Lanxess AG (OTCPK:LNXSF) Q3 2018 Earnings Conference Call November 12, 2018 2:30 AM ET
Andre Simon - Head of Investor Relations
Matthias Zachert - Chief Executive Officer
Michael Pontzen - Chief Financial Officer
Martin Roediger - Kepler Cheuvreux
Patrick Rafaisz - UBS
Georgia Harris - Bank of America
Andreas Heine - MainFirst
Knud Hinkel - Equinet Bank
Georgina Iwamoto - Goldman Sachs
Ladies and gentlemen, thank you for standing by. Welcome and thank you for joining the Laxness' Conference Call. I would now like to turn the conference over to Andre Simon, Head of Investor Relations. Please go ahead.
Thank you very much. Yeah, I want to say good morning to everybody from my side and 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 statements. And with that, I am happy to hand over to Matthias. Please go ahead.
Good morning to everybody. Monday morning 8:30, let's start an exciting week. I go through the presentation starting on Page number 4. Key highlights for Lanxess Third Quarter are definitely the agreed divestments of the remaining 50% that we still hold in ARLANXEO. By now we have sent it in or notably Aramco have sent it in order to get Antitrust approval.
All of that is running well. Final one is outstanding in China. All other jurisdictions have approved in the meantime and our assumption is that by end of the year, also here green-light will come from China so that the esteemed closing will happen in December 31st.
As far as third quarter is concerned, we saw some headwinds here and there especially from Automotive industry, but all in all and despite steep increases in raw materials, operational performance is on spot and 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 and are now fully on track to further expand volume wise but also through new innovative grades most likely being capable to take some market share off B866 but also entering with further products in the lightweight and electric vehicle domain.
We take prides in stating that we further improved on our sustainability performance and also here achieved again began 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 5. You see that we could post a nice sales increase and we were in the position to basically one-on-one rollover raw materials to the customers. As far as EBITDA is concerned, we had a slight increase to €277 million. Nice development on EPS pre as well and as far as seasonal reduction of net debt is concerned, that was visible in Q3, mostly likely we'd 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 week-end Saturday, Page 6. The Canadians cannot only play extremely good ice hockey, we've also been approached and discussed over the last several months with an engineering company that is fully focused on lithium extraction. They have a unique technology and approached us because they knew very well that our brand Smackover Formation that we have in our Arkansas. They could potentially here come to a nice extraction of lithium because lithium is also part of the brine content in the salt and for that 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 will, of course, implement a pilot plant, [indiscernible] all of this be successful, then we will agree on building respective plants in the three sites, an extraction tower that we have in El Dorado. That can be as a matter of fact nice.
Page number 7. We basically like other chemical companies, we've reported by now can confirm that underlying trending is not as strong anymore as it used to be in Q1, Q2. We see some headwinds in some one or the other industry, but overall we see that things are not that bad.
Despite headwinds, I think you see that in all our segments we developed reasonably well excluding Performance Chemicals, here I would say we had a tough year but nevertheless despite Performance Chemicals, despite Agro industry bringing pretty weak bill and we don't see a change at this point in time.
I think all segments were able to perform nicely. As far as Advanced Intermediate is concerned, here AII was basically overcompensating the shortfall in Saltigo. So here one of the worst quarters we have reported so far over the last two to three years. We think that Q4 should be the first time where our measures that we have taken in Saltigo will lead to better performance compared to previous year but the market at Agro is still terrible and we assume that 2019 will not be that good either.
But from Saltigo perspective, our assumption is that we have seen the worse in this business. Advanced Industrial Intermediates performed extremely strong, volume-wise, price-wise more to come next year due to the debottlenecking we are doing.
Specialty Additives punched hard and we now see that synergies are still to come but already today we are performing very strongly and I think we have built a fantastic division that will excel as we go ahead.
Engineering materials, urethane is 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.
So all in all, Group with an exposure to auto of roundabout 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 would digest a pretty weak performance chemicals the year 2018. And of course, we put measures in place to improve the situation in 2019 onwards. So all in all, I think you can see that Lanxess is fully on track. And with this I hand over to our CFO Michael. Over to you.
Thank you, Matthias. Good morning as well from my side. Looking into the financials on page number 8. You see that in that challenging environment which is still year marked of the rising raw material prices, we were to able to pass on the rising raw material prices to our customers leading to give and take of 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 relatively 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 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 number 9 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 pharma Chemtura businesses which generated synergies while we were able to push EBITDA further up to above 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 that we are now back on Q3 2016 levels, but the nevertheless the development was not good.
