In a recent earnings call, Lanxess CEO Matthias Zachert discussed the company's performance in the fourth quarter and throughout the full year of 2023. Despite acknowledging a challenging year marked by destocking and soft end market demand, Zachert highlighted the company's progress in portfolio transformation and the stability of the consumer protection segment. Lanxess also achieved improvements in environmental, social, and governance (ESG) standards and successfully reduced its net debt. Looking forward, the CEO expressed optimism for the future, while also mentioning ongoing challenges such as destocking and force majeure events.
The company's Consumer Protection division faced some softness due to destocking in the agro industry, but growth expectations remain positive, with a targeted growth rate of 5% CAGR and a margin goal of over 20%, contingent on stable end markets. CFO Oliver Stratmann addressed cash flow concerns, projecting a cash impact from cost savings programs in 2024. The company also aims to deleverage its balance sheet and improve its investment grade rating. Details on the divestment of the Urethanes business and insights into the financial outlook for 2024 were also provided, with Lanxess expressing confidence in its liquidity reserves and the potential for profitability rebound.
Key Takeaways
- CEO Matthias Zachert acknowledged 2023's challenges but noted progress in portfolio transformation and consumer protection stability.
- Lanxess improved ESG standards and reduced net debt, aiming for balance sheet deleveraging in 2024.
- Consumer Protection division expects a 5% CAGR growth rate and over 20% margin, dependent on market stabilization.
- CFO Oliver Stratmann discussed a cash flow impact of €50-60 million in 2024 from cost savings programs.
- Lanxess is confident in the Advanced Intermediates division's growth potential and expects a rebound in the Flavor & Fragrances division.
- The Urethanes business divestment is progressing, with high buyer interest and updates expected in the second quarter.
- Lanxess has ample liquidity reserves and is focused on achieving a solid investment grade rating.
Company Outlook
- Lanxess anticipates challenges such as destocking and force majeure events but remains optimistic for future growth.
- The company plans to focus on EBITDA and multiple to drive profitability and determine the true value of the business.
- Management is committed to achieving goals and believes in the structural preparedness of their businesses for growth.
Bearish Highlights
- The company faced a steam explosion in Rotterdam in 2023, causing shortages and financial impairment for the next couple of years.
- Softness in biocides and animal nutrition segments observed, with cautious outlook until construction industry rebounds.
- Adjustments in pricing strategies in the Advanced Intermediates and Specialty Additives divisions due to declining energy and raw material prices.
Bullish Highlights
- The Urethanes business had a profitable year and is on the right trajectory.
- Free cash flow expectations are positive, with a triple-digit million number projected in a more normal year.
- Energy and natural gas costs are expected to ease in 2024, reaching more normal levels.
Misses
- Insurance coverage was insufficient to compensate for losses from the Rotterdam steam explosion.
- The Specialty Additives division is affected by lower market prices due to construction industry softness.
Q&A Highlights
- The Consumer Protection division's profitability and growth were discussed, with a focus on the need for stable end markets, particularly in China.
- The company addressed its leverage and financing strategies, emphasizing the goal of reducing indebtedness and maintaining an investment grade rating.
- Questions about the stake in Envalior were answered, highlighting the importance of EBITDA and profitability for the business's value.
Lanxess (ticker symbol not provided) is navigating through a complex market environment, balancing the pressures of recent challenges with strategic optimism for the coming years. The company's executives have laid out a detailed roadmap for recovery and growth, backed by solid liquidity and a commitment to strategic financial management. As Lanxess moves forward, the market will be watching closely to see how the company's plans unfold in the dynamic global landscape.
InvestingPro Insights
In light of Lanxess's recent earnings call, several metrics and insights from InvestingPro provide a deeper understanding of the company's financial health and stock performance. Lanxess's market capitalization stands at approximately $2.3 billion, reflecting the size and scale of the company within the chemical industry.
An InvestingPro Tip indicates that the company's valuation implies a strong free cash flow yield, which aligns with the CEO's positive free cash flow expectations mentioned in the article. This suggests that Lanxess is generating sufficient cash from its operations, which could be used for debt reduction, dividends, or reinvestment into the business.
Another InvestingPro Tip reveals that Lanxess has maintained dividend payments for 17 consecutive years, demonstrating a commitment to returning value to shareholders, even in challenging times. This is particularly relevant for investors looking for stable income streams.
From a valuation perspective, Lanxess's P/E Ratio (Adjusted) for the last twelve months as of Q3 2023 stands at -7.53, indicating that the market may have concerns about its profitability in the near term. This is further supported by an InvestingPro Tip stating that analysts do not anticipate the company will be profitable this year.
For readers interested in a more comprehensive analysis, InvestingPro offers additional tips on Lanxess's financial metrics and performance projections. Utilize the coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription for access to these valuable insights.
Full transcript - Lanxess AG (ETR:LXSG) OTC (LNXSF) Q4 2023:
Operator: Hello and welcome to the Lanxess Q4 Full Year 2023 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 this call is being recorded. Today I'm pleased to present Eva Frerker. Please begin your meeting.
