LNXSY - LANXESS Aktiengesellschaft (LNXSF) CEO Matthias Zachert on Q2 2022 Results - Earnings Call Transcript

LANXESS Aktiengesellschaft (LNXSF)

Q2 2022 Earnings Conference Call

August 04, 2022 04:00 AM ET

Company Participants

André Simon - IR

Matthias Zachert - CEO

Michael Pontzen - CFO

Conference Call Participants

Charlie Webb - Morgan Stanley

Matthew Yates - Bank of America

Martin Roediger - Kepler Cheuvreux

Rikin Patel - BNPP Exane

Jaideep Pandya - On Field Research

Chetan Udeshi - JPMorgan

Rob Hales - Morningstar

Markus Mayer - Baader Bank

Georgina Fraser - GS

Sebastian Satz - Barclays

Andrew Stott - UBS

Presentation

Operator

Ladies and gentlemen, thank you for standing by. Welcome, and thank you for joining the LANXESS Conference Call.

I would now like to turn the conference over to André Simon, Head of Investor Relations. Please go ahead.

André Simon

Thank you very much, Judith, and a warm welcome from my side to our Q2 conference call from my end as well. As usual, I have our CEO, Matthias Zachert; and our CFO, Michael Pontzen, with me. Please take notice of our safe harbor statement. And with that, I'm happy to hand over to Matthias for a brief presentation. And afterwards, as always, the Q&A. Matthias, please go ahead.

Matthias Zachert

A warm welcome from my side as well here from Cologne. And I'd start the Q2 presentation updates with Slide 4, and the presentation should have been dispatched and put on our Internet. So on Page 4, we basically highlight Q2 in a big picture. And here, as far as the new reporting structure is concerned, please take a lot of the fact that due to the announced joint venture with a minority stake that we are going to take in this global polyamide powerhouse, we are also going to adjust our reporting in line with a more streamlined, de complex portfolio, which is purely focused on chemicals and without polymers. And then discontinued operations, you see here highlighted in the slides the numbers for second quarter, €253 million, which is a reasonable increase of around about 14%, 15% versus the base 2021 of €221 million. As far as the discontinued operations is concerned, our polyamide business that's reasonably well -- as well, having a good punch in the second quarter, even though the business was softening a little bit. So with the €69 million of discontinued operations, we were fully in line with our guidance for Q2 that we have provided with Q1. All in all, this is a steep increase. This reflects a steep increase in sales, 36%. The majority of this is coming from price, price, price.

We were thus able to basically roll over the entire raw material price inflation, energy price inflation and the steep increase in logistical costs as well. Of course, we saw in the second quarter some softening in end markets, notably China. And on top of that, we faced severe logistical issues. This is really a drag. It has not improved over the last three months, it has rather become tougher, also driven by the lockdowns in China and the United States and Europe have not improved either. EBITDA up 14%, which I think is reasonably in line with peers and showing you that we are fully on track with our new portfolio. I continue with the highlights and lowlights on Page #5. On the highlights, noteworthy, we finished the acquisition of the IFF microbial control business, 1st of July, we started the integration. And over the last few years, this business has now developed from one of the leading companies and biocides to the champion in the area where we operate. We are the uncontested leader globally.

Disinfection as far as beverage technology is concerned, biocides, we are taking the first place. Around about €1 billion sales business, truly global, truly competitive. And now from this base, we are going to operationally strive for excellence. The second big strategic move definitely has been the announcement on the polymer powerhouse. Together with Advent, we are going to acquire the DSM business if authorities approve the transaction and the new global leader in engineering materials is going to emerge. Together with Advent, we are currently conducting assessments on the leadership, from the DSM side, link those sides and I'm looking forward to announce then the new leadership team for this global powerhouse in the next 4 to 6 weeks to come. We are going to build here a new polymer group, striving for growth, striving for excellence, striving for value creation. Of course, by this, we also reduced the wanted complexity reduction that investors and analysts have asked for over the last 12 to 18 months. And this is, of course, leading then to the new segment structure we are reporting from now onwards, which is purely concentrating on specialty chemicals. As far as second quarter is concerned, you see that Specialty Additives came out strong, whilst last year still was facing some sluggish end markets here and there, especially as far as aviation is concerned, the lube add business did well, aviation returned with high-margin products.

