LANXESS AG (LXS.DE), a global specialty chemicals company, navigated a challenging first quarter of 2024 but showed signs of resilience with increased sales and a positive outlook for the year. CEO Matthias Zachert acknowledged the tough year-on-year comparison for Q1 but was optimistic about volume growth in many industries.
Sales rebounded to €1.6 billion, and the company is on track with its cost-saving initiative and divestment of the Urethane segment. LANXESS aims for a 10% to 20% growth in EBITDA, with sequential improvements expected in the coming quarters. The company also emphasized its focus on cash generation and a balanced approach to working capital.
Key Takeaways
- LANXESS reported increased sales from €1.4 billion in Q4 '23 to €1.6 billion in Q1 '24.
- The FORWARD! initiative for cost savings is fully on track, along with ongoing headcount reductions.
- The company expects EBITDA growth of 10% to 20% for the full year, with sequential improvements.
- A softer Q4 is anticipated due to seasonality.
- The Urethane segment divestment is progressing, with the first round of the process in its final stages.
- Demand for bromine is driven by the construction industry, particularly in China.
- LANXESS is not currently seeking market share but is focusing on their value proposition.
- No updates were provided on the lithium brine project with Standard Lithium.
- The company does not anticipate applying for short labor in Saltigo and expects no major turnarounds or shutdowns.
- Confidence is expressed in the recovery of consumer market segments in upcoming quarters.
Company Outlook
- LANXESS aims to grow EBITDA by 10% to 20% over the full year.
- Expectations for sequential improvements in Q2 and Q3, with a softer Q4 due to seasonality.
- Focus on cash generation and a balanced approach to working capital.
Bearish Highlights
- Q1 faced tough year-on-year comparisons.
- Decline in the agro crop protection space and a volume decline in Consumer Protection, mainly attributed to Saltigo.
Bullish Highlights
- Sales rebounded to €1.6 billion in Q1 from €1.4 billion in Q4 '23.
- The FORWARD! initiative and Urethane segment divestment are on track.
- Increased demand from agrochemical and construction industry customers is expected.
Misses
- No update on the lithium brine project with Standard Lithium.
- Consumer segment not picking up in Q1 due to decline in agro crop protection.
Q&A Highlights
- CEO Matthias Zachert is confident about the company's restructuring programs and the internal morale focused on rebounding.
- The company discussed dynamic pricing and net pricing across their portfolio.
- Expectations for a pickup in Consumer Protection in Q2 and an increase in Saltigo's performance in the second half of the year.
- Potential for a lower tax rate in the future due to U.S. acquisitions.
- Envalior's expected improvement and clarification that brominated and phosphorus flame retardants do not compete with each other.
- Bromine pricing addressed, with derivative prices not necessarily following the spot price.
- Strategy to regain market share through aggressive pricing.
- Contracts in place to pass on fluctuations in raw material and energy costs to customers.
- The company is well-positioned to accelerate in 2024 despite fierce competition in advanced intermediates and inorganic pigments markets.
InvestingPro Insights
LANXESS AG (LXS.DE) has demonstrated resilience in a challenging market environment, and the latest data from InvestingPro provides a deeper look into the company's financial health and stock performance. With a market capitalization of $2.5 billion, the specialty chemicals company is navigating through its financial year with a focus on growth and efficiency.
InvestingPro Data reveals a significant revenue of $6.93 billion over the last twelve months as of Q1 2024. However, this represents a 20.28% decrease in revenue growth compared to the same period last year. Despite the decline, the company's gross profit margin remains healthy at 17.32%, indicating effective cost management amid revenue fluctuations.
The stock price has seen considerable volatility, reflecting a 6.72% price total return over the last three months, which may interest investors looking for dynamic market opportunities. The company's price at the previous close stood at $29, closely aligned with the InvestingPro Fair Value estimate of $29.89, suggesting the stock is fairly valued at its current level.
InvestingPro Tips highlight several key aspects that could influence investor decisions. Analysts predict that LANXESS will be profitable this year, which is a positive sign for potential investors. Additionally, the company's valuation implies a strong free cash flow yield, making it an attractive investment for those focused on cash generation capabilities.
Furthermore, LANXESS has a commendable track record of maintaining dividend payments for 18 consecutive years, which may appeal to income-focused investors. The company's liquid assets also exceed short-term obligations, indicating a solid financial position to meet immediate liabilities.
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Full transcript - Lanxess AG (ETR:LXSG) OTC (LNXSF) Q1 2024:
Operator: Hello, and welcome to the LANXESS Q1 2024 Results Investor Relations Call. Throughout the call all participants will be in a listen-only mode, and afterwards there will be a question-and-answer session. Please note that this call is being recorded. Today, I'm pleased to present Andre Simon, Head of Investor Relations. Please begin your meeting.
Andre Simon: Yes. Thank you very much, Sara, and a warm welcome to everybody to our Q1 '24 conference call from my end as well. As always, we begin by asking you to take notice of our Safe Harbor statement. And with me today is our CEO, Matthias Zachert and our CFO, Oliver Stratmann. Matthias will start with a short presentation, and then we will open the floor for your questions. With that, I'm happy to take over to Matthias. Please go ahead.