Eva Frerker: Thank you, Anika, and a warm welcome also from our side. Thank you for joining the Lanxess's Q4 earnings call. As always, we begin by asking you to take notice of our Safe Harbor statement. 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. I will now hand over to Matthias. Please go ahead.
Matthias Zachert: Thank you, Eva, and welcome to all participants on this conference call. I would like to start our presentation on Slide 4, going through the documents that have been dispatched on our Internet. 2023 was definitely a tough year. We've talked about a multi-crisis year with negative impacts from destocking that was quite severe throughout 2023, a soft end market demand in our industries. Competitiveness-wise, especially Europe and notably Germany suffered from escalation in energy prices and therefore it was definitely a year that in the last few decades we have not seen to this extreme levels. Despite that and despite the impacts and turbulences we were confronted with, I think we made right strides in the right direction. This relates to our portfolio transformation, putting in value in place, closing the transactions in April 2023 was a major step to advance into the direction of a pure chemical play. Several years ago, our portfolio was polymer dominated, this is history. But now we have to make sure that new leadership businesses we have built in chemicals are also delivering on the financial performance that this portfolio should achieve. Positive in 2023 is the overall stability on consumer protection. This segment, which we clearly earmarked as core center in our portfolio did comparably relatively well, showing stability on sales, also here we were confronted with destocking, but all-in-all this was the best performing segment. We counteracted the softness and the decline in markets with our FORWARD! program and we are fully on track to mitigate the turbulences we faced in the markets. And of course, with the Urethane Systems divestiture, we started end of the year the process and definitely we'll continue executing this in the months to come. Noteworthy is also our very nice improvement as far as ESG standards are concerned. Yesterday evening we had the positive news from the CDP organization that we were again qualified as an A company on the A list of CDP and in chemicals we scored as number one. And I think this confirms again our big strides in the direction of highest sustainability standards in our industry where we definitely are a clear front runner, perceived I think by everybody if you go to MSCI, EcoVadis, even SBTi gives us credit for being fully compliant with Paris treatments being on the Climate 1.5 path. So having said this, of course, let's address challenges. We've never seen destocking in nearly all of our end industries. Only agro kicked in late and is now still lagging as far as destocking is concerned. But I think by and large the other industries have completed their destocking activities end of last year. We saw clear softness in demand. Unfortunately, when it comes back, you are confronted even with other negative stuff like force majeure which were hitting us notably in our F&F business units. We had chlorine supply issues throughout the year in our Uerdingen site and then on top of that, utilities company had an explosion, so we got no steam anymore in Rotterdam, which will still be an issue for 2024. So our products are unfortunately on allocation because we cannot satisfy demands. Demand is coming back, but of course our capacity will still be restrained in Botlek Rotterdam because of the steam shortage. Of course, working capital, we started the year with a huge amount of inventories, this was criticized by investors. We promised at the outset of 2023 that this will be a core focus, a core priority in the year 2023. I'm happy to say that we delivered on that, but sweating out inventories when demand is weak is hitting you twice and therefore we were definitely optimizing balance sheet, but penalizing our P&L. If you go to Slide number 5, this is visible on EBITDA, falling to levels of €500 million is something that we definitely had not expected at all. But of course, this was a toxic year, I always stressed that. And therefore, we are everything, but happy about the profitability developments. But we clearly earmarked cash generation and net debt reduction would be priorities. And here I'm happy to say that we executed vigorously with no mercy. And as far as free cash flow is concerned, Q4 was another quarter of cash delivery of working capital reduction. All-in-all, we reduced net debt from €3.8 billion to €2.5 billion. I think a clear step in the right direction and I think better than you had expected at least when I judged this from the models I've seen. So also in Q4, we continued on reduction of debt and cash flow delivery. And I have to say, sweating out roundabout 4 percentage points in a year like '23, I've never seen before. We started '23 with 25 percentage points net working capital to sales. This is now slightly below 21 percentage points and this is a big achievement. So I'm happy that we were rigorous, hurting the P&L for sure, having a clear substantial increase and idle costs. So that was visible quarter-on-quarter. But of course, we now start 2024 in a much better shape and we will continue to focus on strengthening the balance sheet in 2024. But of course, the severity on burdening the P&L in '24 is largely done with. We will keep focus on cash flow generation, but definitely we will not again face the highest priority of reducing our inventories like we've done in 2023. Now ladies and gentlemen, let's start to shed some light on expectations for our segments and here I start with Page number 6. Consumer protection, we are modest in our promises for 2024. I think Consumer Protection by and large will do well, but we clearly see that the agro industry is intensifying destocking. We have some customers that basically have for the next 2 quarters flagged that they will deploy inventories as much as possible, so some of them went from 100 to 0. They are clearly indicating that by summer they want to be through with inventory reduction especially on stocks in Latin America, so they indicate to come back in second half, but all the big players in the industry are clearly sweating out inventories with a little delay compared to the other industries. We see that by and large markets are intact, but they want to reduce inventories that reside with their distributors, so that will definitely soften the performance and Consumer Protection, all other business units, especially F&F, hence material protection should improve F&F in the second half, material protection most likely in the first half, but Saltigo