And as far as brominated products, of course, here, we benefit from the overall gradual increase in pricing due to scarcity of brominated products at all. And thus, we could expand margins and in absolute terms, increase EBITDA. For the rest of the year, I look positively at Additives. Consumer Protection performed well, too. And here, strong contribution coming from the flavors and fragrances business units from the integrated business of Emerald Kalama. Together in the team up, we now unlock value creation potential, go for synergies and bring this business towards excellence. So both business divisions did well. Intermediates as flagged in Q1 faced the increase now in energy prices, whilst Q1, we showed strong results in Intermediates. Now in Q2, we take the hit of Q1 raws and energy. This is the normal quarterly methodology that good analysts and investors that track us should not be surprised of. I'm very proud that today, we can announce that SBTi approved also our 1.5 climate path, which is fully in line with Paris agreements. I will come to that in a moment. We handed in our Scope 1 to Scope 3 targets and got the golden standards from SBTi 1.5 climate path approved. Challenges, logistics is a real drag. And of course, inflationary environments, we've not seen something like this in the last 20, 30 years.

Inflationary environment is now there. We have to deal with it, and we are dealing with it. Page 6 shows you the new reporting structure of the company. So on the left-hand side highlighted in red, new LANXESS. On the right-hand side, you see Engineering Materials. The segment will be dissolved. High Performance Materials will be reported under discontinued operations. From next year onwards, should the joint venture be established and closed, it will be reported as equity where we will stand -- where we will take a stake in this joint venture of up to 40%. As far as Urethanes is concerned, it will be consolidated in the Recon segments. In 2023, we will fully focus on striving for excellence in IFF. So the integration is key for 2023 to get that done in a proper way and unlock value. And we will, of course, focus heavily on creating the joint venture between DSM and HPM that will keep our organization and management busy 2023. Urethanes will be parked in Recon. And in 2024, we will see if we monetize it for a lot of money because interest is high in the markets or if we keep it under Recon for the time being. This is something we will address to unlock value going forward.

Page 7, SBTi approval. 2019, we went out and communicated to you climate neutrality target 2040. We were here around about 10 years more aggressive than industry. And this was basically a 12 to 16 months preparation. So in order to communicate aggressive Scope 1, Scope 2 targets, we worldwide, first of all, had to assess our emissions for CO2 at all sites, all products, we did that. Once we had transparency, we decided on the approach we take to reduce CO2 emissions. We identified priority projects, the ones that we have communicated in the meantime, we decided to decouple emissions from growth. And of course, we pursue technology innovations. And with this, we were then able, after we had established transparency, defined projects in the third place we then communicated targets. The same approach we took on 2020 -- we took on Scope 3. So over the last 12 months, we basically achieved transparency. This was pretty hard work because Scope 3 is more difficult to assess.

On upstream, it's easier; downstream, it's more difficult. So it was intensive work of a lot of people. And after 12 months, we were basically ready to assess upstream, downstream and to analyze our absolute emissions in Scope 3. Afterwards, we defined our projects and action items and then also defined the targets. With this, we now go out and we went out and registered based on the assessments and the targets of Scope 3, we then registered our Scope 1, Scope 2, Scope 3 emissions with SBTi, and we are happy now to announce that SBTi has approved the best-case path, has given us clearly the stamp on LANXESS climate strategy, Paris agreements and therefore, qualifies for the 1.5 degree path. As most of you hopefully know, this is in the chemical industry, one of the very few examples where 1.5 degree is given by SBTi. So we are happy that our aggressive sustainability targets are acknowledged. And as you know, we are -- management has paid and incentivized on this.