Matthias Zachert: Thank you, Andre, and welcome, everybody, on this conference call for Q1 '24. I start with -- slides for the presentation has been dispatched. On Slide 4, we show that as far as year-on-year performance is concerned, we clearly acknowledge a very tough comparison. Q1 '23 was our last somewhat okay quarter, and it was the best quarter in '23. So the comparable base is definitely here, the toughest for the running year. And this is the case for sales, but also for profitability. So if we make the year-on-year comparison, no doubt, a tough quarter. We would like to shed light, however, on what we see in the markets. And here in Q1 versus Q4, but as a matter of fact, also versus Q3 and Q2 last year, we see in many of our industries that volumes are picking up, exception, clearly, agro. Agro started destocking later than other industries, and this accelerated in the second half last year, turned out to be tough in Q4 last year, but now quite severe in Q1 and still severe in Q2. And from the indications we are getting from our customers, improving in the second half. So for the other industries, we clearly see also in Europe that destocking has come to an end. Customers are starting with regular quarterly orders, like they used to do in the past, at lower levels though, but they start to confirm orderly commitments. This is a change to '23 when all customers basically just wanted to destock. So we see that sales rebound to 1.6 versus Q4 1.4. And this, of course, led to a positive, which is increase in the receivables. If you look into our balance sheet, we have €200 million increase in receivables. And as you know from our turning rate, this turns into cash normally within around about 45 days. So whilst net working capital increased on one area that we like, which is receivables. Turning to EBITDA. Same storyline. We acknowledge the year-on-year comparison being very tough. But here also the same statements hold through. We see sequential improvements. Even though the base improvement versus Q4 is soft, we clearly have to stress in Q4 last year, we had no bonus accruals because we paid no bonus for profitability connected incentive schemes, we had one-time relief. All-in-all, this is not operational, and the €101 million that we now report, we fully report on an operational basis. Despite Saltigo being really in very, very tough turns due to the fact that some of the customers have simply ordered nothing. This we assume to improve modestly in Q2 and then continue further improvement along the lines that I've just said. Further support will definitely come from our FORWARD! initiative. The implementation of cost savings is fully on track. You also see that when you look at the headcount reporting we've done in Q1 and Q4 versus the remaining quarters in '23, you clearly see that we are clearly accelerating here and are fully on track to get what we wanted to achieve. As far as the Urethane's divestment process is concerned, also here, I can confirm this is fully on track. The first round is about to be finalized. We started here with high single-digit numbers. In the second round, you normally tighten the process because you cannot continue with so many interested parties, so we will tighten the process and will take around about a handful into the next round. And then, eventually more information is shared, and the final phase is then the negotiation phase that you normally do with 2 to 3 interested parties. So also here, I think we do what we want to do. With this, I turn your attention to Page number 5. We give you here an overview on the sequential development of our segments. Clearly, on Consumer Protection, that was a tough quarter because Saltigo fell out completely. And as you have heard from the agro companies, please look at their transcripts, they have all confirmed that Q1 '23 was a peak year or a peak quarter, and therefore, also Saltigo had peak volumes and peak profitability. This drops out completely. And therefore, Q1 was hit hard consumer protection-wise, notably by agro-destocking. Again, I would like to make my comments that the agro industry, by and large, also sees Q2 as tough, but not as tough as Q1. When you look at the transcripts of the big companies, I mean it's on the Internet, I cannot comment on customer feedback, but I can give you the statements of Corteva (NYSE:CTVA) who says, "We expect to see market growth in the second half of '24." That's what they clearly confirmed, and I understand why. FMC (NYSE:FMC), for instance, makes the statement that market conditions expect to improve as the year progresses. So as they publicly state that, you can assume that they do this on data. And as far as our feedback is concerned, we see that in the agro industry that the feedback from our customers clearly confirms this statement. So from the agro side, we assume that's Q3 and Q4, but notably Q3, Q4 normally is seasonally weaker, should show further improvements and that's reflected also in our guidance. Specialty Additives, well, also here, you clearly see the rebound in the end industry. However, please take note of the fact that construction is clearly soft, remains soft in China and is soft in Europe. We assume that here, from Q3 onwards, more momentum will come in, not a booster, but a gradual improvement, at least this is the indication we are getting from the client side. So also here, a sequential improvement, Q1 versus Q4. We expect further improvements in Q2 and another sequential improvement in Q3. Advanced Intermediates, definitely from the product side, not as resilient as the other 2 segments. But this is a business where the '23 results were extremely hard hits. These are 2 market leaders worldwide and they come back. We have sweated out the inventories last year; sweated out inventories that were produced at extremely high prices from 2022. So this job has been done for basically around about 9, 12 months. We now start from a clean basis, and we now start producing with low energy costs. Now this division turns competitive, and we will take the market back. So here, please expect that this division will see a stronger rebound, profitability wise, than the others because the base is also lower. Now let's come to the full year guidance. Comments on economic environment, I think, are known to you. Let's look at LANXESS-specific guidance. We would like to grow EBITDA by 10% to 20%. There should be this further sequential improvement versus Q1 and Q2 and then continuing in Q3. The reasons for this I have explained, and then somewhat a softer Q4 due to seasonality. The focus is clearly on cash generation. We take a balanced approach on working capital. I mean we like receivables, but we will collect them for sure. And as far as inventories, you see that we kept inventories tight so far. As we see momentum strengthening further in our end industries, we will, of course, also here, in a focused approach, build inventories if need be because if the market grows, we will supply and then we will collect cash. On CapEx, clear discipline will be there, and you will note this in the quarters going forward. But we will not uninvest, there's no reason for underinvesting. We have a strong asset base, but we don't need to spend growth investments at this point in time when utilities or utilization is not at 90%, 100%. So this status has not been reached yet. We are improving on utilization, and we will further improve on utilization going forward, but we have enough spare capacity at this point in time to be disciplined on maintenance CapEx and not on growth. Ladies and gentlemen, this is it for the presentation. And Oliver and I will take your questions right away.
