Ladies and gentlemen, thank you for standing by. My name is Emma, I am your Chorus Call Operator. Welcome, and thank you for joining the second quarter 2018 results conference call. I would now like to turn the conference over to André Simon, Head of Investor Relations. Please go ahead.
Thank you very much, and a warm welcome to everybody on the phone to our Q2 2018 conference call from my end as well. I am very happy to have our CEO, Matthias Zachert, and our CFO, Michael Pontzen, with me. Before I hand over, please take notice of our safe harbor statement. With that, I am happy to hand over to Matthias Zachert for a brief presentation, and afterwards, as always, the Q&A. Matthias, please go ahead.
Welcome to Lanxess. 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 on to the markets as far as raws are concerned, and we mitigated currencies respectfully. As far as divisions are concerned, we had some modest volume development in Advanced Intermediates, basically driven by still weak agro industry. But as far as advanced industrial intermediate 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. Volumes were modest because in the meantime, we have or are in the process of closing three production sites. Ankerweg 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 has stopped production. 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&L in the years to come. As far as Performance Chemicals is concerned, here definitely on the segment side, modest development. The trends of Q1 and Q2 has continued in Q2, but in Q2 you saw the steepest profitability contraction. 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 is strong, pricing is strong, and of course, once the MDIs and TDIs get a little longer, we will definitely start to rejoice also in the Urethanes. All in all, we advanced 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. Lowlights, persisting weak agro markets, but I think we sailed nicely through this difficult time, 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 US 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 number five. EBITDA for New LANXESS has increased nicely to EUR 290 million. EBITDA margin at around 16%. You will now see going forward that due to the disconsolidation of ARLANXEO, margin level and resilience of our profitability will be different than in the years before. New LANXESS 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. 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 management, which will basically release the P&L of EUR 15 million of interests. 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 six to run you through the financial KPIs, just a technical remark. You know, and we told you in the past quarters, that since this quarter, we will report ARLANXEO as so-called discontinued operations. You will find some more information on it on page number 30 in the presentation and obviously in our half-year report. In a nutshell, basically, you will find a P&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 of December numbers are not restated.
Therefore, it's really hard to compare year-end numbers with the 30th of June numbers because 30th of June do not include ARLANXEO, 31st of December do include ARLANXEO.
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 US dollar was weaker by $0.09, which did weigh on the sales and on EBITDA. Nevertheless, we were able to further increase EBITDA and same is true for EPS. Net financial debt is at around EUR 2.6 billion at this point in time. As said, it is hard to compare versus 31st of 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 LANXESS today is at EUR 1.5 billion. It was 31st December, EUR 1.9 billion. Don't forget, in the EUR 1.9 billion you will find ARLANXEO.
If you deduct ARLANXEO, 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 ag cycle is still not very favorable. We managed to keep EBITDA stable on Q2 2017 high level, besides the ag weakness and the headwinds from currency. All in all, a very good quarter for Advanced Intermediates. Specialty Additives 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 besides the site consolidation Matthias was referring and besides the strong headwind from currency because obviously in the former Chemtura 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 the quarter. Margin as well, nicely further improving year-over-year and sequentially. Turning to page 8, Performance Chemicals. Performance Chemicals was weaker than expected. Prices were only up slightly. Volume was good in two business unit, LPT and MPP. In Business Unit Leather, volumes were down given the fact that we closed our Zárate site in Argentina end of last year.
EBITDA was down as well, driven by some different elements, be it on the one hand side, a very high second quarter 2017 we are comparing ourselves with, but also effects from raw material, effects from currency. We still saw a very weak chrome pricing environment. We saw some uptick in freight and energy costs. All in all, we saw a decline in EBITDA. As Matthias mentioned earlier, that decline should not accelerate over the next quarters to come. Engineering 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 ride EBITDA and margin up to a very good level of above 20% at that point in time.
All in all, you see that three of our segments did have a very good quarter. One segment, Performance Chemicals, because of the reasons I mentioned to you. What's going on in the next half year to come, Matthias will guide you through.
Thank you, Michael. With this, I move to page nine, to the outlook of our company. 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 should improve from Q4 onwards, but the agro industry from our point of view, should then be modestly better in 2019 volume-wise compared to 2018. As far as Lanxess 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.
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. With this, ladies and gentlemen, we open our Q&A session and we expect hopefully a very interesting interaction also on the road when we meet all of you. Please go ahead.
Ladies and gentlemen, at this time, we will 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're using speaker equipment today, please lift the handset before making your selection. Anyone who has a question may press star followed by one at this time. One moment for the first question, please. First question comes from line of Tom Wrigglesworth with Citi. Please go ahead.
Good morning, gentlemen. Thank you very much for your presentations. Two questions. Firstly, on Specialty Additives, could you break out the portfolio effect? I appreciate that Chemtura's still in there for the price and volume dynamic, because I'm interested to know what the exit rate for margins would've been for this business, given that 2Q is normally the seasonally weak period for bromine, and where you think the margin can go from here, given that we're in uncharted territory. The second question on Advanced Intermediates, could you just confirm what the volume growth was ex-Saltigo so we can get a better sense of what the underlying growth rate is for that business? Thank you.
