LANXESS Aktiengesellschaft (LNXSF) CEO Matthias Zachert on Q2 2020 Results – Earnings Call Transcript


LANXESS Aktiengesellschaft (OTCPK:LNXSF) Q2 2020 Earnings Conference Call August 13, 2020 7:00 AM ET

Company Participants

André Simon – Head, Investor Relations

Matthias Zachert – Chief Executive Officer

Michael Pontzen – Chief Financial Officer

Conference Call Participants

Matthew Yates – Bank of America

Thomas Wrigglesworth – Citi

Georgina Iwamoto – Goldman Sachs

Samuel Weber – SW Kapital

Andreas Heine – MainFirst

Martin Roediger – Kepler Cheuvreux

Patrick Rafaisz – UBS

Markus Mayer – Baader Bank

Peter Spengler – DZ Bank

Chetan Udeshi – JPMorgan

Operator

Ladies and gentlemen, thank you for standing by. Welcome and thank you for joining the LANXESS Conference Call. I would now like to turn the conference over to André Simon, Head of Investor Relations. Please go ahead.

André Simon

Thank you very much, Judith, and a warm welcome to everybody on the phone to our Q2 2020 call here in Cologne from my end as well. I hope every one of you is fine in these special days. I have with me our CEO, Matthias Zachert; and our CFO, Michael Pontzen. Please take notice of our safe harbor statement. And with that, I am happy to hand over to Matthias for a brief presentation, and as always, the Q&A. Matthias, please go ahead.

Matthias Zachert

Hello, everybody, and welcome to second quarter 2020 conference call results of LANXESS. I move to Page #4 immediately, where we give the business overview business highlights that basically happened in the last few months. LANXESS was one of the few companies providing Q2 guidance and also guidance for the full year, and we are very happy to report today that we were hitting or have hit midpoint of second quarter guidance with €224 million EBITDA. As far as margin is concerned, we kept pretty close to the margin we reported last year and at overall 15.6% of EBITDA margin. As far as segmental performance is concerned, we basically followed here the – we achieved basically here what we had indicated a few months ago, was three segments were impacted by demand decline.

We have had one segment stemming out and showing strong performance, consumer protection, the segment which was just created beginning of the year, where we had some pre-buying activity by one customer who basically ordered in the second quarter what he normally orders in the entire year. But if you blend that out, the Consumer Protection business would still have reported top line and bottom line growth. Of course, second quarter was also impacted nicely by the divestiture of the CURRENTA 40% share that we were selling to MIRA and here, we had an exceptional boost in net results being a record net income quarter. And of course, as far as financial performance, financial liquidity is concerned, this was also nicely impacting our liquidity position, reducing the overall net debt so that the balance sheet is in proper order and we can sail with a nice momentum through this crisis.

I’m happy to say that the portfolio transformation, despite corona, continued. We were executing within the last few weeks and months two nice strategic moves which I will share with you in a moment. Basically, on the membranes business, which we flagged in our Capital Markets Day as a troubled business in our hands, and we indicated also with the full year financials that Leather business is no longer core, and it has been taken into discontinued operations. Now we execute with a respective divestiture program. Our AGM is going to be held soon. It’s going to be virtual. And I’m happy to say that the dividends will be paid on that day, which reflects an increase versus the €0.90 we were paying off – paying out last year.

I turn your attention to Page #5, short update on where we stand on corona or COVID-19. I think all of us are learning as we go through this crisis. We find all – we try to all find our new normality. And as far as Asia is concerned, except India, as far as Europe is concerned, I’m happy to say that all plants are running and people are more and more back into the office. In China, it’s 100%. In Europe, we are gradually coming from 20% going to 30%, 40%, 50% and a little above right now. So we find our new normality and have returned to our standard shift model now also in Europe. Of course, we have increased our hygienic high standards more and more over the last several months and keep, of course, social distancing in place in some areas, especially where we have production for automotive industry. We have short time work in place. All in all, this is in Germany, a modest amount of roughly 600 people. And we can clearly say now after a few months, that China is currently leading the demand recovery. In the second quarter, we still had somewhat 75%, 80% of activity. And month by month, this moves up more to normality, in some cases, even reaching previous year’s level. In Europe, this is yet to come, and we will see when this will happen. And of course, other regions like India and Brazil, notably, are far away from this trading level yet.

Home office is something we have experienced afresh. We learned out of it that this is something where productivity can be maintained at high levels. We keep home office in place, of course. But as I said before, China is back into the office. And in Europe, we are basically around this 40%, 50%, 60%, depending on which country you are looking at. The cost containment measures we announced in March have been swiftly implemented. So we benefited basically from these €15 million reductions that we announced and respectively reduced costs already in the second quarter. And this is going to continue, of course, and kept in place in Q3 and Q4 as well.

