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.

Thank you. If you do wish to ask an audio question, please press star 11 on your telephone keypad. If you wish to withdraw your question, you may do so by pressing star 11 again to cancel. Once again, please press star 11 to register for a question. The first question comes from the line of Jonathan Chung from Morgan Stanley. Please go ahead.

Hi. Thanks for taking my question. I've got two, 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 sort of 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%?

Thank you. Well, Jonathan, thanks for your two questions. 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 are declining volume-wise by five, six percentage points. I think in light of destocking that was a theme everywhere also in consumer protection, I think the five to six 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 decline. reduction in Zaltigo in our agro camp 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 five, six 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 side. Now let's come to the other two 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 destock, 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 and 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 targets 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.

Thank you for the ball, Matthias. Hi, Jonathan. You asked for the cash impact in 24, and there's basically two pillars you can look at. We've guided to a total of 60 million exceptionals, 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 and 60 million, I think you will have a good assumption there.

Next question, please.

One moment, please, for the next question. The next question comes from the line of Chetan Udashi from JP Morgan. Please go ahead.

Yeah, hi. Thanks for taking my question. Mathias, I wanted to get your sense. I heard you talk about that you want to settle the debate on balance sheet by end of this year. 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 you're thinking about the balance sheet, just going back to your comments that you made? And just coming back to the, you know, I'm looking at the slide 18 on your presentation or in your presentation, which is quite helpful, I have to say. But, you know, 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 know, you are waiting for the cash from the sale of the Euroteins business, but is there any other plan? Are you looking to tap the debt market to refinance those anytime soon? Thank you.

Well, thank you very much for your question, Chetan. I mean, I would pass on the word to Oliver, but I still like the balance sheet, so I think you've seen that in the 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 yes, talk to and look into the master of the ceremony here. Oliver, come on. Hammer down the facts.

Matthias and Chetan, look, you see 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 two and a half 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.

Thank you.

Thank you, Oliver, and I think you will see, and 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 debts 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 markets talking about capital structure. That's our goal, and we take it from here. Next question, please.

One moment, please, for the next question. The next question comes from the line of Jaideep Pandya from On Field Research. Please go ahead.

Thanks, and first of all, well done on the free cash flow. The first question really is on advanced intermediates. You know, if I look at Benzene and Torween last year, they went down sort of in the 5% to 10% range, but you've dropped prices significantly. you know, in the mid-teens, it feels like. So normally you would have in-sync pricing versus, you know, 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 Emeril, you've taken a write down in FNF. Could you give us a bit of a background of, you know, 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 proceeds 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? Thanks a lot.

Thank you Jaideep for 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, 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 two quarters with inventories that had been produced with extreme high prices out of 2022, alluding to high Roth, 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 a soft market. And therefore, in both businesses, intermediates, advanced industrial intermediates, but also inorganic pigments, that was really a disaster year, which you've seen reflected in the financials and 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 therefore, 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's 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 intermediates, industrial intermediates. I have full confidence that especially the big ship, advanced industrial intermediates, has the potential to substantially increase if all 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, favor and frequencies, 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 we were hammered in 2023 because two of the sites, and we are not talking about small sites. We have four world-scale plants, one medium-sized plant. But two out of the four world-scale plants had false measures, and not only for a month. Erding was down nearly for the entire year, and we were heavily impacted in Rotterdam in the second half of last year. So two big sites, not because of own disruptions. This was the chlorine supply, which was not there. In the other area, in Rotterdam, the utilities provider on steam exploded. You 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 demand, 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 2023-2024 are being burdens. 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 a 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 IFFs. 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 Eurothanes. 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 markets 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 assets 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. 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. This pre-marketing process will take us a few weeks. From our point of view, most interested parties, we will then do the true process very tight. And I think it would be a tight and then relatively fast process so that most likely in course of second quarter, we will give more color to the streets. I think this is everything that I can say at this point in time. And of course, more to come. With this, Jaydeep, I think all questions should be answered.

Yes, I hope the good, exciting times come back soon. Thanks a lot.

Yeah, we had 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. And it has taken now... Wow. Six to eight quarters. And the good thing at least is eventually we now see that there are, I think you call them green shoes or green shots or something. 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. Thank you.

Next question, please.

The next question comes from the line of Tristan Lamott from Deutsche Bank. Please, go ahead.

Hi, thanks for taking my question. You've gone into detail on advanced intermediates. I'm wondering if you could do the same thing for specialty additives in the state of the market there. What does it need to come back and what are you seeing sequentially in the different parts of that business? Thanks.

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 it's clearly remained 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 one driver, but even stronger driver was the brutal decline in end markets demands. You've seen that also with our peers. I mean, look into ICL. Some of you covered them. They had a similar decline. And they are 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. Further questions, please.

One moment, please, for the next question. The next question comes from the line of Anil Shenoy from Barclays.

Please go ahead. Hi, everyone. Good afternoon, and thanks for taking my questions. Just two 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?

Anil, I think nobody is more qualified to answer your questions than Oliver.

Yeah.

Kick the ball.

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. Here we have the, I explained that we have temporary savings already in the year 23, and we have 90 million of savings, of which 40 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 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 around about 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 Netherland Botlek site at Rotterdam. Both of them we have labeled adding together to something like 15 plus 10 million, so 25. And 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 items, cost items running against us. We have around about 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 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 half a billion in 23 and a nice chunk coming from working capital. Now, what we're 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.