will have a tougher trading environment notably in the first two quarters where last year they did exceptionally well. Speciality Additives, here the one flag that I would like to raise is construction industry. We see that construction remains extremely tough in China. We see also that Europe remains very difficult and Germany is not improving, so here the other industry should remain stable and slightly improved, but on construction we clearly raised the flag. This is something that we are going to struggle with also in 2024. Advanced Intermediates is different. Here we see that most of the end industries are coming back. We see volumes returning, so utilization should definitely be better than last year which should not be that difficult because last year was extremely challenging. We see, of course, also that competitiveness is improving, energies are going down, freights are going down. And therefore in this business, we see definitely that '24 should be a better year. Now let's come to full year. Well, I know that the word moderate is being questioned throughout the morning. Ladies and gentlemen, let's face it, we were a little bolder last year and we had extremely ugly year with 2 profit warnings that we take notice of this and are cautious right at the beginning. I think you should understand. What happened last year, we don't want to repeat in 2024. So we want to do everything in '24 to improve our business everywhere. I think we initiated early on in '23 and some are tough measures to get our cost structure in an improved status, so that we should double rejoice when volumes return. But please understand that we want to start the year on a cautious way. We know that the year still has several quarters where we want to deliver on and we don't want to come out again with a series of profit warnings we would like from now on to deliver. This is the expectations we have. We are working hard to make this happen, so please understand that on our guidance, which has always been qualitative with [indiscernible] numbers. We start the way like we did this morning. We give more color on Q1. Q1 is a tough comparable base last year and therefore this will be, from our point of view, the last challenge on a quarter-to-quarter comparison and our expectation is based on what we hear out of our businesses, out of the sales force, that from Q2 onwards we should then start to enter again into a more positive tonality. Cash flow generation will remain as a priority on the agenda. 2024, we would like to make a further big stride in deleveraging the balance sheet so that the comments on a stressed balance sheet will be put to bed by end of the year. That's the clear target. We would then like to have a set up where you clearly see that we have everything that it takes to move the company forward. And with this I would like to finish the presentation and open the door for all of your questions.
Operator: Thank you. [Operator Instructions] The first question comes from the line of Jonathan Chung from Morgan Stanley.
Jonathan Chung: I've got 2, please. Firstly, on cash. What cash impact should we expect for your other line? So in other words, what other exceptional cash output should we model for 2024? And then secondly, on Consumer Protection volume. I'm surprised to see a negative 19% volume in the quarter for a division that you called stable and resilient back in the CMD. Can you unpack some of the moving parts in this division for Q4 and what volumes of sales is lost due to force majeure? And if I recall from your CMD, this division can grow at 5% CAGR. Do you still see this as an achievable growth rate given the weakness you saw in '23? And how long do you think -- and what leverage would it take for this division to reach your target margin of more than 20%?
Matthias Zachert: Oliver will take the cash flow question on the other line and I will start with Consumer Protection. So if you look into the full year, I think a quarter is a quarter, but does not really show the entire picture. Let's look at full year consumer protection where we're declining volume wise by 5, 6 percentage points. I think in light of destocking that was a theme everywhere also in consumer protection. I think the 5 to 6 percentage points are not completely out of sync. If you look into fourth quarter, definitely we saw that customers cleaned up their balance sheet as well. We had two major accelerators for volume decline. This was the abrupt reduction in Saltigo in our agro-chem space, so we saw that in third quarter. There was a slowdown in volume ordering in crop science, in crop protection, but a severe decline in Q4 and this is going to continue in Q1 and Q2. So here basically all the 5, 6 big players are massively reducing their ordering whilst we see that the end consumer is still in relative good shape. So that should answer the question on volume sides. Now let's come to the other 2 questions. I start with the profitability. We don't back away from the 20% margin target in this segment, but of course it needs more stability in the end markets. And that relates to -- or that brings me to your growth question. This division should grow better than GDP for sure, but we need, of course, markets being intact and here I start definitely with China. I definitely start continue with agrochemicals. Should agrochemicals be in a market environment where you de-stock, don't expect growth. We need China in consumer protection as well, in microbial control. This is one of the big markets as far as disinfection is concerned. The Chinese disinfection market is one of the biggest in the world. When this market is shrinking, don't expect the normal growth rates of 5% upwards. So we don't back away from the growth rates in Consumer Protection which we have seen in the past. We've seen margins in the high teens. And as this division develops further, we should be able to come to the 20% margin target here. But we need to have markets being intact, destocking being history and overall regional growth coming back to somewhat normal level. And then I think you will see profitability targets that we have alluded to in the past. And with this, I kick the ball to Oliver.
Oliver Stratmann: Thank you for the ball, Matthias. Hi, Jonathan. You asked for the cash impact in '24 and there's basically 2 pillars you can look at. We've guided to a total of €60 million exceptional and the biggest chunk from a cash perspective will certainly come from our forward cost savings program. And here we have a cash effect of €50 million that is announced. So if you pick anything between €50 million and €60 million, I think you will have a good assumption here.
Operator: The next question comes from the line of Chetan Udeshi from JPMorgan.