With this, ladies and gentlemen, let me move to the strategic moves. We have implemented one in a few weeks ago in July and the second one now as of yesterday evening. As a matter of fact, we negotiated here over the last several months and came to a conclusion yesterday night and are happy to communicate to you that we have executed on what we’ve stated in the last Capital Markets Day events, where I flagged that the business unit Leather consisting out of a chrome chemicals, chrome ore mine and organic leather chemicals will be addressed. The chrome value chain, we have already executed or in the process of executing the closing. And yesterday, we signed a binding agreement with basically the second player in the markets, TFL, which stands for Together For Leather. We have been, over the last few years, player number three. The industry is in the process of consolidating this number one player in place, who is clearly leading the pack, and with a combination of TFL and LANXESS, I think a second powerful player is going to emerge. So it makes a lot of strategic sense. Whilst it doesn’t, organic leather chemistry was not really fitting to our portfolio anymore because of the fact that we specialize on faster-growing specialty businesses that are structurally in a different league, and for that very reason, we have decided to exit it. As far as financials are concerned, €80 million will be paid in cash, kind of equity value. Around about €25 million of financial burdens, liabilities, majority is pension, are going to be moved over as well. And we have earn-out mechanisms in place that could, at best, lead to €115 million incremental purchase price, closing to be expected by mid ‘21.

Further financials on Page #7, I have seen that from this year onwards, when we decided to report leather as discontinued operations, I have basically not seen any value in your models, the analyst models associated to the leather chemicals business at all. So I think this is a value transaction. Let me give you some backup information, the organic leather chemicals. We post this year around about €150 million of sales with around about €10 million of EBITDA. As indicated, enterprise value at closing will be around about €115 – sorry, €105 million being made up of €80 million cash payment for the purchase price and €25 million of debt. And we will see over the next 3 to 5 years how much incremental value through the earn-out optionality will be in the bank accounts of our company. As leather has had legal entity sites representation, sales reps admin people around the world, we are going to have remnant costs incurred in course of ‘21 and ‘22, and then of course, we will address them one by one, but this will linger in the P&L for this mentioned time periods.

On Page #8, we give indication on the water chemistry that we have in our Consumer Protection division. I flagged here in the last Capital Market Day event as well that we do like ion exchange resins. It’s a business where we take one of the leading positions worldwide. Here, growth rates have been sound, strategic drivers, like enforced regulation on recycling industry-used water more and more are benign. So here, we like at the business trends. We like the market position. We like the technology advantage that we have. Our capacities are tight. And for that very reason and due to the accelerating trends for our products, we are now analyzing where to build another world-scale plant. This would take some time. Investments will be between €80 million and €120 million, spread over around about 2.5, 3 years. The decision on where we are going to build this plant is yet to come. But we are excited to basically, here, service the biotechnology industry, the battery technology industry, but also the semiconductor industry.

So whilst we are going to strengthen our position in ion exchange resins, we are going to say goodbye to our membranes business. I think we found a good home that is SUEZ, a world’s reputed technology leader, also with deep understanding in water technology. They are going to take over the business, which, for us, was loss-making and round about generating round about of €20 million of sales. Unfortunately, we will have an impairment of €20 million, which is in the books of Q2 already reflected. Closing here is expected end of 2020. And with this, you see that the portfolio transformation of our company continues despite corona, and we are happy that we could execute on these 2 projects, which we announced, give and take, 9 months ago, and are happy that we can announce that to our shareholders and interested parties.

Page #9, I turn the attention to our AGM. I hope that all of our existing shareholders will register and vote and give feedback to the recommendations that we do on the AGM. And one of the recommendations is that we stick to our dividend policies and even increase our dividend versus previous year despite current hard economic recessionary times. So also on the dividend policy, day by day, year-by-year, we want to deliver on our promise.

On Page #10, we provide the guidance, the new guidance – sorry, the old guidance, we confirm the old outlook. Economic view has not really changed. Government stimuli from our point of view are going gradually to kick in. In Germany government stimuli has started in third quarter. In European Union, it’s yet to come and yet to be implemented. So our view in LANXESS is that step-by-step, government stimuli are going to kick in and support economic trading. Outlook on our sites, we confirm the guidance we have provided in last quarter, i.e. €800 to €900 million EBITDA. And on Q3, we see that from very low level in Q2, gradually, improvements also in utilization. But it’s only a very gradual improvement of round about 1, 2 percentage points month after month moving up. And so we don’t expect a steep increase in business momentum. But we see business momentum wise, at least now month-on-month, always little incremental improvements. I think my team has already taken calls from investors and analysts.

