LANXESS Aktiengesellschaft (OTCPK:LNXSF) Q3 2022 Earnings Conference Call November 9, 2022 4:00 AM ET
Company Participants
Claus Zemke – IR
Matthias Zachert – CEO
Conference Call Participants
Annette Becker – Borsen-Zeitung
Bert-Friedrich Frondhoff – Handelsblatt
Patricia Weiss – Reuters
Andrew Noel – Chemical ESG
Tom Brown – ICIS
Operator
Ladies and gentlemen, cordial welcome to the press conference of LANXESS. This conference is being recorded. Following the presentation, you have the possibility to ask questions via telephone. [Operator Instructions]
Claus Zemke, Head of Corporate Communications, will start the conference.
Claus Zemke
Good morning, colleagues. Our greetings from the LANXESS tower. And we will now have our press conference, and we have Matthias Zachert, CEO; and Michael Pontzen, CFO, with us, and we will listen to the presentation and then will be available for your questions.
So Mr. Zachert, the floor is yours.
Matthias Zachert
Thank you, Mr. Zemke. Ladies and gentlemen, cordial welcome on the occasion of our Q3 press conference. We’ve got a lot to report. So we will start with Page 3 of our presentation. So this is a stable quarter despite the headwind which we have been experiencing for a couple of weeks now.
So we have been able to increase our earnings and the new businesses have made important and positive contributions, and at the same time, it has been possible for us to pass on increased energy and raw material costs successfully. And we focused on our new activities together with Advent when it comes to the engineering materials, high performance materials. And here, we have achieved a lot with the different teams. And when it comes to our guidance, we will stay within the guided range.
Now let me drill deeper. Slide 4. Here, you see sales, plus almost 40%. This goes to show that we have got a very strong portfolio, and we have been able to pass on cost EBITDA third quarter, again, a slight increase year-on-year. And again, this is not what you would normally see in the chemical industry this year. And we have been able to increase our net income. But of course, we have to include these one-off events that we had.
Now next slide. On the price side, you see that we have been able to use our leading market position, so that it was possible for us to pass on cost. When it comes to currencies, we can say that we had beneficial exchange rate effects, mainly because of the U.S. dollar portfolio. The acquisitions made important contributions. And there is, nevertheless, some concern when it comes to volumes. The industry does no longer grow.
And we see in the third quarter, we are talking about a transitional period where there is a slowing of business activities. And we are still being stable, but we proceed on the assumption that we will have tough times ahead of us, and this is true for the entire German economy and also the industry of Germany.
Now ladies and gentlemen, let us talk about the individual segments. Specialty Additives, Slide 6. Plus 31% sales increase. EBITDA substantial increase by almost 20%. And here, of course, we see the advantageous situation on account of our market position. But the fact that we’ve got a strong focus on the U.S. came our way as well.
A couple of years ago, we stepped up our activities in the U.S., and we’ve got very productive sites in America, which, of course, now feel international competition, but site conditions are very favorable in America. There are favorable energy prices in the U.S. And that, of course, is very good for our earnings. And competitors have got different problems on account of them not having any sites in the U.S. and that means that we prevail.
We see that also in the Intermediates segment. We’ve got two business units that is Advanced Intermediates and also Inorganic Pigments and one being located in Leverkusen, the other in Roding. And in the two businesses, we do feel the pinch, on the one hand because there is too much red tape in Europe interfering with the industry in Europe, and then also the burden that we feel on account of the rise in energy prices. And despite our efforts to pass on prices, we feel that there is an earnings erosion.
Against this backdrop, we stay alert when it comes to spending money. And our investment will only be focused on maintaining our competitiveness. But as long as we are faced with a situation as we see it today, we will not expand our spending activities. And we just hope that Europe and Germany will change their attitudes in order to make it more attractive for us to actually go for investments, CapEx projects here in Europe and Germany.
And then Slide 8, consumer protection, so sales and EBITDA. The acquisition of the past has paid off, and we are one of the leading actors in all the different geographies all over the world. In this segment, it has become one of the leading segments in the group portfolio. And in one or two years, we feel that this segment will support the leading position of LANXESS.
