Lanxess Ag Ord

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.

Thank you Annika and a warm welcome also from our side. Thank you for joining the Lanxess 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 Sachert, 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.

Thank you, Eva, and welcome to all participants on this conference call. I would like to start our presentation on slide four, 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 and 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 the 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 segments. We counteracted the softness and the decline in markets with our forwards program. And we're fully on track to mitigate the turbulences we faced in the markets. And of course, with the European systems divestiture, we started end of the year the process and definitely will continue executing this in the months to come. Noteworthy is also our very nice improvements 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, EcoVardis, 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. Fortunately, When it comes bad, you are confronted even with other negative stuff like force majeures, which were hitting us notably in our F&F business units. We had chlorine supply issues throughout the year in our Erdingen side. And then on top of that, a 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 a bottleneck 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 would 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 sheets, but penalizing our P&L. If you go to slide number five, this is visible on EBITDA, falling to levels of 500 is something that we definitely had not expected at all. But of course, this was a toxic year, I always stress 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, 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 to 2.5. 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 four percentage points in a year like 23, I've never seen before. We started 23 with 25 networking 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 in idle costs. 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 2024 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 ventures 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 the page number six, consumer protection. We are modest in our promises for 2024. consumer protection by and large will do well, but we clearly see that the agro industry is intensifying the stocking. We have some customers that basically have for the next two quarters flagged that they will deploy inventories as much as possible. So some of them went from hundreds to zero. 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 and material protection, should improve. F&F in the second half, material protection most likely in the first half. But Zaltico 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 industries should remain stable and slightly improve, but on construction we clearly raise 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 an extremely ugly year with two 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. We want to do everything in 24 to improve our business everywhere. I think we initiated early on in 23 and summer 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 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 full via 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 setup 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.