So we have conveyed that in second quarter, we had some support coming from raw being in the magnitude of €10 million. We’ve indicated already at the beginning of the year that we will have a major standstill, which is basically happening all the 3 years in Antwerp, and this is the year where the maintenance, turnaround maintenance is going to happen in one of our biggest sites in HPM, which will lead to idle costs in the neighborhood of €10 million to €20 million. And of course, this will be something hitting third quarter. And we have flagged as well that as far as Consumer Protection is concerned, with a fantastic second quarter with volume increase, which was somewhat abnormal due to this preordering of one customer, you should rather expect that third quarter will be on par with previous year. But overall, if you look at the yearly performance, Consumer Protection will grow and will shine with strong momentum and strong profitability and margins, as well as EBITDA.

And with this, ladies and gentlemen, I close the presentation. And with happiness, Michael and myself with happiness and energy will take all of your questions. Please go ahead.

Question-and-Answer Session

Operator

[Operator Instructions] The first question is from Matthew Yates, Bank of America. Your line is now open.

Matthew Yates

Hi, good afternoon everyone. And I think I was one of those people that didn’t value your leather business very much, Matthias. So that was a good bit of news. I have a couple of questions about the trajectory into Q3. Firstly, on Engineering Materials, I think your volumes were down 24% in Q2, which is pretty respectable against global car production that was probably down 50% to 70%. So I just wondered, to what extent does that mean there’s a lot of inventory already in the channel or were you overproducing at your own sites ahead of the planned maintenance that you referenced? I am just trying to get a sense of the shape of recovery you are seeing in Engineering Materials in the second half? The second question, which you touched on in your introductory remarks and that was the Consumer Protection division and as you say quite an abnormal growth rate there. I am just wondering if you can help us disaggregate the impact of that order that was pulled forward? And then in terms of your Disinfectant business, if you can just give us a sense, was there kind of a crazy panic buying in March and April or have volumes been more consistent through the quarter and have remained that way into Q3 so far? Thank you.

Matthias Zachert

Matthew, very valid questions. And let me take them one by one. You are totally right, if you look into the automotive industry in second quarter, I have never seen in my life before, not even in Lehman times, declines of volumes between 50% to 70%, depending on which month you look at. So this is really a drastic decline in – it has been a drastic decline in Europe. And if you look at this decline from the other sites, you have to say that there are – there were still enough inventories on the site of the automotive producer. Because no automotive producer was assuming that, in Europe at least, volumes could decline that significantly. But we see now that measures were taken by the OEM producers, by the suppliers to the OEMs. They drastically reduced mothballed plants. We are sending people into short labor. And now gradually, they are moving up. We have to look if August is going to be impacted or not. But basically, I would say, everybody had stocks on hand. We were also reducing production but in second quarter, we kept reasonably the production still in place because in one area we, of course, are preparing for the planned maintenance and turnaround in Antwerp. So we could have stocked down more, but didn’t, for the reason of producing goods for the plant maintenance. But all in all, even if you would adjust for that, we were not falling as drastically as the automotive industry was falling. And I think that speaks for the value chain we have put in place, which in itself, is pretty strong and powerful. Now as far as Consumer Protection is concerned and your question on what was the incremental take or incremental inflow that we had, it was in the low teens. So if you adjust that, you would see that second quarter Consumer Protection performance will still be very strong. But of course, the EBITDA in the low teens, you basically need to take that off the normal growth we would have had in Q3 and Q4. Business performance of biocides, I mean, it was strong last year. There was no substantial onetime increase in second quarter. The biocides business will continue with its growth rates in third and fourth quarter from everything that we see. So the business is nicely positioned for growth. But of course, the incremental momentum that we saw in Saltigo in the second quarter will be reduced in third quarter and fourth quarter, and that will eat up, of course, then the growth that we see in the biocides. Water chemistry is going to maintain a good momentum. So that’s the reason why we look at the Consumer Protection business with delight for 2020. It will be from a margin perspective, from the absolute growth perspective, the best-performing segment in our portfolio.

Matthew Yates

Thanks for taking the questions.

Matthias Zachert

Always welcome, Matthew. Next question please.

Operator

The next question is from Thomas Wrigglesworth, Citi. Your line is now open.