One moment, please, for the next question. The next question comes from the line of Konstantin Wichert from Bada Helvea. Please go ahead.

Yeah, hi. Thanks for taking my questions as well. 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 Eurofence business contributed to that segment in 23. I think in the past years, there was always between 40 to 50 million EBITDA. But if I've seen correctly in your financial statements, you also recorded the small goodwill impairment to that unit. So maybe, yeah, 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 set some allies on your pricing strategy here um also with regards to lubricant additives and uh if i think correctly you recently increased your price for hexane deal but on the other hand we've seen the strong price decreases in the fourth quarter in advanced intermediate so uh yeah how are you perceiving there if volumes come back

Well, Oliver will take the first two. I will pick up number three again. So, Oliver, go ahead. Fine.

Yeah, 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. And that was much better and accounted for the vast majority of the swing here. 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 EuroSaints, maybe Matthias wants to point into the direction of performance. As far as I know, EuroSaints is really a good business and has performed quite nicely.

Matthias. Yeah, I can only confirm that we even started with Eurotains 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 speciality editors, 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 environment, 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 editors, 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, and the Spot prices you've seen in Brom 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, Anil.

Yes. So thanks. Maybe if I just may add again, so what was the reason for the small, rather small but still a good will impairment on the Eurofins? If the business is running so well, what was the reason for that?

The reason for a better start now in 2024, we also started pricing initiatives that we didn't do in the past few years. 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 have 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.

Okay, thanks.

Thank you. One moment, please, for the next question. We have a follow-up question from Jai D. Pandya from OnField Research. Please go ahead.

Thanks a lot. 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. 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 Uh, just wondering if net burden capital is a wash, um, you know, what sort of free cashflow then is nice. I mean, are we looking at a three digit million number organically or do you expect neuroscience inbound proceeds and therefore overall free cashflow will be nice. Just wanted to clarify that. Thanks a lot. Yeah.

Um, let me take the free cashflow, uh, question first. Um, 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 set 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 2023, should be seen as promising on the hundred million we need to be careful that we that we look at the 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 round about a hundred 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... 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.

OK. All right. So if I ask simplistically, do you expect utilization to meaningfully improve this year versus last year? Yes. Okay, thank you. That was me.

I wouldn't have answered in any other way. Thank you.

Yes from both sides. So complete synchronization.

We both say yes to each other.

Ah, how good it is. It's almost romantic. Any further questions?

One moment, please, for the next question. We have a follow-up question from the line of Jonathan from Morgan Stanley. Please go ahead.

Hi, thanks. I've got one 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 2024 at something like 40 euros, which I think you mentioned before? Thanks.

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 yes okay all good any further questions one moment please for the next question the next question comes from the line of martin rodiger from kepler chevreul please go ahead

Yes, thanks for taking my two questions. 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 Invalior, you did this value adjustment in Invalior. Does this have an impact on your expectations for the APDA development at Invalior? 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 value, but in your annual report, you now see the fair value at roughly 1 billion. So that's a revision of minus 200 million euros.

Thank you. Happy to hear you on the call, Martin Rüdiger. 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 around about 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 a further easing of prices for 2024. And I think in light of the fact that storage in March, I mean, we are ending the quote unquote 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% level. So, energy and gas shortage is no longer a concern to the industry. So, I think here also prices will reach a normal level, more normal level going forward. Now, on a value, 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 an value is not driven by book value. We always referenced that this is pretty technical in nature. The value of an value is driven by EBITDA and the multiple periods. And on EBITDA, we depend on synergies. We depend on rebounds in the markets. There are three rating agencies that have published their reports over the last three months. The rating agencies are called Standard & Poor's, Moody's, and Fitch. They are in-detail interactions with Invaluor top managements. And the Invalior 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 Invalior business has ample of cash at hand, more than 300 million. And reference is made by all rating agencies that unused credit lines exist. are in place giving another 300 plus million of credit facilities to involve your 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 and value, there are public reports that make clear comments in all of these rating agency reports. And therefore, I allude 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 value of business through implementation of synergies, through a strengthening of end industry demands, will show different profitability levels going forward. And that will ultimately determine the true value of this business.

Thank you.

You're most welcome, Mr. Rüdiger. And now my question again. Anybody else who has something to raise, then please go ahead.

We have one last question. One moment, please. Our last question comes from the line of Matthew Yates from Bank of America. Please go ahead.

Hey, afternoon, everyone. Thanks for squeezing me in. 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. Thank you.

Yeah, Matt, thanks for your question. 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 one 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.

And the only little humble further remark I would like to make, I read in your reports that you – a struggle to see growth going forward because we, according to your assumptions, have too little capex. In all frankness, we have finished 2023 with the utilization of 60% slightly below. When you have an underutilization of 40%, you better start utilizing your assets before you build capacity. So I think in the next one to two years, without growth investments, we can grow because we will bloody utilize our existing assets and that will drive profitability upward.

Thank you both. 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 timeframe they would expect that to be delivered on? I'm sure it's not necessarily a one-year thing, but what sort of timeframe are they basing that comment on?

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.

Thank you, Oliver.

Sure. 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 the 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 André Simon, who most of you know already. André spent some time in an operational position within LangSys and will resume the position as Head of Relations during my absence. 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.

Well, thank you, Eva. Thank you for your strong contribution and looking forward to seeing you again. And Andri, 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've noticed by now that in course of today, after the release of results this morning, management's 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.

Thank you. This now concludes our presentation. Thank you all for attending. You may now disconnect.