announced that we stop our plant in Mexico, Renosa, which is basically producing for also the Additives division. So All of these plants are basically from Q2 onwards stopping production with this stopping sales by and large. And of course, now this is going to impact volumes but favorably P and L, we don't close production sites that are adding to profitability. We are closing production sites that are negatively impacting our profitability. And for that very reason volumes from Q2 onwards will be softer. Of course, once this has eaten through the P and L for the next few quarters, and has entered into the comparable base, then from 2019 onwards, volume will be stronger. But P and L net nets will rejoice through the plant closures that we've done. And I stress again, when we did the due diligence on KEMTura, we saw major upside potential through reorganizing the production network and we are now just executing on it. As far as M and A is concerned, I think you see now that the business where we had a clear overlay overlap with a chemtura portfolio and the flame retardants and lupads is doing exactly what we had expected the business to do. So, specialty additives is getting stronger and stronger quarter on quarter. Now as far as the 2 other businesses are concerned organometallics we see value here and we want to unlock it ourselves. We see that Organometallics is a leadership business, 1 of the top 3 players worldwide. Structurally, in a position where it should earn a good amount of money. And for that very reason, we would like to bring it to a profitability level that we feel confident confident with or happy with. And then we see what we are going to do. The same holds true with the Eurothanes business. The Eurothanes business is a leadership business in a niche, especially in the hot cast, where it basically has, wonderful market share The only issue we see right now is MDI, TDI, the raw materials that we need, where scarce are short due to a lot of force majeures. And we see that this is going to be even more difficult in Q3 this year. What we then see that, more availability of volumes should be in the market from Q4 onwards and hopefully then further improving in 2019, because here we had difficulties in our business to always pass raw materials onto our customers or even get raw materials to produce our facilities. I think with this all, your questions have been answered. Next question, please. Thank you. Next question comes from the line of Georgia Harris with Bank of America. Please go ahead. Just firstly on Specialty Additives, are you able to break out at all the level of synergies you achieved in Q2 and maybe a bit of color on how these compared to Q3 and what your expectations are for synergies for the rest of the year? And secondly, on engineering materials, you mentioned raw material tightness is going to worsen in Q3 Is this something that you plan to counter price increases or should we expect some margin squeeze from that? 2 valid questions. We don't break we don't break up as synergies by quarter So we've given guidance that 1,000,000 of synergies are due for 2018 for the for its entirety. I. E. For overall lengths. Of course, over proportional amount is being taken or being delivered by Specialty Additives, but we don't break it down by segments or sorry, by guess by segment or by business units, but you could assume that, of course, here in Specialty Additives in the first two quarters, each quarter contributed to profitability and synergies was one reason, that was driving it. As far as engineering materials is concerned, I think you see rock solid performance in Q1, Q2. You will see overall I think a very nice performance for the entire year 2018. Both businesses are doing well. The the only alert I would like to provide. 'eighteen is a year where the Eurothanes specialties are doing great volume wise, but we could even do better if we could have some ease on the pricing of MDI and TDI. In Q3 we might even have some lower volumes because we cannot get enough products, especially on the monomer TDI, but this should improve due to additional capacities coming on stream in Q4. And therefore, we simply would like to lose to some softer profitability on the Urethane solutions, while overall the year would be another very strong year for the entire division. Okay. Thank you. Most welcome. Next question please. Next question comes from the line of Martin Evans with HSBC. Please go ahead. Yes, thanks. Morning. Just a quick one back on the sort of portfolio as it stands at the moment with reference, I guess, to Saltigo, where you appear to be a little bit more optimistic about next year's agrochemical outlook. I guess the question is from your perspective, you're still what do you think is so special with Saltigo such that you remain committed to keeping it in the portfolio given what else has happened in terms of the additional businesses you've acquired because it does seem to be a a hugely competitive marketplace in which you deal the ag industry and you're relatively sort of modest player, is it an area that you think at some point, if these pressures in the end market continue, you would consider as to whether or not you should keep it in the group? Valid question, Martin, but let me give a little bit more transparency on Saltigo. I think the business Zatigo did pretty well over the last 3 years. Once the market was in a trough, we performed reasonably well. Of course, we had no peak earnings. We had troughed earnings, but the troughed earnings were at, I would say, overall decent, decent levels. Now there are two things that I would like to shed light on. A, if the market volume wise improves, we should get more financial contribution on our end as well. The consolidation in the marketplace does not necessarily have to be negative for us. The consolidation has led to quite in quite an increase in indebtedness by all players, that are out there. We still have 4 to 5 players after the consolidation of our end industry and 2 to 3 of these, 4 to 5 players have such a substantial increase in indebtedness that the likelihood that they are going to for outsourcing I. E. To us is higher than building own plans on their own. So that's another positive trend that we are seeing next to potential volume increase 3rd, the ARC industry is currently working on new innovation, new better pipeline, And as far as Saltigo is concerned, we are the leader in Europe on customer manufacturing, for the agro industry. So We are only going for the synthesis steps which are more sophisticated, normally starting with synthesis step number 6 or 7 going up to symptoms of step number 1213. We are not competing in the territories of the first few levels, which are less sophisticated. This is normally done in India or China. The interesting thing, however, is that due to supply issues that some of the agro players have in India and notably China, some of the European agro companies are starting to ask us if we could enter into these synthesis steps as well. So far we've not taken the decision to do this. Because we clearly want to use our capacities