Thomas Wrigglesworth

Matthias, Michael, thank you very much for the presentation. A couple of questions if I may. Firstly, I think in the first quarter, you talked about preparing for a potential period of 2 years but a willingness to consider M&A towards the end of this year. Is there anything that’s changed that, either made you more positive or negative around that kind of earlier statement? Any detail there? Secondly, on Specialty Additives, can you give us some of the later data points on that business? How that might recover through the second half and into 2021? And any guidance there would be very helpful? And thirdly, just a point of clarification, cost savings, did I hear you say that you had €50 million of cost savings in the first half and are we – are you still targeting €50 million to €100 million for the full year for 2020? Thank you.

Matthias Zachert

Tom thanks for your questions. So let me take them one by one. As far as the 2 years’ tough trading environment is concerned, we are still looking at this in the same way, even though I clearly would like to say macro economists are expecting a rebound. I assume that this is likely because of the government stimuli being passed by now. When we gave indications on how we look at 2020 and 2021, of course, not all governments had decided on respective stimuli. And now the €750 billion of government stimuli are to be implemented in Europe as well. My assumption is this will not be really visible this year, but it will be visible next year. So most likely, 2021, we are going to see a rebound in the European economy. But for 2020, I think it will be, all in all, one of the toughest recessions we have ever seen. So we are prepared for that. And I think we are maneuvering through this crisis in a decent way with strong financials and a reasonable, resilient financial performance at group level. M&A, we will reassess. We are not positioned to maintain good investments in place on CapEx, but also on M&A side, and we will more and more open up to M&A, the more we see that the economy is stabilizing, trading is stabilizing, business is stabilizing.

Now on your second question regarding Additives. Well, Additives has been hit predominantly in the Rhein Chemie additives business due to the automotive exposure. The lube adds have been hit by the aviation industry, which is the highest margin lube adds in our portfolio. And of course, the roundabout €120 million, €130 million of additives going to the automotive industry were suffering as well. The so-called PLA business, which is the brominated and phosphorus flame retardants and plastic additives, overall, did reasonably well. But of course, construction and electronic industry was suffering as well. We assume that in the third quarter, the decline on profitability will somewhat be the same, as you have seen in the second quarter, and then it should stabilize. We basically look at the fourth quarter in a way where we will see less decline from a percentage point of view because we will, here, face easier comparable base, one reason. Second, we think that also the underlying industry demand is going to improve and might, in some countries, even accelerate due to government stimuli. Now on the cost savings, Michael will answer this question. I would look at this implicitly the €50 million we have put in place. Nothing more has been announced so far. The €50 million we have put in place we implemented basically instantly in March as we had prepared for a recessionary environment already last year. And I would slice that into 3 pieces, one-third, one-third, one-third, coming quarter-on-quarter, Q2, Q3, Q4. And Michael will give you more color on this.

Michael Pontzen

Thank you, Matthias. Hi, Tom always good talking to you and the rest on the phone. Indeed, as Matthias said, we initiated the program. We told you guys that there is additional ideas underdrawn, which we, for the time being keep underdrawn. But we recognized a good one-third of the announced numbers in Q2, and the rest is expected in the Q3 and Q4. The majority of the costs are variable costs. We, as you know – there are travel bans out there. We stopped on certain processes. We brought down costs and that is all fully in place and fully controlled by the organization.

Thomas Wrigglesworth

Thank you very much. Very, very helpful.

Matthias Zachert

Next question please.

Operator

Yes. The next question is from Georgina Iwamoto from Goldman Sachs. Your line is now open.

Georgina Iwamoto

Thank you. Good afternoon, Matthias, good afternoon, Michael, nice to speak to you. And my first question was just a clarification. In your kind of initial presentation, Matthias, I heard you saying that 3Q would be roughly flat year-on-year, and I wasn’t sure if you were referring to group EBITDA or Consumer Protection performance. And then my second question is, if you could give us an idea of the kind of strategic fit of the Saltigo business in the portfolio today. Thanks.

Matthias Zachert

HI. Georgina, well, on your first question, this, of course, relates to Consumer Protection. In third quarter, the group will be down versus previous year. So thanks for clarifying this matter. On your second question, the fit of Saltigo to our company setup, it’s very strong. Saltigo is one of the technology leaders in what it’s doing. It has always been the core of the former Bayer Chemistry. What we have here a technology setup, which is I think, in Europe, at least, unique. If we have a chemical problem in any of our businesses here in LANXESS, Saltigo is the place to go to. And therefore, if it relates to precursors in the biocides business, we get the teams from Saltigo in place as it relates to sophisticated chemistry and other parts of our portfolio here going into the Additives division, for instance, and even in intermediates. We cooperate between intermediates and Saltigo. So there’s no doubt that Saltigo is going to remain a core pillar, a core element in our overall portfolio.