Slide 9, sustainability. Again, strong activities here. For example, the first sustainable ion exchange resins for water filters. And then we have got a program where there are bio-based precursors being used and the CO2 footprint is to be reduced step by step. And this comes under the Scopeblue product range, sustainability range as we call it in-house. And this will help us with the Scope 3 targets.
And we have made a lot of headway in this respect. And therefore, NGO SBTi organization has confirmed that we have got a very aggressive target, a true stretch target and have a Paris COP21 climate path 1.5. And that means we are one of the very few, particularly in the chemical industry, that gives us this recognition. And we want to achieve this by 2030, reduction, climate neutrality on the basis of successive use of renewable raw materials, logistics is to become green. And of course, we want to have climate neutral products across the board.
Slide 10 gives you the external rating based on sustainability studies and assessments, and in the capital market, it is the MSCI index that has become very renowned. And in 2018, we also established very ambitious goals and implemented them year-after-year, and this can be seen on this slide, but also in the annual report in detail. We have achieved substantial improvements in the ratings with AA now and MSCI really appreciated explicitly that when it comes to reducing emissions, we are clearly faster than the industry average.
And when it comes to toxic emissions and waste, not only did we establish ambitious targets, but we are also rather fast. Also with water stress, we have our objectives phrased very clearly, and corporate governance is also appreciated because we have clear processes and targets. And that is the case for our group worldwide. So we are among the first three chemical companies in the world. And we are very happy that we are considered so progressive.
Next slide. We are preparing for stormy times in view of what you are reading in your papers. This is what needs to be done and we are well prepared. The LANXESS leadership team is crisis proven, and we know what needs to be done. And some months ago, we already established liquidity of EUR1.8 billion of undrawn credit facilities. And that is our safety net and it’s never a mistake.
In crisis, you need to be liquid. We are very disciplined when it comes to spending, and we have made prioritization in production and we reprioritized should there be a volume reduction, we will be flexible in adjusting our production. We did so in the past, and we will continue to do so in this present situation and also in the future in case 2023 should see a recession.
And also looking at the gas shortage situation, we were the first in the chemical industry that already established a contingency plan as of quarter one. And this was prepared operationally and also narrowed down with the individual operations. And having said all that, I think we can be rather certain that in case of stormy times, just as in the past, LANXESS is well prepared.
Let us look at our specified guidance. We still think that the raw material and energy markets will remain volatile. Consumer demand will be negatively impacted. Based on the inflation trend, we expect the clients to actually reduce their stocks, and so the demand in Q4 will probably be less than in Q3.
But nevertheless, we are very glad that we can remain within our original guidance corridor, but here in the area from EUR900 million to EUR950 million, which is an increase as compared to EUR815 million in 2021. And so a not easy year would be finished on a happy note, but there is still some time to go. So here, we have to be very careful and immediate when controlling the fourth quarter.
Now let us talk about the planned plastics joint venture that we want to bring about with Advent. In the past quarter, we have already implemented a lot, and we’ve also made nominations and restructured the organization. The new CEO is appointed, very well-known in the chemical industry, Calum MacLean, who for many years worked in the chemical industry in leading positions. He used to be CEO with the English Synthomer Group and he knows the business inside out. And so the two shareholders very much appreciate Calum MacLean being the future CEO.
And the top management team was also appointed. We are almost complete now, and it is a good mix of top DSM and top LANXESS people. So we can use the best of two worlds and hopefully, by the end of the year, the carve-out of our business will be finished by the end of the year. And we take it that most probably in the first quarter, we will receive the antitrust approvals needed. Of course, we will stick to announcing it for the first half of 2023, but we think that the approval will be seen sooner, but there are different jurisdictions worldwide and the trend is rather optimistic at the moment. So I presume that in the beginning of 2023, we will be done.
And let me end this presentation with announcing a change in our Board of Management composition. We are so happy to announce today that Frederique van Baarle will become a new member of our Board of Management as of 2023. She will join the LANXESS Board of Management as soon as we will have closed the joint venture with Advent. And she will then hold the position of the Labor Director on the Board of Management. And first of all, she will look at the worldwide HR organization. And after a very well-orchestrated handover, she will then become responsible for the entire region, North and South America, and thus become U.S. President.