Chetan Udeshi: Matthias, I wanted to sort of get your sense. I heard you talk about that you want to settle the debate on balance sheet by end of this year. And I was just curious, what do you have in mind in terms of leverage number or absolute net debt number, so that we get a sense of how we're thinking about the balance sheet, just going back to your comments that you made previously. And just coming back to the -- I'm looking at the Slide 18 in your presentation, which is quite helpful I have to say. But there are upcoming bond maturities, not right away, but in '25. And I'm just curious, how are you thinking about refinancing those? Maybe you are waiting for the cash from the sale of the Urethane business, but is there any other plan are you looking to tap the debt market to refinance those anytime soon?
Matthias Zachert: I will pass on the word to Oliver, but I still like the balance sheet, so I think you've seen that in course of 2023 that we took that very seriously. And therefore we will continue making sure that the balance sheet will be further tidied up and look into the master of the ceremony here. Oliver, come on, hammer-down the facts.
Oliver Stratmann: Matthias and Chetan, look, you've seen what we've announced end of last year and you've heard Matthias in his opening words that there continues to be a focus on cash. We want to reduce our indebtedness, bring leverage down and we're going through a year that at least we believe in the second half will show improvement. So the focus will remain there. We want to be an investment grade rated company, preferably solidly investment grade rated. We've also said that there are certain ratios which are in the magnitude of or below 2.5 times net debt to EBITDA. Therefore, we want to work in that direction. I will not give you an absolute number now that we're going for by the end of the year, but I'd like to refer also to your '25 question. Here it's important for everybody to realize that not only are there no maturities in '24, but the maturities we have in any of the year that comes after '24 doesn't exceed €600 million. So that is literally one benchmark bond to be refinanced. However, for '25, we have already made clear that everything is basically pre-financed because we have already signed and fully committed lines in place. So when it comes to '25, we will effectively find the most attractive and most appropriate way to refinance if necessary or pay back. Your takeaway leverage remains in the focus. We are working steadily for a solid investment rate.
Matthias Zachert: And I think you will see and here I close the topic. I think '24, if everything goes according to plan, you should see an absolute net debt reduction. And at the same point in time, an increase in EBITDA. And if both components improve, you can automatically understand that the ratio net debt to EBITDA will change substantially and that's clearly the goal for 2024. We hope that at the end of the year, once everything is put into place, there will be nobody left in the market talking about capital structure. That's our goal and we take it from here.
Operator: The next question comes from the line of Jaideep Pandya from On Field Research.
Jaideep Pandya: First of all, well done on the free cash flow. First question really is on Advanced Intermediates. If I look at benzene and toluene last year, they went down sort of in the 5% to 10% range, but you dropped prices in the mid-teens it feels like. So normally you would have in sync pricing versus these two key raw materials. So could you tell us what is really going on in Advanced Intermediate? Are you getting a lot of competition from Asia? Because historically you used to be this very strong player in Europe with some periphery competition from Asia. So has that dynamic changed? That's my first question. The second question is really on sort of the two acquisitions you made in the last couple of years, IFF and Emerald. You've taken a write-down in F&F. Could you give us a bit of a background of what led to that? And is there a risk that there is a write-down on IFF because environment has changed meaningfully? And then the last question sort of is focusing a bit on the polyurethane divestment. I think you highlighted in the CMD or the roundtable a proceed value in the region of €500 million or so. Are we still looking at that as sort of a flag in the sand or is there a meaningful change? And timing-wise, do we expect this deal this year or it's a bit of a TBC now?
Matthias Zachert: All valid questions. And let me take them one by one. I think as far as intermediates is concerned or advanced industrial intermediates, first question, I mean, last year was tough. Last year was tough because on high stocks that we started the year with for one. Second, we definitely had, in terms of competition, a situation where we started the first 2 quarters with inventories that had been produced with extreme high prices out of 2022, alluding to high raws, alluding to high energies that were all in our inventories, so we started off with high pricing. And in order to avoid P&L hits at the beginning, we tried to defend our pricing, which was a tough battle in the soft markets. And therefore in both businesses, advanced industrial intermediates, but also inorganic pigments, that was really a disaster year, which you've seen reflected in the financials, in the profitability performance, but both businesses contributed substantially as far as inventory sweat-down is concerned. So we definitely start '24 on a completely different platform, which is positive. And even though the end industries are still under attack or are under pressure as far as construction is concerned where inorganic pigments is 50%, 60% exposed to, I'm definitely here more positive on this division going forward. The market leadership position remains very strong. Inorganic pigments is the worldwide leader, undebated, but of course we need a market that supports that and the same holds true for the industrial intermediates. I have full confidence that especially the big ship advanced industrial intermediates has the potential to substantially increase, if all good goes well, to even double-up in course of 2024. So let's keep an eye on that. And I ask you to keep an eye on that if we can show you that this business is a good one. Now let's come to your second question. I mean, flavor and fragrances, believe it or not, we posted around about €100 million of EBITDA 2022. We were fully on track with