Georgina Iwamoto

Okay, that’s very helpful. Thank you.

Matthias Zachert

You are most welcome. Next question please.

Operator

The next question is a question is from Samuel Weber, SW Kapital. Your line is now open.

Samuel Weber

Hi, first of all congratulations on your great management in tough times and also on the perfect timing of your CURRENTA sales. And I think there could have been a better timing for a cash injection than now. So my question relates to your definition of free cash flow generation. You achieved your target of at least 60% in this quarter. And however, when defining this target, you base it on EBITDA pre exceptionals. And I wanted to ask you, is there a time in the near future when this cash conversion pre exceptionals will equal the cash conversion after exceptionals? That’s my first question. The other one is why do you consider expenses for digitalization as exceptional items? Does that have to do with CheMondis? And is there any news regarding CheMondis? Thank you.

Matthias Zachert

Well, dear Samuel, thank you for your respective questions. I think you have totally right on the CURRENTA divestiture. When we did that in September, we are not aware that a worldwide century recession would hit our nice blue planet. But in this time, posting a capital gain of €800 million and a cash intake of an amount similar to this is, of course, greatly, nicely taken. And so we are – for that very reason, of course, in an outstanding setup. I think the leather chemical business is also a nice incremental value because it was un-leasing hidden reserve because it was more taken by anybody as a value driver. So I hope that this is another nice surprise to your eyes. Now as far as the definition of cash flow is concerned. I have always learned one thing in my more than 20 years in this industry: be consistent in your targets that you give to the internal organization and to the external world. Because then, your teams and your organization will understand and follow. If you want that your entire workforce of 14,000, 15,000 people understand, you have to be simple in your definitions. This means that you cannot be that sophisticated, as most of you are in the financial world. My people, if shift worker, a sales rep, my people understand what EBITDA is. And my people understand what CapEx is. So this is a very simplistic definition of cash conversion. But everybody in our group understands that. And everybody understands what we want to achieve with this target. So when I spread out to you, to the sophisticated financial world, a cash conversion targets, for you, it might be too simplistic. Of course, Michael and his team follow more sophisticated analysis. But in order to be in sync internally, and to the external world, it needs to be – this needs to be definitions that everybody understands.

Now on exceptional digitization, of course, CheMondis is part of this. We have decided to do this. If we want to do innovation on digitization faster than other companies, and CheMondis is definitely more and more the leading platform in the chemical industry. Still early stages, it still needs to develop. But I think in the second half of this year, we will most likely with Q3 or November, December time round, we will give an update on CheMondis, where it stands. It has developed nicely. Functionalities have developed nicely. You can test and check it. Go to the Internet. Punch in CheMondis and you will access the platform. And as customer, more and more customers have used CheMondis in the times of corona. And therefore, we are happy that we are present at a time where digitalization is going to kick into the entire industry, but also as far as go-to-market place is concerned and therefore more to come in due course.

Samuel Weber

Thank you.

Operator

The next question is from Andreas Heine…

Matthias Zachert

If I may, if I may.

Operator

Sorry.

Matthias Zachert

I hope that all of you have seen – you are one of the persons following our cash flow. I hope all of you have seen that the operational cash flow, entire first half 2020, has been very strong. Next question please.

Operator

The next question is from Andreas Heine, MainFirst. Your line is now open.

Andreas Heine

Yes. I would like to come back to the comments you have given on core trade. I would like to refer to this quarter-on-quarter trend. So you refer to the €10 million raw mat you have as a tailwind and potential €20 million maintenance shutdown, which we have to have in mind for Q3, and the preorders you had, early orders in Saltigo. If I take this sequential view, then usually, Q3 is seasonally weaker, which means this year runs against recovery from the lockdown. But I would assume that these extra factors you said is something what means that Q-on-Q, Q2 to Q3 leads to by roughly this amount, lower earnings? And then, going into what your guidance is for the full year, where you usually feel most happy with the mid-range, so €50 million, which is also where the consensus is. If I do the math, then Q4 has to get rather close to what you had last year. Could you comment on these two please?

Matthias Zachert

Andreas, thank you for your question. In principle, your assumptions are right. We told you guys that in Q3, we expect an improvement in business momentum without now seeing a true pickup. Nevertheless, we gave you indications, be it – and you referred to it on Saltigo, on the raw materials, what you might also have in mind, maybe an effect from currency. It’s a question where the U.S. dollar will be in the remainder of the year, if it stays at €1.17, €1.18 that will have an effect. But clearly, the trend should be in favor on a sequential basis. That means that the difference on an operational level to which we will be short, will be and should be smaller in Q4 versus previous year than it is and will be and expected to be in the third quarter.