On the basis of the extension of our sales, our workforce and the production sites accounting for 30% in the LANXESS Group by now, it is to be reflected the U.S. is a focus area and thus substantially important in the LANXESS Group, and therefore, it is important for us to see that the United States are reindustrialized. And so they will be more of a competition to Europe. And therefore, it is important to have someone on the Board responsible for the Americas, and this will, therefore, be the rationale behind that.
Ms. Van Baarle, who is well experienced in the business, she was Head of Purchasing worldwide at LANXESS, and she was responsible for HPM, and she will be the ideal fit for this position on the Board of Management. And we are really happy to welcome her on the Board of Management now. It was so good to have found her and the Supervisory Board has approved as well. And so today is the day where we can announce this change.
Ladies and gentlemen, you see quite a number of pieces of information we were able to report on the third quarter, and we hope that this has already answered many of your questions. But should there be more, we are now happily opening the ground for your questions. Go ahead.
Question-and-Answer Session
Operator
Ladies and gentlemen, we will now start Q&A. [Operator Instructions] So first question, Annette Becker, Borsen-Zeitung. The line is open.
Annette Becker
Good morning, everybody. I’ve got two questions. First, I’d like to know, the new member of the Executive Board, is that on top? Will we have one more member on the Board? And what is the reason for expanding the Board? And then you mentioned the regional location of LANXESS, but you didn’t make mention of China. So what about China and LANXESS? And are you thinking about withdrawing from China? Or are you on a growth path in China as well?
Matthias Zachert
Ms. Becker two very good questions. As far as the Executive Board is concerned, its composition. I’m very sure that you follow events for you to understand that some people do actually retire. And when you have a look at the competition, you will say that Anno Borkowsky, who is the Regional Head of the Activity, indirectly, Anno Borkowsky, became a member of the Executive Board a couple of years ago. And at the end of 2023, he will retire according to his employment contract.
And this goes to show that we will have something like a transitional period, and this will not be an overnight event, but for one or two quarters, we will have the two working hand in hand. So it is not that we are expanding the board, it is just that we want to have a very well-organized transitional period. And at the end of the year, beginning of January, we will then again have four members on the Board. We some time ago had even five, but we believe that four is exactly the right size for our company, particularly in this position and situation.
China, yes, of course, we do have a presence in China and the plastics business being carved out means that we will have reduced activities in China. Currently, we have no CapEx project to expand our activities in China, because we do understand that in the current situation, we need to be alert as far as China is concerned. I mean, markets are closed, there are restrictions on travel, and therefore, it is no good object to invest into. So expansion investments will not be done in the foreseeable future, only investments to maintain our operations. And I hope that this answers your second question.
Annette Becker
Yes It does.
Matthias Zachert
Next question?
Operator
Jonas Jansen, FAZ.
Jonas Jansen
Good morning. I’d like to come back to the expansion investments. I mean you mentioned that twice Mr. Zachert. Do you have a target figure to understand what you are driving at. And then cresol, that’s the second largest site in the Leverkusen, the largest. But then you said you will only go for maintenance investments.
And then you said 30%, America getting more and more important. So do you believe that this will change, that Germany will only play a junior role? And second question. Would we have needed more investments in Germany. And I mean, you invested into a great silt facility, a 3-digit million amount. But originally, did you have more plans to invest in Germany?
Matthias Zachert
Well, Mr. Jansen. On investments, in the past, on average, we invested EUR150 million to EUR200 million to expand our activities. And this is what we actually did always. And I always said, we zoom in on Germany, we zoom in on North Rhine-Westphalia and on Leverkusen. It was very clear and it was very much in favor of expansion investments here in Germany.
But my feedback sitting here and today following our strategic analyses means that if you have a look at the overall situation, and if you were naive and continue making investments into expansions, you would be ill-advised, it’s just not a good idea given the circumstances that we are faced with. At the end of the day, we need to be competitive, globally speaking. Otherwise, we will burn money. And this is certainly something which we would not like to do.