our financial expectations, so this business contributed extremely well. But [indiscernible] in 2023 because two of the sites, and we are not talking about small sites, we have 4 world scale plants, 1 medium sized plant, but 2 out of the 4 world scale plants had force majeure and not only for a month. Urethane was down nearly for the entire year and we were heavily impacted in Rotterdam in the second half of last year. So 2 big sites, not because of own disruptions. This was the chlorine supply, which was not there. And in the other area in Rotterdam, the utilities provider on steam exploded. We had a huge explosion and we were not the only one being impacted. You had basically severe shortages on steam, even on the commercial side and definitely on the industrial producers. So that impacted significantly 2023 and it still spills over on 2024. In an increasing end demands, we cannot supply. We are on allocation. And this definitely is not all compensated by insurance. We get, of course, some credits here, but all-in-all, the financial performance in '23 and '24 is being impaired. And you know how cash flow works when the years are close to the discounted values are impacted most, it impacts also your business plan. Our clear assumption is that F&F will come back to our expectations in the years to come, but '23-'24 are being burdened. That's the reason why we took the write-off, but we believe that this business has all it takes to rebound going forward. IFF, I mean, when you do an impairment, you do an impairment. In IFF, we see no risk for adjusting our books. And therefore I mean we saw softness in our biocides business as well because China is a big market and we also have in microbial control, construction industry playing an important role. We saw that health for animal nutrition, there are other big companies, like in the Netherlands and Switzerland that reported softness in animal nutrition. That's the same that we saw. For the first time in 10, 15 years, we saw that animal nutrition is being negatively impacted, but we see no risks for goodwill or assets being corrected in IFF. Our clear view is that also here markets will rebound. I think with this we've addressed your second block of questions and then we come to the Urethanes. The process is running. We are well on track. When we announced the potential divestiture in November last year, we were receiving a lot of inbound calls because everybody knows that this asset will come once to the market and then will disappear. We got a lot of calls in the years before at all levels of the organization, including myself. So we know that this is a wanted asset. And we have now, I think, prepared everything to start the process. So documents, data rooms, everything is populated. We have received a very, very high amount of interest in the business. And normally we would have started a normal process, but we have got so many interested parties that we do a kind of pre-marketing, first of all, to really see with the most interested parties with whom we would like to start, otherwise, we have too many players in the process, hence this pre marketing process will take us a few weeks. And then from our point of view, most interested parties, we will then do the true process very tight and I think it will be a tight and then relatively fast process. So that most likely, in course of second quarter, we will give more color to the Street. I think this is everything that I can say at this point in time and of course, more to come. With this Jaideep, I think all questions should be answered.
Jaideep Pandya: Yes. I hope the good exciting times come back soon.
Matthias Zachert: Yeah, we had enough bad stuff and the good thing about chemicals is it goes down. And when it goes down, everybody thinks it will never go up. But then you start that, it goes up again. It has taken now 6 to 8 quarters. And the good thing at least is eventually we now see that there are -- I think you call them green shoots or green shots or something --
Oliver Stratmann: Shoots.
Matthias Zachert: Shoots, yeah. Oliver is the expert. There's something green that we see and that makes us positive. But regardless, we do everything in order to make it green ourselves.
Operator: And the next question comes from the line of Tristan Lamotte from Deutsche Bank.
Tristan Lamotte: You've gone into detail on Advanced Intermediates. I'm wondering if you could do the same thing for specialty additives and the states of the market there. What does it need to come back and what are you seeing sequentially in the different parts of that business?
Matthias Zachert: Well, Tristan, additives needs next to E&E, which is improving, needs construction. And construction is really bad. I mean, I don't see -- there are some changes here and there in some of the markets, but China is still down. Germany is still down, Europe is soft. And before I turn more positive on additives, I would like to see that construction returns. That's the reason why I clearly remain very modest here. We've seen that additives and here the polymer additives had an extremely record year in 2022. The segment posted a record profitability compared to previous years. And then we had a steep decline in 2023, driven also because we wanted to reduce inventories. It was 1 driver, but even stronger driver was the brutal decline in end market demand. You've seen that also with our peers. I mean, look into ICL, some of you covered them. They had similar decline in their flame-retardant business. They made the same comments on electronics industry and construction industry. So we are no different here. We are competing in the same market segments. So when construction returns, I will definitely return more positively on my tonality for the segment. But for the time being, I remain cautious. I hope you understand. I hope this answers your questions.
Operator: The next question comes from the line of Anil Shenoy from Barclays.
Anil Shenoy: Just 2 questions, please. How are you looking at the EBITDA bridge and the FCF bridge for 2024? In your last call you mentioned that you see a few tailwinds for EBITDA even if there is no improvement in underlying conditions from synergies, from absence of one-offs and also by not having to push the high-cost inventory. So yeah, how are you looking at it? And then also in terms of FCF, for 2024, how do you see that progressing?
Matthias Zachert: Anil, I think nobody is more qualified to answer your questions than Oliver. Kick the ball.