Operator: [Operator Instructions] And our first question comes from the line of Jonathan Chung from Morgan Stanley. Please go ahead. Your line is open.
Jonathan Chung: I've got two, please. The first one is on your pricing for Specialty Additives. I see the negative 10% decline. How much of that is driven by bromine prices, and how much of that is your active price concession to regain market share? And my second question is on your lithium brine project. Could you give us an update on the brine supply negotiation with Standard Lithium? And when would we expect to see contribution from this agreement? Thanks.
Matthias Zachert: Jonathan, thank you for your question and for your time on the call. First, on bromine, I mean bromine picked up last year, softened again in Q1 and is now picking up again. So it's not so much, at this point in time, a derivative of or driven by supply. It's more driven by demand. And here, I mean, bromine prices, you don't see contractual prices in Europe and North America. You only see the Chinese spot markets on bromine. And this gives you the clear indication that the construction industry in China is still struggling. And therefore, as far as bromine prices are concerned, we need to see a pickup in construction in China before bromine prices start to rise to higher levels again and this is not the case yet. So the indicator you're looking at clearly confirms that the Chinese construction industry is still doing very soft and is suffering. And that's a reflection of this. As far as our sales is concerned, we are not here going for market share at this point in time. So we clearly focus on the value proposition. So price reductions we currently see are a reflection of either raw materials or in some areas the reflection of bromine where we sell bromine directly into the markets, and that, of course, is also done at lower prices. Now as far as lithium is concerned, I think there is no update at this point in time. It's fully in the hands of Standard Lithium. I think they flagged very clearly that as far as technicalities, et cetera, are concerned, they are either done or very far advanced, but the next decision they have to do is on basically getting the project capitalized, financed. And that is in their hands, and once they have completed this, I think it's in their hands to go forward. That's the status currently on Standard Lithium.
Operator: Thank you. Our next question comes from the line of Sam Perry from UBS. Please go ahead. Your line is open.
Sam Perry: Hi. Thanks. Just one for me, please. With regards to your comments on sequential improvement in Q2 and Q3, so taking your Q1 EBITDA and the fact that your historic average level of sequential decline in Q4 has been about 20%, it would imply that to hit the midpoint of your guidance, you need to see around high 30% sequential EBITDA growth in Q2 and then again in Q3. Is that the right sort of trajectory of improvement you're seeing in your order book for Q2? And then what gives you confidence in another step-up in earnings again in Q3, given the relatively recent comments surrounding low visibility? Thank you.
Oliver Stratmann: Yes. Let me take that question, Sam. Oliver here. Well, we've guided to sequential improvement in earnings Q1 going into Q2, and then further moving on in Q3. The hint towards seasonality in Q4 does not imply that this is in any means a normal year. So the typical earnings distribution that you are alluding to, we've seen in the past, simply has no basis in a year that we are going through right now. Matthias has pointed to already with regard to agrochemical customers to not only what our customers are saying, but even what they are printing on their websites and that they are expecting demand to pick up in Q2 and Q3 even more. So that confirms what we are hearing when we talk to our customers. And I can tell you that we are, of course, also ramping up our cost savings program FORWARD! And as we go through the year already last quarter, we have said that even though only moderately, we also expect more demand to come in from our construction industry customers. So that gives us, in a summary the confidence that we will really see a pickup here sequentially over the quarters. And then we just have to bake in for some sequential lower number in Q4. You also asked how confident we are. And when I look into what the market is expecting right now, and I'm looking right into the face of Matthias as well, who smiles at me, we can live with the consensus number as it stands right now. So we are confident in this sequential improvement.
Matthias Zachert: I'm always smiling at you, Oliver, but now particularly. I hope the question has been answered. Next question please.
Operator: Thank you. Our next question comes from the line of Matthew Yates from Bank of America. Please go ahead. Your line is open.
Matthew Yates: A couple, please. Firstly, I appreciate the extra detail you put in the slides about the development through the course of the quarter and how that may have impacted receivables build in collection. Now that you've given an EBITDA guidance for the year, can you also be a bit more specific on what you would expect for free cash flow generation this year? And then, I wanted to come back on Consumer Protection, where essentially, we've seen profits halved, which is somewhat surprising for what's supposed to be an asset-light business with quite resilient end markets. Clearly, peers and customers are experiencing the same phenomenon you are in AG. Is it possible to isolate how much AG or Saltigo contributed to that year-on-year profit decline? And just as an aside, when we see prices in the division reported minus 5%, does that reflect competitive behavior, or is that more about the raw material deflation pass-through? Thank you.