So we need to tell politicians, we can only stay competitive if site conditions are competitive. And I mean, 30, 40 years ago, these conditions were very good. And that meant that we could offer jobs, but if we are no longer competitive, we cannot increase and maybe not even maintain the number of existing jobs. That simply means that we will have fewer jobs. And I mean, to doctor around with the symptoms cannot be helpful, and other economies try to keep the industry and not to shy industry away.
But over the past couple of months, we were very vocal and said, let’s keep our activities here in Germany, our value creation also in Europe, because otherwise, within the next 15 years, we will not only complain about gas supplies, but also about raw materials and feedstocks, which will then come from other locations in the world and no longer from Germany or Europe. And as long as we don’t have an opportunity to stay competitive here in Germany and Europe, we will have to do something else. And I will defend things, but only to a degree that it makes economic sense. Does that answer the question?
Jonas Jansen
Yes, it does.
Operator
The next question is from Bert-Friedrich Frondhoff, Handelsblatt. Your line is open.
Bert-Friedrich Frondhoff
Good morning. Most questions have already been answered. With the inflationary trends that will be here to stay, how are you going to deal with that? Will you be able to keep increasing your prices and that’s in the months and the year to come. And how are you preparing for the recession? I haven’t really understood the liquidity slide, what is your cost control? And what kind of approach are you taking right now?
Matthias Zachert
Thank you, Mr. Frondhoff. With inflation, as long as there is inflation, we have to pass on higher prices, although it’s going to be more difficult. That is the general trend, quite clearly so. And this is also in the individual businesses. And wherever we have strong market positions, that will be possible, but headwinds will be more stormy most probably. How to counteract recession?
As I said, in periods of recession, the most important thing that you need is liquidity. And we have a back of liquidity amounting to EUR 1.8 billion that we have established in contract terms, i.e., undrawn credit facilities. We don’t think that we need to draw the credit facilities. But honestly, Mr. Frondhoff, we’d rather have too much than too little liquidity. And we already started in March, April, where there were still negative interest rates, and we were able to secure very favorable terms and conditions that you can only dream of today.
So at a very early point in time, I believe we took the right steps. Looking at the cost and investment, there are many projects that we scanned through and those that we did not consider really important, we put them on hold or cancel them, and we postponed or canceled investments. And it was only the priority investments, for example, in sustainability were made, and we are still very strong there, also towards the end of the year.
And yet again, we were able to reduce our CO2 emissions, and that is fantastic. We won’t be saving a single cent when it comes to investing in sustainable investments. The rest is also investments in areas that have no site factors here in Germany. They will be put on hold for as long as we have an environment that cannot ensure our competitiveness. So we believe we are really well prepared. Thank you very much. Next question.
Operator
[Operator Instructions] The next question is from Patricia Weiss, Reuters. Your line is open.
Patricia Weiss
Greetings. I would also like to ask a question concerning the investments to expand the business, EUR 150 million to EUR 200 million were mentioned by you. But where do you want to place the money in the future? Is that already earmarked or will you just wait given the conditions? And did I understand it correctly that you said, given the framework conditions, not only do you look at Advanced Intermediates, but it’s also in Germany?
And second question, you said that you backed a shift of the planned opt-out of the coal-fired plants and you are using this energy in Krefeld and Leverkusen. What’s the present status?
Matthias Zachert
Ms. Weiss, your first question with some kind of secondary question. We will make additional investments next year, whether it will be EUR150 million on average or rather at the lower end of EUR100 million, but we’ll have to wait and see. I think these investments will be made in a reduced fashion. Around about EUR100 million will probably be what we will be ending up with. We will be more careful.
And the second part of your question, your analysis is spot-on, with Advanced Intermediates, we will keep investing worldwide. But in Germany, we will just concentrate on maintenance and on sustainability investments. No enhancement of capacity will be made in Germany. That is a change as compared to our previous strategy and orientation, and I commented on that earlier on. So much to answer your first question.