Well, Tom, on Advanced Intermediates, we don't break up business units by business units. 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. In 2019, we expect that the Tigo will start to show volume picking up again. 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 second quarter and third quarter on bromine in China is seasonally weaker. This we see also in course of 2018.
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 flame retardants are doing well. We did very nicely push pricing on the lube adds, an element that we didn't do last year. This is something we are addressing this year as raw materials have escalated in Q1 and Q2 2018. Different like 2018, we are addressing raws and push it onto customers. Of course, what also is nicely coming through are the cost-cutting initiatives we initiated last year, also through plant closures.
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. Further activity will happen and, of course, once implemented, we will communicate on this, but all of that should be pretty healthy for the P&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 you see regionally and in important customer industries such as automotive or building construction? Do you see any pronounced summer lull this year? Second of all, can you please elucidate the performance of Agro 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, and hence 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 one. This is an interesting approach. I will start with the second, which will be easier to answer. On Agro trends, the answer 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 have taken our measures, A, on the cost side, B, on the contractual setup. Here, our assumption is that both will contribute to an improvement from Q4 onwards this year. It's not going to be gigantic, but from internal assessments and from everything that we are seeing, we assume that Saltigo will start to show financial improvement from Q4 onwards. As far as your first question, which is-
Mr. Zachert, can I just please on your answer, would you have had the same view six, seven weeks ago, or has the demand situation from agrochemicals worsened due to the frost situation? That was actually my question.
The frost 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. There are quite more significant markets elsewhere in the world, as you well know. 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. By the way, our outlook is the outlook for the entire company, factoring in everything that we see as of today. On the first question, summer long, as this point in time, all feedback we are getting from the business, there is no sudden summer contraction.
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. Therefore, as far as industry trends are concerned, I've conveyed, I think, in our guidance that we see industry trends intact. 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 first half. 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.
The next question comes from the line of Patrick Hoffe with UBS. Please go ahead.
Thank you. Three questions from me, please. The first would be on cash flow. Can you talk a bit more about the change in other assets and liabilities and what exactly happened there? Secondly, staying with Specialty Additives, you mentioned the closures and the site network optimization impact in 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? The last question, a more general one in a portfolio context. You've owned Chemtura for a year now, more or less, and you acquired Organometallics and the urethane business. How do you think about these business currently from a 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 two and number three. Michael will address the cash flow statements immediately, as cash is dear to our heart. It should be priority number one, shouldn't it? Absolutely. In all means, Matthias.
Yeah, Patrick, the 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 Q2 2017, we booked some EUR 160 million, give and take, on total exceptional. That was obviously not cash related. Therefore, you find a relatively low number in the second quarter of 2017. The relative high number in the second quarter, in principle, is basically driven by the fact that we pay out our bonus in the second quarter. That is driving that number. In general, there are basically always three elements who drive that line.
One is bonus payment, one is effect from restructuring bookings or exceptional bookings, and the third is swings, which come from hedging activities. Matthias?
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, a short wrap-up on what we've done so far. We announced in the second half of last year that we will stop the production in Ankerweg, which basically is producing for lube adds. In the fourth quarter, I think we announced the restructuring and closure of our plant in Rio Claro. Today I've indicated, and with this to some extent announced, that we stop our plant in Mexico, Reynosa, which is basically producing for also the Specialty Additives division. All of these plants are basically from Q2 onwards, stopping production, with this stopping sales by and large.
Of course, now this is going to impact volumes, but favorably P&L. We don't close production sites that are adding to profitability. We are closing production sites that are negatively impacting our profitability. For that very reason, volumes from Q2 onwards will be softer. Of course, once this has eaten through the P&L for the next few quarters, and has entered into the comparable base, then from 2019 onwards, volume will be stronger. P&L net nets will rejoice through the plant closures that we've done. I stress again, when we did the due diligence on Chemtura, we saw major upside potential through reorganizing the production network, and we are now just executing on it.
As far as M&A is concerned, I think you see now that the business where we had a clear overlap with the Chemtura portfolio and the brominated flame retardants and lube adds, is doing exactly what we had expected the business to do. Specialty Additives is getting stronger and stronger quarter on quarter. As far as the two other businesses are concerned, Organometallics, we see value here, and we want to unlock it ourselves. We see that Organometallics is a leadership business, one of the top three players worldwide. Structurally, in a position where it should earn a good amount of money. For that very reason, we would like to bring it to a profitability level that we feel confident with or happy with, and then we see what we are going to do. The same holds true with the Urethanes business.
The Urethanes business is a leadership business in a niche, especially in the hot cast, where it basically has wonderful market shares. The only issue we see right now is MDI and TDI. The raw materials that we need were scarce or short due to a lot of force majeure. We see that this is going to be even more difficult in Q3 this year, whilst we then see that more availability of volumes should be in the market from Q4 onwards and hopefully then further improving in 2019. Here we had difficulties in our business to always pass raw materials on to our customers or even get raw materials to produce our specialties. I think with this, all your questions have been answered. Next question, please.