So we especially saw strong volume declines in our leather business unit driven by the one-hand side closure of our Argentinean 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 and in urethanes, we saw a better momentum on pricing. So the EBITDA in Engineering Materials was driven by the strong operational performance.
That's in a nutshell through the segments and now Matthias is running you through our guidance.
So I come with this to page number 11. Industry trends, we generally see intact. Of course reference is made by everybody on geo-political risks and all the [indiscernible] out there. But all in all, we don't see like some of you have feared, a hot landing in China, we see that fear momentum is softening but 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 the underlying demand remains positive, at least we are seeing it like this. Even though we definitely would like to confirm that we factored in a tougher environment in automotive, let's see where 2019 first quarter goes. If we are in Europe, we will see an acceleration again after WLTP weighing on the momentum right now on Europe. This is something that needs to be on the monitor that we at this point in time have no reason to be negative in our perspectives on Q4 2019 but we consider that momentum would be softer.
We also see more moderate development in construction demand but also this is something we address. We often got questions on Rhine water level. Here in river cruise in Cologne, we have seen two weeks ago, a situation where it was turning tight. We've done already for the last four to eight weeks everything to go on the roads with various supplies and deliveries.
So all in all, we could mitigate the situation. Unfortunately over the last two weeks and also in this weekend, it has rained cats and dogs and I was out and got completely soaked up with rain. So we now see that the water level in the Rhine is going in a right direction. So compared to basically two weeks ago, we are now at 30%, 40%, 50% increase as far as the level is concerned.
So that looks more positive. And based on all this information, when we look down into our order book, we confirm EBITDA 2018 exactly where we have guided in summer. All good on our side and with this we open the floor for your questions.
[Operator Instructions] First question is from the line of Martin Roediger 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 compound exposure or what is the driver behind that? And is this strong performance in Q3 in this segment, the sign that also business should perform well in Q4 despite all the headwinds we have.
The second question is on operating cash flow. That was slightly down in Q3 year-over-year, despite the increase in EBITDA, despite lower working capital impact and despite lower cash taxes. Can you please elaborate on that?
And the third question, can you explain to me why the minorities are less than 50% of the discontinued earnings from ARLANXEO. Thank you.
Well, let me take the first question and Michael will take second and third one. As far as Engineering Materials is concerned, I think the growth trend that we have indicated on the ends compounds, we guided between 3 and 5 percentage points. Third quarter came in nicely. But this also has to do sometimes with simply bigger lots being the distributed and requested by the customer side.
We had in Q2, Q1 a situation where a momentum was strong, So we saw good order intake. We also assume that fourth quarter is going to be a decent one, most likely not at the same kind of growth rates but Engineering Materials especially HPM would do solid in Q4 and my assumption is that also the urethanes which disappointed in Q3 as we guided due to the post measures that we saw in the icocynates and the (inaudible) in United States. And we think that this is going to improve in Q4 and also fortunately we see that the MDI and PDI pricing is visibly improving for us. So the tightness that we've seen in Q3 is not there as before.
On cash flow, Michael will make the clarification. I think we would like to clearly indicate, 2018 is still a year and 2019 would see this as well where we clean up. We do want to get to the savings in synergies and of course, this 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 big swing and the changes in other asset and liabilities, and here they are basically two main driver in the quarter. One is obviously the exceptional bookings which we had in 2017, so in 2017 we had a much higher number than we had in 2018.
Then we had a booking of variable compensation which was higher in 2017 than in 2018 and that was the major driver which put back, let's say, the profit before taxes because they were booked as exceptions 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 and there are some cost allocated to that separation. The agreement with Aramco is that these costs are - which are carried with us at LANXESS are being rewarded and that leads to the fact that some millions are being back granted from ARLANXEO to us.
So it's not a 50-50 contribution which is being [indiscernible] with Saudi Aramco, we have a higher share given the fact that we have some cost with regards to the separation.
The next question is from the line of Patrick Rafaisz of UBS. Please go ahead.
Thank you and good morning everyone. Also three questions from me. The first is on Advanced Intermediated and you talked about Saltigo still being weak, but you nevertheless recorded good volume growth over the entire division and nevertheless EBITDA was flat which would also stress some lack of operating leverage for the Industrial, I think, of the portfolio. Can you comment on that, please?
And 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 doing a feasibility study stage, but would be great to hear a bit more on how you think of this?