Second question, substituting coal. We still plan to do that, and we are not the sole actor in this field, but we agree with the other Chempark users as to what to do. We continue to want to go for this replacement, all of us, but it will have to be something that we can only affect over a period of two years to pay tribute to the present situation. But the objective is to reduce CO2 and to reduce the use of fossil fuels is a clear priority with all the partners there and definitely with us as you see with the contracts that we entered into, and it’s also the targets implemented in our global contract. So we are really well on track and ahead and we are sticking to this policy.
Patricia Weiss
May I ask for the time planned, when was the original exit planned? And for how long will you be stretching it?
Matthias Zachert
The window was — if we have called it a window, I don’t even know. Let me look around. Nobody said, no, we didn’t. So okay, I take the position to give you the facts. The original plan was that given the technical approval in 2024, we wanted to switch, and that will probably now be done in 2026. So here, we have this one to two year period that we had to add, as I said beforehand. Okay, next question.
Operator
Thank you very much. We now have our first question from the English channel. One moment. Andrew Noel from Chemical ESG.
Andrew Noel
Hi. Good morning, everyone and thank you for taking my questions. I’ve got three, please. You are 4.5 months into IFF buyer side. And I wanted to ask, are there any new synergies coming to light? You talked about a large network of custom active partners. So I’m wondering if you could bring some of the production of those ingredients in-house to Saltigo, would it make sense to expand LANXESS’ active capacity? That’s the first question.
The second question is on Urethane Systems. It looks like it’s going to be several hundred million euros of loss. Is that what it costs to set this business up as a stand-alone entity? And are you moving ahead with the sale or taking a pause because of all the measures you are taking across the group at the moment?
And then just finally, I looked through the statement for a mention of lithium and the brine to lithium project, I couldn’t see any. Maybe I missed it, but could you give me an update there? I thought with the lithium prices so high, I would have thought I would hear something more about it. Thank you very much.
Matthias Zachert
Well, Mr. Noel, always a great pleasure to have you on the line. Thank you for your international presence and interests. Let me address the questions one by one. As far as IFF is concerned, there are no new synergies that we need to communicate, because we have been pretty clear at the outset of the communication. So the synergies that we assumed at the beginning of the integration, we can confirm.
Underlying wise, the business is fully on track. Synergies most likely will be implemented a little faster. And as far as the production network is concerned, also this is something we have addressed around about 12 months ago in August ’21, and that with a variety of suppliers that we have and contractors that we have, we do have clearly the chance to decide on in-sourcing more because with Saltigo, as you’ve rightly indicated, we have a platform to do the active production ourselves. This will not happen everywhere around the globe with around about 35, 40 suppliers that we have, but it will be implemented with some.
If you change the configuration of the production network, you cannot do that in the first phase of synergies. The first phase of synergies is normally SG&A related, but you do that in the second phase, which is likely to start end of ’23, beginning of ’24. So in the next 12 months, we are fully dedicated on top line and SG&A to get that going.
And afterwards, with all the registration, with the licenses that you need to get and permits by local authorities, that preparatory work will be done in the next 12 months and then you will implement and unleash the synergies then most likely from end of ’23, beginning ’24 onwards, and Saltigo definitely will play a role in this entire configuration.
Now on urethanes, I would like to provide you with more transparency so that you are not here on the wrong track. The urethanes have been taken to our so-called other business segments, formerly known as reconciliation. And reconciliation, we had all our corporate costs and country costs. So this segment was always negative. Now including urethanes into the segments, the EBITDA of urethanes doesn’t suffice to iron out the costs of a global corporate group that has around about EUR 8 million, EUR 9 billion sales.
So don’t conclude out of the negative recon business that is solely due to urethanes, that’s false. Urethanes is a profitable high-margin business. And therefore, it’s no longer so much fitting to the pure chemical value chains that we have as it is a polymer, isocyanate based. And therefore, in the divisions, it does not really have a natural fit. And for that very reason, we’ve taken it under recon, but again, it’s not negative. It’s a clearly profitable business.
Now your last question, lithium, rightly spotted. We have not communicated on this because there is currently no news that needs to be communicated. Standard Lithium is advancing on their feasibility study. Our assumption is that this will be finalized in the first half of next year, and then they will decide on technology, economics, et cetera.