Oliver Stratmann: Yeah. Anil, happy to talk to you first time on the phone. Let me guide you through the bits and pieces that we have mentioned and the things that are in our hands, like the forward program is the first that should be on your monitor. I explained that we have temporary savings already in the year '23 and we have €90 million of savings of which €40 million will build an incremental step going into 2024 because we are diligently working on that, I think you can build on that as well. And then we have mentioned that the decline or the reduction in inventories that we have gone through and that also our customers have gone through will not reoccur to the extent that we've seen it with the exception of the ag industry. And we had mentioned in the past that there is roundabout €100 million impact that we have seen in terms of EBITDA in the year '23. So that shouldn't reoccur. Now, if we look more into the things that have happened, unfortunately, all of them negative with the connotation that they don't reoccur, like the supplier outages we've had, namely the chlorine outage and then the explosion and the fire Matthias has mentioned on the Netherlands Botlek site at Rotterdam, both of them we have labeled adding together to something like €15 million plus €10 million so €25 million. Then there is still the implementation and the harvesting of synergies from the EKC acquisition and the IFF acquisition and that should basically lead to another €15 million per the publications that we've made. Now, the point is and I want to be very transparent here as well, with all cautiousness, there will also be cost items running against us. We have roundabout €1.4 billion sum in salaries and wages that we're paying. And I'll leave it up to you what you assume as a global increase here. But if you pick anything between 4% and 6% that will add up to at least a middle double-digit number as well. And then going through the segments, you should also bear in mind that specifically in the first half, indeed, we will be suffering from ag, agrochemical customers working on their inventories. Now, I think you have enough steps of a bridge to come to a conclusion and deduct a number for '24, I hope. And then your second question was on, as I understood, free cash flow '24. Now, you've seen us generate a pretty strong free cash flow with north of €0.5 billion in '23 and a nice chunk coming from working capital. Now, what we are expecting is a shift more towards the operational business and less will come out of working capital. I will not guide a free cash flow number, but I think it's fair to assume if EBITDA rises, if earnings rise and we keep an eye on our working capital management, that you can expect a nice free cash flow here. With that, I think we can go to the next question.
Operator: The next question comes from the line of Konstantin Wiechert from Baader Helvea.
Konstantin Wiechert: Maybe I would start with the all other segments. I think in November you were still expecting minus €150 million there and now that came in surprisingly better. I was just wondering if you could shed some more light on what was driving the improvement here? And also if you could give some more details on how the Urethane business contributed to that segment in '23? I think in the past years there was always between €40 million to €50 million EBITDA, but if I've seen correctly, in your financial statements, you also recorded a small goodwill impairment to that unit. So maybe how did that business finish last year? And then my second question, if I may come back to especially Advanced Intermediates and Specialty Additives and just if you could shed some light on your pricing strategy here, also with regards to lubricant additives. And if I've seen correctly, you recently increased your price for heptanediol. But on the other hand, we've seen these strong price decreases in the fourth quarter in Advanced Intermediates. So yeah, how are you perceiving there if volumes come back?
Matthias Zachert: Well, Oliver will take the first 2. I will pick up number 3 again. So Oliver, go ahead.
Oliver Stratmann: Fine. There's basically a short answer. The majority of the improvement in our others line is just that last year you have seen quite a substantial negative number here from foreign currency hedging. That was much better and accounted for the vast majority of the swing. The FORWARD! program that we've mentioned a few times and the savings certainly also come from the admin functions which are in there as well. And on Urethanes, maybe Matthias wants to point into the direction of performance. As far as I know, Urethanes is really a good business and has performed quite nicely. Matthias?
Matthias Zachert: Yeah. I can only confirm that and we even started with Urethanes the year pretty well with a further improvement in profitability. So the business is on the right trajectory. And with your questions on intermediates and Specialty Additives, please follow my communication of last year. And what I also said earlier on in this conference call, in both businesses, in both divisions, we started the year with high priced inventories. So we needed to defend our pricing in the second half of 2023 and notably in fourth quarter. Of course, we had to recognize that energy and raw material prices went down. In Q4, we adjusted product prices for the definitely substantially declining energy prices, which was very visible in intermediates, which is a business unit with higher raw material and energy exposure. So that's the reason for the bigger price reduction. But of course, we clearly took the direction in Q4 and continued taking this direction in 2024 to improve our utilization as well and to make sure that in the current environments, we take the markets as we want to take it as market leaders. So here we clearly in intermediates take a more competitive approach in order to make sure that utilization in 2024 moves up again and profitability strongly improves. So that's the approach we take in intermediates going forward. On additives, you've seen that market prices went down and this is driven by notably construction. If we talk about the brominated products, we see that through construction being soft, I mean, of course, then demand is at very low levels, hence the spot prices you've seen in bromine have reached 10 years lowest point. Last year in summer and autumn, then slightly improving, but we came in 2023 from 7,000 spots in Asia for brominated products to 1,700, 1,800. Now it has slightly improved to above 2,000, but that had its implication on the entire derivative value chain. So pricing in 2023 was really bottoming out and now only gradually improving. And that's the driver especially for the polymer additives division, which is the biggest in our additive segments. And here we have to see where construction business is going 2024 and onwards. That's basically the background to pricing in both divisions '23 and '24. I hope this clarifies everything.
Konstantin Wiechert: Maybe if I just may add again. So what was the reason for the rather small, but still a goodwill impairment on the Urethane? I mean, if the business is running so well, what was the reason for that?