Yes. Thank you.
Next question comes from the line of Georgia Harris with Bank of America. Please go ahead.
Hi. Thanks for taking my questions. Firstly, on Specialty Additives, are you able to break out at all the level of synergies you achieved in Q2? Maybe a bit of color on how these compared to Q1 and what your expectations are for synergies for the rest of the year. Secondly, on Engineering Materials, you mentioned raw material tightness is going to worsen in Q3. Is this something that you plan to counter with price increases, or should we expect some margin squeeze from that? Thanks.
Two valid questions. We don't break up synergies by quarter. We've given guidance that EUR 30 million of synergies are due for 2018 for its entirety, i.e. for overall Lanxess. Of course, over proportional amount is being taken or being delivered by Specialty Additives. We don't break it down by segment or by business units. 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 only alert I would like to provide, 2018 is a year where the Urethanes 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. This should improve due to additional capacities coming on stream in Q4. Therefore, we simply would like to look 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.
Yeah, 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, 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 hugely competitive marketplace in which you deal, the ag industry, and you're a relatively 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? Thanks.
Valid question, Martin. Let me give a little bit more transparency on Saltigo. I think the business, Saltigo, did pretty well over the last three years whilst the market was in a trough. We performed reasonably well. Of course, we had no peak earnings. We had trough earnings, but the trough earnings were at, I would say, overall 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 an increase in indebtedness by all players that are out there. We still have four to five players after the consolidation of our end industry.
Two to three of these four to five 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 plants on their own. That's another positive trend that we are seeing next to potential volume increase. Third, the agro industry is currently working on new innovation, new better pipeline. As far as Saltigo is concerned, we are the leader in Europe on custom manufacturing for the agro industry. We are only going for the synthesis steps, which are more sophisticated, normally starting with synthesis step number 6 or 7, going up to synthesis step number 12 and 13. 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. 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 have answered all your questions.
Yeah, thanks very much. Very clear.
The next question comes from the line of Markus Mayer with Baader Helvea. Please go ahead.
Good morning, gentlemen. Three questions, again, coming to Saltigo. What is your more long-term view on the effect of digital farming? Because large companies like Bayer, they expect a significant negative volume impact. What is the effect you're expecting for your business there? Secondly, on this article that you are planning higher investments in the US, could you specify in what business areas these investments might be? Is it in particular in the acquired Chemtura assets or broad on overall plants you have there? Lastly, on the higher inventories on the cash flow. Came this basically from higher product prices combined with volumes, or has it also to do with the Grimbarn going into Q3 and with this also higher inventories? Thank you.
Michael, you addressing the cash flow, I will take the other two.
Good morning, Markus. 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. 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 were referring on top line as well on price effects. Matthias?
On digitalization, which we also like, I'm not aware that Bayer is guiding for volume decrease for its own business. I think I've heard the opposite going forwards. Due to the fact that simply more agro ingredients or agro products are needed due to the increase in overall world population. Digitalization in the agro industry will lead to further productivity gains as far as usage of product 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 products that the agro industry is developing and potentially bringing after 2019 to the market.
As far as the investments in U.S. are concerned, we've guided from the outset of the acquisition that we have EUR 50 million 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 reflect also investments in some areas of our business, like HPM, where we would like to further increase our capacities in North America. Speaking about HPM, 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 one and a half years ago, starts to be fully utilized already. We have here penetrated the market nicely.
Our compounds, our custom-made polyamide compounds are taken very well, also in North America. Therefore, these are playing into the direction of increasing the capacities in the U.S. Another element I would like to stress is, for instance, our El Dorado site. With the fact that China is more and more scarce on chrome reserves. I've recently announced that here in North America, we will open up further wells to extract chrome from the ground. We've indicated that Emerald 3000, our innovative chrome flame retardant product, also likes to have further volumes. Therefore, we have announced also in this regard, capacity increases. 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.
Perfect. Thank you.
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 call, we were discussing the potential opportunity to find the 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? That was the first one. The second one, 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're just in line with your previous thinking? Thank you.
Mr. Swoboda, two valid questions. Let me take them one by one. 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 unit in its entirety is a business that is being restructured, and here we clearly alluded to chrome and took first step, i.e., Zárate closure. That midterm, we might go for a 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. We were less positive on the chrome value chain. That is basically the communication coming from the company. Of course, I will talk to my IR guys if they are telling anything different. 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. For those of you that attended the Capital Markets Day last year when one of our customers was making presentations on our products, we see that our products are simply pretty liked by the markets. 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, whilst we also have quite nice products that we offer to our customers. In essence, it's a good business. We like it, and I think we are here positioned exactly in the right time.
It's very clear. Thank you very much.
You are most welcome. Next question, please.
Yeah. We are done.
No questions?
There are no further questions on the line.
Oh, it's not that hot by nine o'clock. We are so energized. We would like to take further questions. If there are none, we will take all of your questions on the road, we are looking forward. I hope all of you get a summer break. We will still be very active. 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. Thank you for joining. Have a pleasant day. Goodbye.