Andreas Heine

And that is in absolute terms and then relative terms?

Matthias Zachert

Yes. So we are not going to see in third quarter – we’re not going to be back to happy times. So Q3 trading last year, the world was already in a difficult economic environment, as but Q3 this year, we will still see that automotive industry is heavily impacted. We would see that aviation industry is heavily impacted versus previous year. And oil and gas are, compared to last year, heavily impacted. If we see an incremental improvement of 1 or 2 percentage points on utilization versus Q2, that doesn’t mean that the world will be back to order. And then let’s look into August. August is a decisive month. I do assume that in the automotive production value chain, some of the producers with go for prolonged shutdowns, as they have done in Lehman times, in order to simply destock their value chain. And therefore, let’s be prepared still for a tough quarter in third – in this third quarter. But my – again, I reiterate my belief is that fourth quarter, the relative decline versus previous year would soften out and I hope then that we will see further improvements in the year to come. But it’s early stages. Corona has brought a lot of surprises. And therefore, our approach here in LANXESS is run operations tightly, keep the fire power and accelerate afterwards. So that is our approach. And so far, it has worked well. Next question please.

Operator

The next question is from Martin Roediger, Kepler Cheuvreux. Your line is now open.

Martin Roediger

Thanks. I have just three little questions. One is on the disposal of organic leather. As far as I understand, the market is already consolidated. You mentioned the strong 1 player. And you mentioned that 2 and 3 player come together, but what makes you confident that antitrust authorities will agree on that deal? Second question is on the underlying tax rate in the P&L. When you take out the items, disposal gains from CURRENTA and the tax payment for CURRENTA, what was the underlying tax rate? Was it 28% or different? And thirdly, can you remind us about your hedging policy? I think it’s primarily dollar related. Is that like in the past this 12 to 18 months forward hedges? Or is there any difference compared to the past? Thanks.

Matthias Zachert

Yes. I would take – hello, Martin. I will take OLC, leather question, and our CFO, who is, of course, a tax expert and hedging expert, will take two and three. These are two complicated matters for me. On organic leather, well the 1 is clearly having, here, market share, which is pretty strong. Two and three, we have analyzed the market configuration. The analysis that we have made brought – came to the conclusion that we can do this transaction. And basically, we are not in the area of sales in the €1 billion area. We are in the area of combining a €200 million sales business with €150 million, €160 million. So from the analysis so far, we consider that there is no legal hurdle. But of course, antitrust authorities have to make the call. And we will do here all preparatory work to provide information. But of course, we have to see what antitrust authorities would say. The experts, the legal experts, internal, external legal experts, we consulted on these transactions have seen that there are no complications. Michael, run the show on taxes and hedging.

Michael Pontzen

Yes, two of my most beloved topics.

Matthias Zachert

I hope so.

Michael Pontzen

Absolutely. Martin, yes, the underlying tax rate is in the ballpark of 28%. That is absolutely right. And with regards to the hedging approach, we still stick to the approach which the former CFO or the first CFO of this company implemented at one point in time.

Matthias Zachert

Don’t make jokes.

Michael Pontzen

Which is a very good one. So yes, we are still on a rolling approach, yes, on a quarterly basis. We are putting hedges in place, which have – which include a forward curve, which goes into 1.5 years or 18 months ahead of time.

Martin Roediger

Okay thanks.

Matthias Zachert

Welcome. Next question please.

Operator

The next question is from Patrick Rafaisz with UBS. Your line is now open.

Patrick Rafaisz

Thank you and good afternoon everyone. Three questions for me, please. The first is on the cost savings. And you talked about the variable nature also in those €50 million. And if we assume that the economy bounces back in 2021, as you mentioned as possible, how much of these savings you reckon would reverse again? And the second question is maybe for Michael, on working capital, pretty big swings here on the various line items, for example, receivables. How should we think about this in Q3 and Q4 2020 as a whole? And the last one, on the lithium from brine project, I realize that Q1, you said it can’t really move forward with the project in the environment. There is COVID restrictions, etcetera. You think there’s a chance to be starting to look at this more closely again pretty soon or is there more something for 2021 and beyond? Thanks.