Matthias Zachert: I mean, the reason for a better start now in 2024, we also started pricing initiatives that we didn't do in the past few years. And therefore, we have here a business that is project driven, project related. Some of these projects are kicking in '23, '24, leading then also to more innovation on the customer side, but definitely here also we had more initiatives on the pricing side where we were a little bit more humble in the past, but now making sure that technology is rightly priced and this is of course driving profitability upwards.
Operator: We have a follow-up question from Jaideep Pandya from On Field Research.
Jaideep Pandya: The first question, I guess both for Oliver maybe, is on the €100 million EBITDA improvement potential that you guys spoke about in the second half of last year through improvement in utilization. So could you just tell us if that €100 million still is on the cards or because of the softer H1 outlook now on volumes, we may not see full benefit of the €100 million and some of that will spill over into maybe '25 when the utilization progressively improves? And the second question really is on the free cash flow comment. Just wondering if I just use even consensus numbers and deduct €350 million of CapEx and interest costs, just wondering if net working capital is a wash, what sort of free cash flow then is nice? I mean, are we looking at a three-digit million number organically or do you expect Urethane inbound proceeds and therefore overall free cash flow will be nice? Just wanted to clarify that.
Oliver Stratmann: Yeah, Jaideep. Let me take the free cash flow question first. You will remember also in November, in the papers that we distributed at our analyst roundtable, we made some sample calculations to showcase what a free cash flow could be under certain scenarios and conditions. And now as I said, I don't want to give a precise guidance on free cash flow, but the charts will tell you that a triple digit number in absence of any sale of an asset is definitely what you can expect in a more normal year. Now I'd like to come back to what we said in the beginning of this call, there is a lot of uncertainty still out there. We like to remain humble for now. But with the metrics you have already mentioned, you know, our interest cost is extremely low, 1.0% through all of our instruments and the CapEx number we've guided is said to remain more or less on current level. So I think the free cash flow, even with working capital management being not to the extent that we've seen it in '23, should be seen as promising. On the EUR100 million, we need to be careful that we look at the right items here. What we have mentioned is that our inventory reduction and the fact that we had to digest high priced inventories, had an impact of roundabout EUR100 million. That was not referring to our customers buying more and our utilization going up because customers drive utilization, but rather what we had to sacrifice in order to get our business here in order. So therefore that is something as an impact and therefore I've mentioned it, where I would believe the drive-down of inventory values of working capital is not something that you will be able to see reoccurring. And also the high-priced inventories have been digested by now.
Jaideep Pandya: Okay. All right. So, if I ask simplistically, do you expect utilization to meaningfully improve this year versus last year?
Matthias Zachert: Yes. That was me.
Oliver Stratmann: I wouldn't have answered in any other way.
Jaideep Pandya: Yes, from both sides. So complete synchronization.
Matthias Zachert: We both say yes to each other.
Jaideep Pandya: How good is this.
Matthias Zachert: Almost romantic. Any further questions?
Operator: We have a follow-up question from the line of Jonathan Chung from Morgan Stanley.
Jonathan Chung: I've got 1 more question around natural gas. So what assumptions have you made for your energy and natural gas costs in 2024? And is the current lower gas price a tailwind for you or not so much because you have hashed your gas for '24 at something like at €40, which I think you mentioned before?
Matthias Zachert: Well, that was pretty tough to hear acoustically. I'll nevertheless answer what I think I've heard as a question. I think you asked whether natural gas costs, our assumptions for '24 and whether the lower gas prices would be a tailwind. From my financial perspective, I would refer back to what I've said in the past with regard to energy and raw material costs. You should see those as a pass through. For those contracts where energy is really important, which is by far not every contract that we have with customers, there we pass them on. Naturally, if you have gas prices that are much higher than in other regions, that doesn't help. Gas prices have come back quite substantially, but you should also bear in mind that they are still higher than, for example, in the US.
Operator: The next question comes from the line of Martin Roediger from Kepler Cheuvreux.
Martin Roediger: Just to be precise, can you quantify the energy costs in 2023 and to which extent these energy costs will go down in 2024? And secondly, on your stake in Envalior, you did this value adjustment in Envalior. Does this have an impact on your expectations for the EBITDA development at Envalior? The reason I'm asking is that initially you said you expect at least additional €1.2 billion as value for this 40% stake in Envalior, but in your Annual Report, you now see the fair value at roughly €1 billion. So that's a revision of minus €200 million.