Matthias Zachert: Matthew, thank you for your questions. And I will take second and third question, and Oliver will take cash flow, and I might chip in here. So let's address Consumer Protection first. Your assessment is totally correct. The swing in profitability is nearly completely related to Saltigo. And I stress that before, we had, like our customers, a peak year in Q1 '23. And Saltigo had a peak year in Q1 '23, and our Q1 '24 is exactly the opposite. Please read the transcript of our customers. They will clearly state that Q1 '24 was a bleak year, where they reduced as much as possible and orders did not come in. So that's the reflection. And we make the statements, but I clearly give you the sources where you can check that yourself. Now as far as pass-through is concerned or your third question is concerned, clearly this is a one-on-one relation as far as pass-through on raw materials is concerned in Consumer Protection, and that's basically from my side. And now I hand over to Oliver.
Oliver Stratmann: Matthias, thank you. And Matthew, thanks for the question. You asked about free cash flow guidance and you also mentioned receivables. Now Matthias has already made the connection to the nice portion or the nice part of this, which is that the driver was really the increased sequential sales number. When I looked into this, I also found that this is kind of a calendar item. The 29th of March was actually Karfreitag here in Germany. So the collection of monies was not happening and we found money from the receivables coming in first week of April. So that certainly had some seasonal effect here as well, which we didn't see in the year before because then the Easter holiday was later in April. On free cash flow guidance, I'm very happy to try and build a little bridge for you. I must say, with the caveat that I hope you appreciate that I'd really like to refrain from guiding working capital developments, they heavily depend on the degree of business and demand pick up. But apart from that, if you start off a bridge with what I believe the consensus number around €570 million in EBITDA is right now, we've guided up to €350 million in CapEx, which leads you down to € 220 million. And then I believe on the last call, I already mentioned a number in the magnitude of €40 million that you can bake in for interest. We have guided to a cash out related to our FORWARD! program that is expected this year of another €50 million. And then as €570 million isn't a huge EBITDA number, also the tax number should be limited to a ballpark of €40 million, which leaves you with still a triple-digit million number that, if my math is correct, should remain open. So this is clearly not a free cash flow guidance because we see the demand picking up. And normally, when you increase sales, your receivables and also your inventory will show some traces of that. But I'd like to reemphasize that we will have a very tight eye on our indebtedness, and we have clearly heard and are acting according to this to focus on bringing down our indebtedness. I hope that answered your first question as well.
Matthew Yates: Oliver, sorry, just quickly. On top of that €50 million for the FORWARD! program, do I also need to include the below the line items on digital and IT, or is that already included in the €50 million?
Oliver Stratmann: No, no, that's not included. The €50 million that I mentioned is purely the FORWARD! And there may be payments that exactly, as you mentioned for projects like our SAP once in 15 to 20 years, implementation are coming on top.
Operator: Our next question comes from the line of Martin Roediger from Kepler Cheuvreux. Please go ahead. Your line is now open.
Martin Roediger: Firstly, on urethanes, can you provide some indication what the sales and the EBITDA figure was in 2023, so that we know what will be missing going forward in case you have disposed that asset? Secondly, sorry to come back to the destocking in agro activity. And within Consumer Protection, it's not just only Saltigo, it's also some MPP and Flavors & Fragrances activities, which have some exposure to agro. What can you do to overcome that massive destocking impact in agro? I mean beyond waiting until these things are getting better. Can you get some compensation, for example, by using short time working allowances? And third question, just for my interest, are there any major maintenance shutdowns to occur in the course of this year in Q2, Q3 or in Q4? Thanks.
Matthias Zachert: Thank you, Martin, and thanks for your time on the call. I would basically take all of them. As far as urethanes is concerned, please understand that we don't give numbers on selective business units. But it's a very, very good business. And the good thing is we started here some changes that we implemented last year and they fully kicked in. We had the best-ever quarter in urethanes in Q1, and this will continue in the quarters going forward. And we fortunately also have filled the project pipeline with technology projects. So the business will continue to strengthen going forward. And of course, we are very well aware about this. So this is as far as urethanes is concerned. Now coming to agro. Your statement, I mean you know the industry pretty well. Your statement is very accurate. Also the other business units have some agro exposure, but definitely not as significant as Saltigo. So when we talk about a business that is really substantially exposed to agro, it's Saltigo, around about 75% of sales are here committed to the crop protection sector of the agro industry. And with material protection and Flavors & Fragrances, it's a little portion, so we don't even mention that. The second business units having more visible exposure to agro is Advanced Industrial Intermediates. We've not flagged that here specifically because Advanced Industrial Intermediates has normally a very broad diversified industry base. And therefore, you don't see any negative flags in Advanced Industry Intermediates because all the industries are currently kicking in and AII, as we abbreviate this business, is starting to show its competitiveness again. So the giant gains power and makes use of it in the marketplace and through this overcompensates the agro exposure, also Advanced Industrial Intermediates, so this is positive. And as far as short labor is concerned, we are not yet in a situation where we need to go for short labor in Saltigo. You normally apply for short labor if you don't see, for the next 6 to 9 months, demand picking up. Here, we did relatively well in Saltigo basically until October, November last year. Then the volumes declined. But now in Q1, we already see that in Q2, there is some further orders coming in. So Q2, we don't expect to be as tough as Q1, and then more demand kicking in, in Q3. So there is no reason for at this point in time at least to apply for short labor. And on shutdowns, I mean, we normally have the bigger shutdown season in July, August and then in December time. So the schedule that has not changed. We normally flag shutdowns always when we had our big polymer machines in a shutdown. So we flagged the last biggest shutdown, I think with the High Performance Materials business when our profitability was hit by €20 million, €30 million because of the shutdown. These kind of shutdowns we will no longer have because the business profile has now changed. We are not protected against force majeures of suppliers, of course, this can lead to shutdowns. And this unfortunately happened in Flavors & Fragrances last year twice. And one is still putting pain on us as we speak. We think that in third quarter, latest fourth quarter starting to improve in Rotterdam Botlek, so that we have more steam supply available, which then should also support also that F&F performs better. But in the future, I don't think we will talk about major turnarounds or shutdowns anymore because the kind of chemistry that we had in the past is different today. I hope this clarifies all your questions, Martin.