And then lastly, the Rhine water levels. You talked about and 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. So Advanced Intermediates, you are fully on the spot. The segment did well. As a matter of fact, Advanced Industrial Intermediates was basically here taking a lot of trades and was making sure that everything that was positive in the segment was coming from Advanced Industrial Intermediates.
Very strong volume, very strong pricing, very strong EBITDA contribution. It has been however completely eaten up by the Saltigo contribution or lack of contribution better. Saltigo was falling versus previous year visibly but this would change in Q4.
Advanced Industrial Intermediates is going to rock the boat in Q4 as always but we would see, from everything that we know as of today that Saltigo will improve Q4 versus Q4 last year as indicated already a few months ago.
So that's as far as your first question is concerned. Joint venture characteristics, Standard Lithium has the technology - extraction technology, that's a pretty sophisticated technology developed, patented and I think if you go through their Internet sites, they are pretty outspoken about this project.
They see this as a fantastic opportunity and my recommendation is if you want to get further insights, go to their publications. They went public this morning at 7:00 AM as well. So 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 are extracting bromine or brine. So we basically will - if the pilot plants come out with the results that Standard Lithium has tested, we would then basically contribute the lithium rights that we have of the lithium extraction that we have in El Dorado into the joint venture. So we would make sure that Standard Lithium can use our existing infrastructure that we have, they could access our raw materials. We would get, of course, the bromine and they would extract the lithium out of it and we would then share the profitability in a standard [ph] manner but, of course, we are the owner of lands 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. So we had only opportunities to win. There is nothing that is a downside for us. This can be only a very, 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 plants that is being built.
Now on river Rhine, of course, here notably the Leverkusen plants, the Leverkusen plants would be impacted like Bogastow [ph] we would both have, we have visible production in Leverkusen. So all of us are working tightly together, but normally fourth quarter is a quarter where here you have winter season, autumn season. So 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 boards because we see that the situation has calmed down and again is substantially better than it has been a few years ago.
I hope that clarifies all your questions and therefore I would like to open the floor for the next question please.
The next question is from the line of Georgia Harris 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? And also, could you comment maybe on any potential for further synergies next year?
And then my second question was on the construction market. You mentioned a softness there. Could you give a bit more color on perhaps whether it's reaching the outlook for that market? Thanks.
Let me say the following and Michael would pick up the ball on synergies. If you look at the exceptional guidance that we do on Q4, you can assume that we will make sure that we get all cost savings that we are planning and in a focused decent manner and if possible with a certain acceleration but this is something we will only make clear once we have closed all books for full year. Michael, on synergies.
Yeah, Georgia, as Matthias said, we will report the details when we disclose full year results next year March. We are very good on track to achieve the envisaged 30 million for this year and for next year we expect another 30 million to come and the year after the remaining 10 to get to our target of 100 million.
So then in the construction, notably in the emerging markets we see that construction has softened. That has impacted our pigments business as well. So that's the feedback, but again, no collapse, no dramatic change, simply softening, and we've guided for here softer environment, but all of that embedded in our guidance. Next question, please.
Next question comes from the line of Andreas Heine of MainFirst. Please go ahead.
Yeah, thank you for taking my question. I would like to start with performance chemicals. So it was indeed very weak but looking on this place of the businesses you have, I would expect that most of that is dedicated to leather. The 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?
And then could you give some flavor what we can expect in Q4 from the net working capital run down? It has increased quite a bit, also in relative terms, in days sales outstanding. Is that something where you can improve that in Q4 or is that impossible?
Maybe also one question on Saltigo. So you report for quite some time that it's getting weaker and it's good to know that Q4 is doing somewhat better. I would still expect that Saltigo is profitable on EBITDA line. Could you confirm this please? Thank you.
So Michael will take net working capital. I will address first and third question. So let's start with Performance Chemicals. What you are indicating is pretty on the spot. So the major shortfall is definitely on leather and that will continue in Q4. So Performance Chemicals, our view on Q4, it's another very bad quarter. It will show clear decrease in profitability percentage wise, absolute terms as well.
So here not very nice, but let's look at it. Leather is just a disaster. We are working on it and we will make sure that here 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 am looking into 2019 as far inorganic pigments with measures that should then improve the situation going forward.
The other two business units do well. No discussion for that. There are reasons we are making sure that NPP biosites would be further developed and I think reference was given to you in the last analyst round table. 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 turned pretty tight and then some products are in allocation models.