And only then I think we will start to drill it down deep into the technology, analysis results, economic viability at lithium prices, which are mouthwatering, but all of that is due when the feasibility study is finalized, and that normally takes not only a few days, they started beginning of the year, and it will be finished first quarter, second quarter next year. So for the time being, we wait until the results and then we start communicating. I hope, Mr. Noel, that with this, all your questions are answered.
Andrew Noel
That’s great. Thank you for direct English response as well. If I could come back. I know you’ve had a lot going on strategically in portfolio. So just going back to Urethane Systems, do you feel like taking a pause rather than perhaps selling that business. Now is not the right kind of time and there might be a better opportunity sort of six months to one year down the line?
Matthias Zachert
Well, as far as urethanes is concerned, we have enough of work on our plates. I mean the integration of IFF is not yet done. Communication wise, potentially, everybody assumes this is dealt with, but integrating a business takes around about 12 months. The closing was a few months ago. So from third quarter onwards, we started getting our hands around the business. And once you have everything done integration-wise, that would take us, I would say, until end of ’23.
Now the entire organization is extremely busy with putting the polymer joint venture in place. This is a global business. It needs to be globally carved out. This is a lot of work. We also put a lot of time together with Advent into the best configuration of the new organization, management team, how we want to run this global leader, which has to compete with, of course, everybody around the globe because it’s a global competitive industry and market. So we want to take the right decisions here. And this keeps our organization fully busy. So urethanes is not going to be addressed in the one or the other way in 2023. This might come ’24.
Andrew Noel
Thank you very much. Much appreciated.
Matthias Zachert
You are most welcome.
Andrew Noel
Thanks a lot.
Operator
Our next question is from Tom Brown from ICIS. Your line is now open for your question.
Tom Brown
Good morning. Thanks for fitting the call, interesting quarter there. Just on the idea of excessive red tape in Europe or Germany, in particular, I was curious, are you alluding to particular regulations? Is there anything you’d like to see change, things like the Carbon Border Adjustment Mechanism or is it just a general environment in Europe? And secondly, regarding the joint venture with Advent, have these final ownership stakes been decided at this point? Is like LANXESS taking 40%? Thank you.
Matthias Zachert
Well, let me come to the ownership. No, precise percentage terms will be calculated at the time when we close the books. So the current communication stays as it is. And as far as your first question is concerned, the regulation, I mean, you’ve addressed one element, CBAM. We can talk about a few other elements like REACH that has now been postponed or in general, Chemicals Strategy for Sustainability or the overall theme of Fit for 55 for the economy and industry as a whole.
So let’s look at CBAM, I mean, Carbon Border Adjustment Mechanism. In the chemical industry, we have a mechanism that has been implemented for a few decades. It’s the CO2 certificate emission system, ETS. It has led in the last 20 years to the following facts, that the entire industry basically increased their volumes over the last two decades by around about — or since 1990 by around about — volumes increased by around about 60%, while CO2 emissions were reduced by more than 40%.
So the CO2 certificate mechanism was extremely successful. And according to the new ideas of CBAM, the new ministry and organization is going to be introduced — or should be introduced with, I don’t know, thousands of civil servants. The ETS system then consequently, despite its success to be abandoned, and nobody has the faintest idea how CBAM should really work in European context vis-a-vis worldwide trade organization, Americas, China, et cetera.
So this is bureaucratic monsters or communist plan economies have, according to history, failed. So if we think we can run successful models with complete bureaucratic monster organizations, I think we haven’t learned our lesson out of history. And therefore, I see that with clear concern, and I hope that people come back to pragmatism, realism while accelerating on ESG like we and the industry are doing for many years already. I hope that clarifies your question.
Tom Brown
It does. Thank you. [Technical Difficulty]
Claus Zemke
Thank you very much. Unless you haven’t got any more questions, we would like to thank you for your participation. And I just hope that we will very soon meet again in the flash. Have a successful day and greetings from Cologne. Good bye.
Operator
Thank you for participating. This now closes the conference.
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