Matthias Zachert

Well, I would take the first and the third question. Michael will take the second on the working capital. So as far as cost savings are concerned, the variable cost savings we have put in place are basically from Q2 onwards, decisions were made mid-March this year, are reducing projects. Of course, no traveling basically anymore, freezing budgets in the entire organization that were due to be spent on initiatives. Now should we rebound next year, I would say quite a chunk of this is going to move back into the business, into the functions. But of course, if you look into, for instance, the traveling costs, which we have reduced now versus previous year or which we plan to reduce by something like €50 million, this will not rebound. I don’t think that 2021, we are going to travel as we did in historic times. But of course, we would, again, go back to projects we wanted to do that we basically have stopped in order to optimize cash and keep costs under control. The one thing I would also like to say, we deliberately not adjusted our potential for growth. We have clearly stated in our calls in beginning of the year, especially in Q1 call, we have not cut capacities yet. We have not impaired our potential to further growth. We might do this if we see that industries are going to be impaired for a longer period of time. But at this point in time, we kept the company clearly in the position to accelerate when it is time for acceleration. So this is on the first question.

On the third question, lithium by now, we have extracted out of our pilot plants lithium. But we are not there yet to confirm proof of concepts. Why? We have extracted lithium chloride. Lithium chloride, in order to be usable in battery technology, needs then a certain crystallization to come to lithium carbonates. The crystallization unit is still in Canada because borders are locked down and it can only marry with our pilot plants once borders are open. We assume this is to come in the next few months. And then, of course, we need to do the full processing. And therefore, our hope is that by end of the year, all of this will be put together, and the entire process is up and running and has been tested then for around about two months, three months. If this is the case, we can see if we get where we want to be. But due to corona, certain things are simply not as seamless as we thought they would be because closed borders, no traveling by engineers, leads to simply a delay in the proof of concepts. And with this, I hand over to Michael, working capital, another CFO topic.

Michael Pontzen

Patrick thanks for your question as there is a usual seasonality in the cash movements coming from our working capital. Usually, we have cash outflow in the first quarter. Then in the second and third quarter, relatively stable movements, some up and down and then in the fourth quarter, again, a release or a cash in from working capital, when I say so, then I am talking about normal times and normal patterns. And what we saw now in the second quarter, especially when it comes to the receivables, there was a huge swing. But if you recall, when we discussed Q1, we said end of Q1, end of March, we were still in a trading environment which was not too bad. If you recall, in the first quarter, prices were down only 2%, and volumes were down only 1%. But then, we saw the massive decline already in the raw material prices. And at that point in time, I told you, we see it already in the payables in the first quarter. This is why payables didn’t move that much. Now we are in a position that we knock down and receivables went down dramatically, why we had a high inflow of cash in the second quarter. When we look into inventories, you see an uptick in the second quarter, which is as well kind of usual pattern. And Matthias was referring to it. There are especially an uptick in inventories at HPM because we are in about to get into our large maintenance, plant maintenance turnaround. So to cut a long story short, in principle, I would still expect the usual pattern, which we saw in the past years, that there should be, especially in the fourth quarter, again, coming cash inflow. But as Matthias mentioned earlier as well, like we did in the past couple of few quarters, there is a very high attention on the cash-generating ability of this company.

Matthias Zachert

Let me add, Patrick, on the explanation that Michael has given. You saw in the second quarter very strong inflow on receivables. Well, in crisis times, sales force has to collect its receivables before others are in a difficult situation. So again, this is a learning out of Lehman, collect receivables before others are collecting them. And I think this was a really strong operational performance by our sales teams. And therefore, so far, touch wood, we have had no issue in any outstanding invoice that we have sent. And so I think the team here around the globe did an excellent job. Of course, you will not see the same kind of inflow in receivables in the next few quarters because we have done our jobs so far. Next question please.

Operator

Your next question is from Markus Mayer with Baader Bank. Your line is now open.

Markus Mayer

Hi good afternoon gentlemen. I have three questions, if I may. You elaborated on the sales and EBITDA forecast for organic leather chemicals for 2020. But I guess, due to the automotive exposure, there was also – there’s also a significant effect applied to this kind of numbers. So could you help us on the sales and EBITDA of 2018 or 2019 or kind of 5 years average? That would be helpful. Also for modeling purposes and secondly, on the – you said you expect pronounced summer lull for the automotive industry in Europe. Have you seen this already at this time or if your customers already mirrored this already, as it looks like that at least in China, this recovery in the automotive industry is still in full swing? And then the last question would be on the Specialty Additives business. Was there also inventory devaluation effect in the Specialty Additives business as I guess with this sharp volume drop also prices might have come down. And with this, you might have had this effect in this division? Thank you.