So that's being said on Performance Chemicals. As far as Saltigo is concerned, yeah, the argo industry all in all are all reporting, if it's U.S. companies or European companies are all reporting bad numbers and we've not seen any positive churn 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, but that should change Q4, it would still be Mickey Mouse contribution but it would be more than last year. And therefore I think we have put all measures in place in Saltigo to see a turn in momentum 2019 versus 2018, but the last few quarters were not nice and my expectation is that Advanced Intermediates will become the strongest segment again. Of course, we are competing between Specialty Additives and Advanced Intermediated, 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 segments 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 would come down as well through Q4 because we not only have the seasonality in our inventory levels but we do as well our seasonality when it comes to payables and receivables because as you know, we are spending given and take 40% of our overall annual CapEx in the fourth quarter that would lead to a higher number of payables, which will help on the net working capital plus usually the month the December is a rather weak month given the overall number of business and the number of holidays which will have an impact on receivables, while we expect net working capital in total to come down and get back to levels in percentage of sales which are comparable to previous years. Thank you.
The next question is from the line of Knud Hinkel of Equinet Bank. Please go ahead.
Good morning everybody. Thanks for taking my two questions. The first one on leather. Mr. Matthias, 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?
And secondly, on Saltigo, as far as I know a German chemical, headquartered not too far away from you, [indiscernible] business in the U.S. and you said during the Capital Market Day that you would also consider to reinforce Saltigo by acquisition. So my question would be why didn't it fit your portfolio because it went too perfectly [ph] as far 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?
Just what option do you consider for the weak leather business? So that we considered sale, I guess it's hard to find a buyer in that environment or consider a complete shutdown of the business. That would be the question.
So I think we have been very clear on - we are not selling problems, we are fixing problems and afterwards we see what we will do. So here on the leather business, notably I mean see in leather, of course, the weakening automotive chain and this has to do with organic leather. So that's the one area where we simply saw weakness in the industry and we have confirmed that, we have stated and therefore leather has been impacted in this regard as far as the organic side is concerned.
Organic leather is still okay. Cash contributors, that's overall profitability has come down also on the organic leather side. Now chrome, we have taken steps to improve it and we will take further steps, this has to do simply with cost. We are taking capacities out, we are taking cost out and we will work here on making sure that the situation is being addressed and improved.
Now on your second question. As far as Saltigo is concerned, I think we have clearly stressed that the market is weak. We have made now, we have put sales measures in place to improve it. We are looking outside what possibilities are existing in North America and Asia. Of course, we are looking into all opportunities.
I am aware of what is being sought in the market. You can assume that we look into those things that are interesting to us and if they are not interesting, we are not pursuing them. I am not therefore addressing specifically the asset that you have mentioned but we clearly can say if we would have considered this as interesting then 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, thank you.
[Operator Instructions] The next question comes from the line of Georgina Iwamoto of Goldman Sachs. Please go ahead.
Hi, good morning everybody. Firstly thanks for your very upbeat music at the start of the call on a Monday morning. I've got a couple of questions and they are around Specialty Additives. I was hoping we could look a little bit closer into the top line. And so can you give an idea for the underlying volume growth is outside of the plant closures? And also how much longer we should expect to see a negative volume growth on the back of your restructuring activities? And then on the good pricing that we saw in this segment, can you give an idea if that was across both lubricant, additives and flame retardants or if it was one more than the other?
And then finally in bromine, in the markets some of your peers have mentioned that there is a shortage of bromine in China. I was wondering if you can give an idea of what you are seeing from the supplies perspective and then whether this is the usual winter season impact or is there some other effect going on? Thank you.
Thanks, Georgina. Well, on Monday morning you have to be upbeat with the music and 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 saw flat volumes in Specialty Additives and this is driven by the fact that we have now three plants being off-streamed which were partly still on-stream last year. So all three plants, if you here, blend that out, you would see a positive volume growth in the area of 2 to 3 percentage points.
As far as the pricing is concerned, I can basically confirm that we have increased, we had to increase pricing in all business lines. So we push prices up in the [lub nets], so we had to do due to the raw material spike, the same we had to address in the [phosphorus] 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 does make sure that's the pricing is appropriately to market prices.
And 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 Lanxess for closing comments.
So if there are no further questions in the room or in the city, I'm looking forward to see all of you on the roads. I would be heading to New York. Michael will also be on the West Coast. We would then be in London. Thank you for your time and we are looking forward to finish the year on track and to then open 2019, another year of transformation and acceleration. Thank you so much from all of us, thank you so much from Lanxess. Bye-bye.
Ladies and gentlemen, this concludes the Lanxess Conference Call. Thank you for joining and have a pleasant day, good bye.