Operator: Our next question comes from the line of Jaideep Pandya from On Field Research. Please go ahead. Your line is open.
Jaideep Pandya: Yes. Firstly, on AI, Advanced Intermediates, long-waited recovery, so good to hear the giant games trend. From my memory, normally when raw materials go up, it takes you about 1 to 1.5 quarter to pass them on. And benzene and taurine have kicked up in Q1. So how is the price versus raw material dynamics here for this division as we progress through the year? The second question is sort of turning on to Matthew's question on Consumer Protection, curious to hear what is the progress for Emerald and IFF because, obviously, there are a lot of moving parts these days, so we've sort of lost them. So just have they also seen the level of destock as the legacy LANXESS or they have actually fared better than your expectation. And then just one last question around factoring for receivables. Could you please confirm that you haven't really done any factoring recently, or have you done any factoring recently? But last question maybe for you, Matthias. Since you've joined as the CEO of LANXESS, there's been time and again, restructuring programs. So how is the morale of the company, given that we are now almost coming to a 10-year anniversary for you as a CEO. So a lot of restructuring has been attempted. So how is the morale for the FORWARD! program? Thanks a lot for taking my questions.
Matthias Zachert: Thank you, Jaideep. Let me ask Oliver to take the factoring, and then I will take all the other remaining four questions, you have had 5 questions, my friend. And then I take the four questions in sequence.
Oliver Stratmann: Yes. Now on factoring, we want to be very transparent here. So, Jaideep, whenever we change something materially here, we'll let you know. You can assume that the factoring has remained on a very comparable level. So there is no visible impact on the statements.
Matthias Zachert: Then I take over on Advanced Industrial Intermediates. Your question was on the pass-through of raw materials. I clearly confirm that the mechanism on passing through raw materials or energy costs has not changed. So what we bought in the first quarter with higher prices on taurine-benzene will be rolled over in Q2. Now as far as your second, third questions, I take them in combination. You alluded to Emerald and IFF. If you look at Emerald, I clearly stated last year, they have been hit hard by the force majeures that we have seen and by the destocking in the entire industry. If you look at our businesses that we have contributed through F&F, Flavors & Fragrances, our business units have been hit by chlorine force majeures and by destocking. So the combination of our new business in both cases, our LANXESS or what we have acquired through Emerald, was hit hard. And unfortunately, both by force majeures and of course, through the product change by destocking. As you have seen with a lot of other chemical players that are close to the consumer. And I think you know all of them, so I don't need to cite them again. So here, this was no different story. Now on IFF as far as the business units, combination IFF with material protection, is concerned. When we look into last year, we saw that also, especially China, biocides market has been extremely hard hit, biocides goes also into paints. Biocides goes also, therefore, into construction. So here, we've seen that the entire business was also hit hard by industry demand softness but also by destocking. We even saw that animal health-related products were going down because of soft markets, because of too high inventories. You saw that other companies in the animal feed sector posted the same messages. So it's not only us, it has been an industry-wide phenomenon. Now if we look at the 2 businesses specifically, biocides LANXESS and IFF biocides, the IFF business did better than the LANXESS business because of the fact that the IFF biocides business had a higher exposure to energy and gas, which we never had. And energy and gas is, obviously you can assume did well and therefore compensated the lot. But all in all, the biocides market in '23 was not good. This is something which we see now gradually improving because destocking is gone. The market is not back to normal terms. So clearly, going forward, we expect that market demand also on animal feed, animal disinfection, we'll see in the further year, further normalization. But at least in 2024, we see that destocking is no longer a theme, which would be well for our business. I hope with this, I have extensively answered this question. And then I come to the last one, morals. Let's put it like this, I think in none of the chemical companies in Europe, you will see that employees are, in 2023, rejoicing how great the industry is doing. And this is also not the case with us. The good thing in LANXESS is, I think, last year, we realized we have to make cuts in order to mitigate the current situation, also stemming from the energy crisis. You should have seen that, at a speed of light, we executed the restructuring program. So we announced that to you in summer and we basically had agreements with the workers council and unions in October already. This is for the industry record speeds and that shows you when we want to get something done, we get it done. Restructuring is no fun for anybody. But my clear speech to the team was, let's get it done as quickly as possible. It will be painful, but once it's done, we close that chapter and accelerate again. And that's currently the view of the troops. And therefore, we are now prepared to rebound to show our strength. I hope that clarifies everything.
Operator: Thank you. Our next question comes from the line of Georgina Fraser from Goldman Sachs. Please go ahead. Your line is open.