Matthias Zachert

Yes, thank you for your questions. Now on the first one, over the OLC in ‘19 was around about €30 million ion sales. And I’m not precisely – way of the EBITDA, where it was, but I think if you add something like €10 million, you will be in the right corner. We, from our side, don’t see that the ‘19 result, which was not the strongest one. But overall, OLC performed relatively stable. So we don’t see that the automotive industry will come back to 2019 in the next two to three years. So I don’t think that a rebound here will be coming soon. Now as far as summer momentum is concerned, I fully confirm what you have said on China. China, I – what we are seeing will go smooth through the summer break. Europe, I am still assessing. They are here and there some positive signs here and there’s some negative signs. I don’t make a call on August trading yet. Now on raw materials, inventory reevaluations, these times are gone. That was rubber, and all in all, evaluations or valuations on raw materials don’t lead to the big swings in any of our segments. And therefore, there’s no one-off impact that was there in Specialty Additives in the second quarter.

Markus Mayer

Okay, very helpful. Thank you.

Matthias Zachert

You are welcome. Next question please.

Operator

The next question is from Peter Spengler, DZ Bank. Your line is now open.

Peter Spengler

Thank you. Good afternoon. There is one question left. If I remember correctly, you said in the Q1 conference call that the midpoint of the guidance for Q2 was possible, but for reasons of caution, you would recommend tackling the lower end of the estimates. So now the midpoint of the forecast in Q2 has been reached, how can we now see the forecast for the full year?

Matthias Zachert

Yes, a valid question. The guidance is the guidance, €800 million to €900 million. And I think in current times where we still – I mean, ladies and gentlemen, we are still fully in the pandemic crisis. Worldwide, we still an acceleration on infections. In Europe, we are seeing that – even in Germany that did reasonably well so far over the last four to five months, we see that infections are increasing. So I urge everybody, I urge everybody, remain cautious. Remain focused on the business, remain focused on hygienic and remain focused on corona. Then you – then we will all manage this crisis well. And if I can give you an advice, I mean, the guidance is the guidance that we have provided. I would give you the same advice as I’ve given last time. And that means be rather in the lower end than in the mid or upper end. We will do our best to manage through 2020. But in current economic environments, in current pandemic crisis, I think all of us have to be cautious. All of us have to be alerted. When it’s time to accelerate, we are in the position to accelerate. So far, it’s time to focus and manage the business tightly whilst keeping, of course, open eyes for strategic moves and opportunities.

Peter Spengler

Thank you very much.

Matthias Zachert

You are most welcome.

Operator

The next question is from Chetan Udeshi, JPMorgan. Your line is now open.

Chetan Udeshi

Just coming back to – and firstly, thank you for giving us the color on the impact from pre-buying in Saltigo in second quarter. Underlying except pre-buying, can you give us some color on how the agro business is doing in general, outside of that one customer contract? Are the trends stable, improving or down year-on-year? That would be sort of useful. And just the second question was just to clarify, the HPM shutdown in third quarter. Is this one of those big multiyear shutdowns, which means that next year, we shouldn’t have similar impact on earnings? Thank you

Matthias Zachert

Well, thank you for your questions. On ag – agro business, I would say it’s, versus previous year, stable to slightly improving. We don’t see a rebound, a strong rebound, in the ag business yet. But I would say it’s – if you look at this conservatively stable, the answer is stable. If you’re giving it a little positive spin, it would be slight improvements. So this is how we look at the ag industry. The ag industry has not yet rebounded and gone up to a cyclical positive momentum. This is yet to come. This will happen one day because this is ag cycle that I’ve seen over the last 20, 25 years. But so far, if you look into prices of corn and soya, etcetera, they are not back to happy days. And as a consequence, farmers are not yet investing as they used to do in high-quality crop protection products. Now on the second question, you are totally right. This is a multiyear turnaround. It happens, in general, every 3 years 3.5 years. The last one we did was basically 2017, also in the second half of the year. It left, at that point in time, I think, to something like €16, €17 million idle costs. And therefore, please understand that we have given therefore the indication of €10 to €20 million. Once this turnaround has been done, everything is spic and span you are not going to be bothered with this, hopefully, for the next three years.

Chetan Udeshi

Thank you.

Matthias Zachert

You are most welcome.

Operator

There are no further questions at this time. I hand back to our presenters for some closing comments.

Matthias Zachert

Well, I wish you then hopefully a good summer and have a fantastic time. We will do virtual road shows all over the place, starting from tomorrow onwards. I’m delighted, together with my team and Michael, to do this and to see you in a virtual way, better than nothing. And I hope that we would see days when physical one-on-ones will be possible again. And with this, stay healthy, all the best and stay tuned. Bye-bye from Cologne, bye-bye from LANXESS.

Operator

Ladies and gentlemen, thank you for your attendance. This concludes LANXESS conference call. Goodbye.

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