for the high technology upgrades. But trend wise, it gives you the indication that trends is not against us. It's rather benign for us, or it's slick if this is the right word used in the U. S. I hope with this, we've answered all your questions. The next question comes from the line of Mark Smayer with Baader Helvea. Three questions, again, coming to Saltigo. What is your more long term view on the effect of digital farming costs large companies like Bayer, they expect a significant negative volume impact and what is the effect you're expecting for your business there? Then secondly, on this article that you are planning high investments in this, Could you specify in what business areas these investments might be? Is it in particular in the acquired Contura assets or brought on overall plans you have there? And then lastly, on the higher inventories on the cash flow, came this basically from higher product prices compared to a combined list volumes? Or has it also to do with the combined going into Q3 and with this also higher inventories? Thank you. So, Michael, you're addressing the cash flow. I will take the other 2. Yes, good morning, Marcus. With regards to inventories, It was basically volume and prices as we have higher pricing level than we used to have. Don't forget Q2 2017 because always comparing with previous year, we had, as well, some effects coming from the inventory step up. We did have as well an organic increase in volumes and prices as well in the second quarter of 2017. So on a like for like basis, There is no huge deviation. It's the usual pattern that in Q2, there is a volume impact, but we have, as well, a price impact as we're referring on top line as well on price effects Matias? So on digitization, which we also like, I'm not aware that Bayer is guiding for volume decrease for its own business. I think I thought the opposite going further going forward due to the fact that simply more agro ingredients or agro products are needed due to the increase in overall world population. Digitization in the agro industry will lead to further productivity gains as far as usage of, products are concerned. And we are striving for the same thing, I. E. Increasing the productivity through the ingredients we are producing and making sure that we are in the innovative product that the agro industry is developing and potentially bringing after 2019 to the markets. As far as the investments in the United States are concerned, we've guided from the outset of the acquisition that we have $50,000,000 of investments which we will use to upgrade our production network in the U. S. And this is something we are executing as we speak. Of course, we have our own asset base, that we would like to upgrade further and we reflect also investments in some areas of our business like HPM, where we would like to further increase our capacities in North America. And speaking about HBM, the two lines in Gastonia, for instance, for the lightweight trends in the automotive industry in North America, the two lines, where the second one was brought onto stream 1.5 years ago, starts to be fully utilized already. So we have here penetrated the market nicely our compounds, our custom made polyamides compounds are taken very well also in North America. And therefore, these are playing into the direction of increasing the capacities in the United States. Another element I would like to stress is, for instance, our El Dorado sites with the fact that China is more and more scarce on Brom. Brom reserves I've recently announced that here in North America, we will open up further wells to extract brom from the ground. We've indicated that Emerald 3000, our innovative, brom flame retardant products also likes to have further volumes. And therefore, we've announced also in this regard capacity increases. So all in all, you see that these are investments that are done in different product areas, but where the end trends seem to be quite healthy. That's the reason why we invest. Next question comes from the line of Thomas Swoboda with Societe Generale. Please go ahead. Yes, good morning gentlemen. Two questions for me please. Firstly, on Performance Chemicals And Chrome in particular, on the last course, we were discussing the potential opportunity to find to find this strategic solution for Chrome. I'm just interested whether the renewed price weakness in the chrome products and chrome itself, changes your approach here. Is a strategic solution for this business in the short to midterm still a possibility. So that, that was the first one. The second one on a follow-up on High Performance Materials business is developing extremely well. I'm just interested in terms of the mix transition, which you are targeting to 2020, Is it fair to assume that this transition is towards the composite materials that this is progressing faster than you initially thought or you just in line with your previous thinking? Mr. Swoboda, 2 valid questions. Let me take them 1 by 1. Chrome, I'm not aware that we have stated in any conference call that we are seeking a strategic solution. We've always stated that leather business units in its entirety is a business that is, being restructured. And here, we clearly alluded to Chrome and took 1st step, I. E. Zarrata closure. And that mid term, we might go for partnership. We never were specific on one or the other business line. We are definitely in our tonality more positive on organic leather chemicals, which is a low CapEx high margin business. And we were, less positive on the Chrome value chain, but that is basically the communication coming from the company, of course, I will talk to my IR guys if they are telling anything different. And, if they do so, I would be very surprised. On the mix in engineering materials, I wouldn't say we are accelerating here. We are executing our strategy every day pretty well. But for those of you that attended the Capital Markets Day last year when one of our customers was making presentations on our products, and we see that our products are simply pretty light by the market. On top of that, we see that the polyamide industry configuration is changing to the better. And that is giving us even a better position within an industry was also have, quite nice products, that we offer to our customers. So in essence, it's a good business. We like it, and I think we are here positioned exactly in the right time. This is very clear. Thank you very much. There were no further questions on the line. It's not that hot by 9 o'clock. So So we are so energized. We would like to take further questions, but if there are none, we would take all of your questions, on the roads and we are looking forward I hope all of you get a summer break. We will still be very, very active and we are excited already to see you on the road and to speak to you soon because we are working hard in order to make you and us happy going forward. All the best from LANXESS, all the best from Sunny Cologne, take good care, and bye bye. Ladies and gentlemen, this concludes LANXESS Conference Call. Thanks for joining and have a pleasant day. Goodbye.