Georgina Fraser: Two questions left or maybe three. I'll try for three. The first one is, we've had a response already to price versus raws in Advanced Intermediates. But could you talk about the net pricing that you're seeing across the portfolio? That's something that seems to be particularly positive for a lot of your chemical peers and it's not obvious to me that LANXESS is seeing those benefits yet. And so maybe if you could just expand that question. The second is pretty simple one. You mentioned that you're seeing a bit of recovery in utilization rates. Could you remind us where we're coming from and where we are today and what sort of utilization improvement is baked into the midpoint of your guidance? And then final question, it feels like we're talking a lot about the upside from a recovery in construction and ag. But if I look at your end market exposures, consumer is pretty material as well, and that seems to be a market where demand is already recovering quite strongly. Is there more upside to come for LANXESS in consumer? Or could you explain why you might not be seeing the same recovery that some peers are in the consumer space? Thank you.
Matthias Zachert: Georgina, Oliver will take the first two. I will take the third one.
Oliver Stratmann: Georgina, net pricing across the portfolio, if you know the pattern on pricing here is that we pass on our prices indeed with a quarter delay, sometimes two quarters, with the majority of our contracts containing for raw materials and energy clauses for those prices to be passed through. What we are indeed doing now, if we look at Q1 versus Q1 '23, is that we compare one quarter in '23, where we still passed on high prices of the fourth quarter '22, when raw material and energy is escalated, with a quarter where prices have already substantially come down. So I think it makes a lot of sense for the first quarter to really look sequentially. And here, we very openly said we had nice volume growth and a price decline of 1%. So year-over-year, I think the view is a bit distorted. And we've proven that in the last 4 or 6 quarters, we have always managed to pass on, nevermore is the relief we have received on the cost end. And when prices were rising, after a short delay, we have passed that on to our customers as well. On the second question, in terms of utilization, indeed, we have seen somewhat of an improvement here. And we've told you that end of last year, for the whole year, we were at utilization that was just short of 60%, in the 50s. We are recovering from that. But I would not like to start a new trend now and basically, on a quarterly basis, update precisely on utilization rates. We will do that on a full year basis. And I think by pointing to a moderate pickup here, which I also want to make that clear, is still by no far and by no means in the magnitude that we appreciate that we like but it goes into the right direction.
Matthias Zachert: Thanks, Oliver. And now on consumer, you might not see in Q1 that consumer is picking up too because it's overshadowed by the ag decline. And I stressed last quarter, in March, when I commented on Q4, that we have customers that don't order anything, which always ordered normally on a quarterly basis. So this is what we currently see in the agro crop protection space. And if you look at the volume decline in Consumer Protection, this is by and large coming from Saltigo. And therefore, that gives you the indication that this is wiping out clearly improvements coming from other areas. And confidence, what is the right word? I assume, and I'm even confident that you will see in Consumer Protection that the trend that you've alluded to will be confirmed in our second quarter numbers.
Operator: Thank you. Our next question comes from the line of Andreas Heine from Stifel. Please go ahead. Your line is open.
Andreas Heine: Three questions from my end, please. The first is on the monthly trend in volume. You have shown February over January, March higher than February. Has that continued in that way in April, and what you can see so far from May? That's the first question. Secondly, you have in LANXESS elucidated on the expected increase from Saltigo in the second half, the end of the supply issues in Botlek and progressive cost savings. At your midpoint in the guidance, have you included much of a macro recovery to get, especially to Q3? So you have already highlighted that you are fine with the consensus in Q2, but then obviously, a very strong pickup has to come in Q3. And I'd like to understand whether this is what you anyhow have in your hands? So the Botlek part, the Saltigo part in the cost savings or whether that needs also stronger incoming orders from what you see right now. And the last question is more midterm. In the case of recovery, I would still assume that Europe is not the area of strongest growth, and the energy situation is structurally different than it has been a couple of years ago. So then more of your earnings should come from the U.S., where basically all your acquisitions were made, which has a significantly lower tax rate. So the question is, whether from the tax perspective, midterm, your tax rate might come down by a couple of percentage points? Thanks.
Matthias Zachert: Andreas, thank you for your questions. Great ones, and I will hand them all over to Oliver.
Oliver Stratmann: Matthias, thank you. Very happy to take even those questions. On a monthly trend, Andreas, we were of the opinion that including a chart that shows January, February and March, makes a lot of sense because we knew people would be looking at our free cash flow, which you could say was impacted by the rise in receivables. And we thought the visibly strong pickup in sales, specifically in March, so the collection most likely hasn't happened yet, was taking place. You know that before in quarters, I can only recollect one-time where Matthias was pointing to a certain month-over-month relation that I believe he quoted his son was asking him for, but I wouldn't like to go back to this methodology and hence, not now talk about the first days in May or how April trading was because we have provided the guidance that the second quarter is sequentially expected to pick up as we expect a sequential improvement in the third quarter. Now you were asking on the midpoint of our guidance and how much that would include a macro recovery and whether the pickup Q2 versus Q3 then Q3 versus Q2 would be in our hands. First of all, I want to make clear that my confirmation of the confidence that we have was not only related to where consensus stands in Q2, but expressively also to where the consensus stands in full year. We can live with both numbers. Now indeed, I'm very grateful for the question, how much is in our hands? Because the pickup Q3 should not only be on the back of the business recovery that we have quoted coming in ag, very mildly also in construction. We also said that our savings from FORWARD! should be ramping up. And last year, the second half was also impacted by chlorine outage. And then you remember, we had this explosion on our Botlek side, both are not expected to reoccur. So indeed, a nice chunk of that is in our hands and not only reliant on the business pickup. Then your last question was on taxes. Based on the fact that, indeed, we have grown our foothold of business and respective earnings coming from the U.S., and when you look into our statements with the acquisitions, we have adjusted our tax guidance. And we had guided to a midterm tax rate there of 26%, which is around about 2 percentage points lower than what we've shown in the past and one lower compared to the guidance we are providing short term. So indeed, don't expect wonders there. The world is rather moving into a direction where everybody wants their share of the cake in terms of taxes, but we will also improve here due to our regional footprint.