Matthias Zachert: Happy to hear you on the call, Martin Roediger. So let us address both questions of yours. All of you know that energy prices exploded in 2023 and saw its implications in the last year. So when 2022, in third and fourth quarter, energy and gas went to [300, 350] as far as the TTF index is concerned, of course, it left its brutal mark in 2023 and we have talked about that a lot. '23 saw an improvement. Energy prices, gas prices went down, so we reported for 2022 an energy price ticket of roundabout €1 billion that was declining to [€500] last year, so a substantial reduction. I haven't looked at the recent absolute forecasts for this year. The latest that I've seen at the end of the year for -- where we did an analysis on our outlook for '24 was in the neighborhood of [300, 350]. So we see further easening of prices for 2024. And I think in light of the fact that storage in March, I mean, we are ending the winter periods. And if you look at the storage of our gas tanks in Germany, we are close to 70 percentage points. So we are as full as you can be at beginning of the year. And therefore I think storage will be very soon back to 90%, 100% levels. So energy and gas shortage is no longer concern to the industry. So I think here also prices will reach a more normal level going forward. Now on Envalior, I think Oliver will talk about all details here. I mean, write-offs, yes or no, of course, but write-offs have implication on book values. The true value of Envalior is not driven by book value. We always referenced that this is pretty technical in nature. The value of Envalior is driven by EBITDA and the multiple periods. And on EBITDA, we depend on synergies, we depend on rebound in the markets. There are three rating agencies that have published their reports over the last 3 months. The rating agencies are called Standard and Poor's (NYSE:SPY), Moody's (NYSE:MCO) and Fitch. They are in detail interactions with Envalior top management and the Envalior top management reports on current trading and business outlook. And if you look into the reports of these rating agencies, they are all published. You see that the Envalior business has ample of cash at hand, more than €300 million. And reference is made by all rating agencies that unused credit lines are in place giving another €300 plus million of credit facilities to Envalior management, so the company is fully liquid. And as far as profitability is concerned, all three rating agencies assume that 2024 will see a strong rebound in profitability as well. So I think if anybody wants to have more color on Envalior, there are public reports that make clear comments in all of these rating agency reports. And therefore I elude you to update your knowledge here from these reports. For us, the name of the game is not counting. The name of the game is EBITDA and multiple. And here I think on multiple, everything has been set. On EBITDA, our assumption is that the Envalior business through implementation of synergies, through a strengthening of end industry demand will show different profitability levels going forward, and that will ultimately determine the true value of this business.
Operator: Our last question comes from the line of Matthew Yates from Bank of America.
Matthew Yates: I had a question really about liquidity and the capital structure of the Group. In your outlook, you're talking about balancing profitability and inventory control. You did a great job last year in getting those inventories down, albeit at the expense of the P&L. I'm now seeing less than €500 million of cash on the balance sheet. And despite Oliver's comments, I'm not really sure how the business generates much cash at this level of profitability. So does the need to protect liquidity prevent you in any way from now rebuilding inventory or receivables? And it's that which is holding back the degree of profit recovery in 2024? I guess, my related question is whether the decisions you're taking are going to have longer term ramifications for the asset integrity given the CapEx or the level of customer service given the way you're managing working capital.
Matthias Zachert: I think when you look into our balance sheet and you don't only look at cash and cash equivalents, but you also consider the near cash assets where we have our money market funds, you will come to the conclusion that there is 1, ample liquidity on the balance sheet. And if you dig further into the annual report, you will also find that we have liquidity reserves in the magnitude of around about €2 billion. So I struggle to see that being in any way in our way or hindering us to achieve any development of the company that we are striving for. I can really reiterate here. We are convinced that the businesses we've bought are structurally prepared to deliver. We are seeing green shoots. We are financially very well set-up and we are last, but not least fully committed to bring this endeavor here, this business to fruition.
Oliver Stratmann: And the only little humble further remark I would like to make. I read in your reports that you struggle to see growth going forward because we, according to your assumptions, have too little CapEx. In all frankness, we have finished 2023 with a utilization of 60% slightly below. When you have an under-utilization of 40%, you better start utilizing your assets before you build capacities. So I think in the next 1 to 2 years, without growth investments, we can grow because we will bloody utilize our existing assets and that will drive profitability upwards.
Matthew Yates: And you said earlier that you are trying to stay investment grade. I think one of the prerequisites from Moody's is that the margin gets back above 14% ultimately. Have they given you any sort of indication over what time frame they would expect that to be delivered on? I'm sure it's not necessarily a 1-year thing, but what sort of time frame are they basing that comment on?
Oliver Stratmann: Yeah, I'm absolutely sure that you are pretty familiar with the usual treatment and that is typically 18 months that you get as a grace period.
Eva Frerker: And as there are no further questions, I would like to thank you for your interest and your questions today. And before we end our call, I would like to quickly inform you about a personal change within the investor relations team. End of next week, I will start concentrating on a little different project for a while as I head-off into maternity leave. However, I'm happy to announce that you will be in very good hands in the meantime as we welcome back Andre Simon, who most of you know already. I will spend some time in an operational position within LANXESS and will resume the position as Head of Relations during my absence. And thank you for the cooperation. I enjoyed working with you and I look forward to reconnecting with all of you when I return next year. Thank you. And now back to Matthias for closing remarks.
Matthias Zachert: Well, thank you, Eva. Thank you for your strong contribution and looking forward to seeing you again. And Andre, welcome. We thank you for your commitment and passion to Investor Relations. And now with even more business, understanding as you have been in a variety of operational functions, so this is true adding value. Ladies and gentlemen, thank you for participating to the call. We will now start going on the road. Perhaps you have noticed by now that in course of today, after the release of results this morning, management continued buying stock, owning more shares of Lanxess. This holds true for two board members, including myself. And I hope this shows you that we believe in our company, we believe in what we are doing. And therefore, we are looking forward to seeing you on the road again. Thank you. Bye-bye from Cologne.
Operator: Thank you. This now concludes our presentation. Thank you all for attending. You may now disconnect.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.