Operator: Our next question comes from the line of Rikin Patel from BNP Exane. Please go ahead. Your line is open.
Rikin Patel: Just had one follow-up, that's on the ag and destocking. Can you maybe elaborate which regions you're seeing the most weakness in? And also once your customers do start to restock the raw materials, should we start to see pricing react in the Saltigo business and maybe headwinds start to materialize earlier in 2025? Thank you.
Matthias Zachert: Well, Rick, as far as regions is concerned, please understand that we are shipping to the agrochemical companies themselves. So we don't supply directly to the regions. They normally use our active, further formulate it and then ship it out. So basically, significant chunks of our products are being sold here in Europe, whilst we know that the products that our ag customers are selling then, of course, goes to the respective regions. Now on pricing, we normally have in our contracts formula prices with determined margins and then also driven by capacities. So therefore, as far as pricing is concerned, this is normally a reflection then of our contractual formula prices and has to do with raw materials, energy, logistics, et cetera. I hope that clarifies the point. If we have new contracts coming in -- new blockbuster contracts coming in, then you can see margin expansions and change and also pricing differences that kick in. And of course, here, we clearly work on that all the time. This is the custom manufacturing business model. And then you see clearly jump starting in pricing, but that's the name of the game for the Saltigo business model.
Operator: Our next question comes from the line of Tristan Lamotte from Deutsche Bank. Please go ahead. Your line is open.
Tristan Lamotte: Two questions, please. The first is on Envalior. So it looks like you have around minus €50 million in income from investments for Q1, which I think is slightly worse than Q4. I'm conscious there are some other items in there. So I was wondering if the JV is still struggling in Q1 or whether there have been some signs of improvement sequentially? And what would you expect as the run rate for this year? And then the second question is on flame retardants. So I was wondering if you could comment on potential regulation in Europe for flame retardants, and with the bromine leaning flame retardant portfolio, does that put you at a disadvantage against peers who are more geared towards phosphorus? And are there some of your bromine-based flame retardants, which are facing regulatory or structural pressure from a move towards more ESG-friendly flame retardants? Thank you.
Matthias Zachert: Well, Tristan, very good questions, and let me take them one-by-one. As far as Envalior is concerned, I mean I will be fully in line here with my legal obligations and constraints. But clearly, what I can say is if you look into rating agencies reports, there are clear expectations that this year is going to improve, '24 versus '23. Three rating agencies have published their reports. And I think it's commented in the net, respectively. And now I take, therefore, a further step up. I look at the polymer industry, which we have very detailed insights into. The polymer industry is improving. So definitely, the polymer industry was hit hard in '23. The polymer industry, in most of the cases, if they go to automotive, if they go to electronics is rebounding. It will not be a record year but it will be a clearly better year than 2023. And therefore, my assumption is that this will also be a better environment for the Envalior business. And also Envalior has clearly communicated to go for synergies. This is now the first year after creation of Envalior, so synergies should kick in. And again, the precise number of synergies has been communicated by the rating agencies, which can also be looked up. And then I think the story line should be very clear, in what direction this powerful joint venture is going to go. Now on your second question, flame retardants. I would like to be very clear, brominated and phosphorus flame retardants don't really compete with each other. If you go for brominated flame retardants, you basically talk about marrying them with one specific polymer. Phosphorus flame retardants, you marry with another different polymer. One loves the polyurethanes, the other one loves polystyrene. Both are used for insulating or isolating, I'm not sure what the right word is, housing and making sure that everything is being properly secured so that energy is not dispersed from rental homes, housing homes, et cetera. But both flame retardants have different polymers that they are attached to. They don't really compete with each other. Let's put it like this. The majority does not compete with each other. So therefore, if you have both products in your basket, you are better positioned to basically supply, in its entirety, the customer industry. So this is the first part of flame retardants, now the second part. You alluded to phospho chemicals being regulated by the European Union. I think it was 2019, in our Capital Markets Day event, I think. I'm not 100% sure. It might have been also the Capital Markets Day event before, but we have a specific presentation on exactly these elements. Regulation of flame retardants in the European Union, we are not worried about that. So currently, in flame retardants in phosphorus flame retardants, we are currently selling the first generation and the first generation might come under scrutiny. If you have not the second generation, you have a problem. We have the second generation already developed. Please take note of the fact that in phosphorus flame retardants, LANXESS is one of the leading giants in the industry. We are on both products guns, 1 of the top 3, in phosphorus, we are notably strong. So as a leader -- worldwide leader in phosphorus flame retardants, you can assume that we have the second generation. As a matter of fact, we even have the third generation in place. The second generation, we could sell to our customers already today, but it's for them, too expensive. I mean, it's unique, it's sophisticated and therefore, it has a higher price. But as it is 4x more expensive than the first-gen, the first-gen is currently being used. The third generation, which we also have, is more expensive than the second gen, but it's top-notch quality Unfortunately, we are selling it only in grams and in kilograms. So this does not suffice but the clear statement to you is regulation kicking in might not be a risk, but might be a real advantage. And as a market leader, we are prepared for regulation. I hope that clarifies it one by one.
Operator: Thank you. Our next question comes from the line of Sebastian Satz from Citi. Please go ahead. Your line is open.
Sebastian Satz: I just have a follow-up on bromine pricing again. I appreciate your comments on weak volumes in construction. But if I remember correctly, in the past your contract prices were lagging the spot price by something like 2 quarters. And given where spot prices are, that would actually suggest another lag down incrementally from where we are today. So I'm just wondering whether this is already factored into your guidance or whether something has changed in your logic and your pricing contracts, please? Thank you very much.
Oliver Stratmann: Sebastian, thank you. Oliver here. Let me take that one. On bromine pricing, we've been confronted all the way with the one available price that is out there, which is a Chinese spot market price indeed. And we've never spoken, to the best of my knowledge, about our contracts and how prices for our bromine derivatives is really agreed upon with customers. What we've said is that from a trend perspective, if the bromine spot price that you can see on the ticker is moving downward, and it has moved in the past sharply downward, then you can take that as a trend indication that is reflective at least of the part of the business where we sell elemental bromine. The derivatives that we produce are not necessarily following this price one-by-one. And maybe against this backdrop comes the perception that there is a certain time lag, but there is no time lag really compared to the Chinese spot market price. And I hope that answers your question.
Operator: Thank you. And our next question comes from the line of Wiechert Konstantin from Baader Helvea. Please go ahead. Your line is now open.
Konstantin Wiechert: Maybe if I may start again with a clarification on the impact of the force majeures that we've seen last year and this year. If I remember correctly, Botlek from basically first quarter on, I think, should be covered by insurance, if that's correct. And so I think the impact from the chlorine force majeure was about €20 million last year with, I think €8 million in the first quarter. So our question would be, should we have a net positive effect then potentially from those two force majeures of about €4 million for the next 2 quarters? And then I think in the fourth quarter last year, Botlek was about €10 million, so potentially a gap of €14 million then in the fourth quarter. Would that be correct? Maybe second question also on the segment. If you could remind me, I'm just not sure anymore whether you ever produced or still producing neonicotinoids in the Saltigo business? And if yes, how that has maybe impacted your utilization in the first quarter this year as well? And if I may squeeze in a follow-up question on the pricing that you have touched on, I think you said you never passed on more than the raw material prices. So I was just wondering if you could clarify how that fits into your strategy that you basically gave us in the fourth quarter results call that you were more aggressively pricing now to try and regain volume-wise market shares? So yes, that would be it for now I think. Thanks,
Oliver Stratmann: Fantastic, Konstantin. Thank you very much. I would say, maybe, Matthias, you'd like to take over the Saltigo question on neonicotinoids? The more technical questions maybe on the several force majeures unfortunately, that you mentioned, which actually reminds me of this miserable year we've had behind us, hearing you talk about all of the negative impacts. But indeed, Konstantin, you are right. And I think I mentioned that in the full year call as well, the bridge that I build also included around about €40 million including the Botlek outage, the chlorine outage, both of them not expected to reoccur. And I would not like to dig even deeper because every year, you do have some instances where, in the beginning of the year, sometimes for 1 week, sometimes for 2 weeks, plants get frozen in the winter time in the U.S. So indeed, there is a relief that you can bake in from one year to the other. On raw material pricing, I'd like to give some clarification as well. The contracts that we have, not only on raw materials, but starting with the energy crisis in 2022, also with regard to energies were included for those contracts that were really energy and raw materials mattered. And our guidance has always been, please perceive any fluctuation in raw material and energy as a pass-through to our customers and you should continue perceiving it that way. The question is totally valid that you posted though, because indeed, in advanced intermediates, partly also inorganic pigments, we are in a fierce competition. And we are prepared here to be more flexible on pricing, which, of course, is not a thing that will be there for good, but a temporary item. Therefore, I'm always saying, please don't look only at one quarter, year-over-year to another quarter, take a longer time frame, and you will see that the price movements that we have are covered by raw material, energy and logistics pieces where indeed, we aim to not pass on more on the way down than we get as a relief. And should they start to rise again when demand picks up, it will, of course, be our ambition to at least pass on what we have to carry. With that, I'm looking at Matthias for the Saltigo and neonicotinoid question.
Matthias Zachert: Well, nicos, as they are called. Konstantin very clearly, I mean, we've never stressed this anywhere in our calls as a big item. And clearly, I can here confirm this is simply not relevant for us.
Operator: Thank you. We currently have no more questions registered. So I'll hand back to our speakers.
Matthias Zachert: Well, ladies and gentlemen, it's the first time in the last few quarters that we see that momentum is coming back, and this feels good. It has been one of the longest severe downturns that I've seen in this industry for the last 20 years, and it's a great industry. And I think we have everything it takes to participate and to show our strength going forward, 2024 is not a normal year, so we need to take it step-by-step. But we clearly want to see and want to focus on '24 so that we show that this company can accelerate. Thank you for participating. Seeing you all on the road show. Bye-bye from Cologne.
Operator: This now concludes our presentation. Thank you all for attending. You may now disconnect.
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