On Page 8, we are providing the guidance on the new parameter. Of course, I have to clearly stress this is based on current market data. There is no gas embargo or other things factored in. We can only provide our guidance based on what we know as of today. I cannot factor in all sorts of things that are not in our hands and that nobody of us that can forecast. So this guidance is made on what we know as of today. Our view on the current economic environment is energy and raws will remain high. We will continuously still face disruptions in value chains. This will not ease in the second half. It will earliest ease in 2023. And there will be increasing pressure on inflation. I don't think that inflation is going to ease this year. At best, it will calm down in 2023, 2024. Based on this, our guidance for the new perimeter is compared to apples-to-apples. Last year, round about €800 million from continuing operations, and we guide for a, I think, decent increase to €900 million to €1 billion. And this, IFF is fully reflected for the second half. And as I noted before, HPM is fully discontinued.

Ladies and gentlemen, with this, I would like to open up the call for all your questions.

Question-and-Answer Session

Operator

[Operator Instructions] And the first question is from Charlie Webb, Morgan Stanley.

Charlie Webb

Maybe just two for me. So first, just in terms of the guidance and now with IFF microbials into the portfolio, what kind of contribution are you expecting from that in the second half? How is that business faring, would be very helpful. And how does that compare, obviously, to the kind of through cycle, mid-cycle or normalized? I think you've put earnings you kind of set out for us previously when you announced the deal. And then just second question around the demand environment, obviously, citing logistic constraints and other challenges as some of the reasons as to why volumes are down in the second quarter and not per se alleviating in the second half. So how do you see the volume dynamic year-on-year and sequentially across the group? And any kind of pockets of, I guess, strengths or ongoing strength, on any areas where you see a bit of weakness or softening in particular, would be very interesting.

Matthias Zachert

Let me address both of them. As far as guidance is concerned, we guided with the acquisition last year, basically 12 months ago, that IFF on normalized basis would be around €100 million -- $100 million normalized because we saw it falling at the time of the signing. So the business used to be at something like $120 million, $130 million EBITDA. And at the time of the due diligence, it was at around about $80 million because it was basically handed over in the last 3 years, 3 times from owner to owner, so clearly under managed. So from this $80 million, we now got it in our hands in a pretty unmanaged stage. So what IFF basically did, they did the carve-out, but they didn't really care for running the business according to what was needed. We saw an inflationary environment. And the business, as we have seen now, basically did not do any price increases at all or literally none, very, very low single digits. So not completely what we have done. So we always captured input cost increase. This was not being followed. This has not been followed by IFF. So the profitability right now is not at the $80 million, it's around about $20 million below this.

On top of that, we will take into our second half this year. Of course, what we will do instantly in the -- once we have taken a grip on the business in our hands, we will go for the obvious what all of the companies have done. So this will not come as a surprise to customers over the next three to six months, there will be clear pricing, pricing, pricing, which the business needs. And therefore, we will bring it over the next two to three years to the desired level that we have targeted for in our strategic assessment because the business on the root are all the high, for instance, is super-duper strong. We fortunately see that also the energy and gas markets in the United States are rebounding. Also here, no price increases were done even though the volumes are highly wanted. So it offers us better momentum going forward. But that is what we integrate in the second half. So we take a modest improvement on EBITDA things through IFF. And then in the next one to two years, we are going to bring this business to operational excellence.

As far as your second question is concerned, we had a volume decline of 6% in second quarter. Not all of that is driven by logistics. Our customers don't tell us, of course, why they order. But if we look at the logistical constraints, it has taken about 1% to 2% of volumes. The rest is coming from softening markets. So we don't see a sudden end of the volume momentum. This is not the case. We see a decline in China. We see a softening in Europe. We see a softening in the United States. And this was also true for the third quarter. So softening in China or stronger softening in China; softening, modest softening in Europe and the United States, but there is no radical decline from one month to the other. As a matter of fact, Q3 started reasonably, sales-wise, reasonably well for the new LANXESS portfolio. But of course, our assumption now is the global economy is no longer in a growth momentum, but it's going to soften going forward. And that is what we -- how we look on the macroeconomic scenery. I hope, Charlie, that does clarifies both questions.

Operator

And the next question is from Q - Matthew Yates, Bank of America.

Matthew Yates

I see that S&P recently put you on negative outlook like they did for a few chemical companies. But I'd like to ask if that decision impacts the strategy or capital allocation in any way and just around the proposed exit from nylon deal. I think when you announced that, you said it was a minimum 4%. Would you consider to get some more cash upfront? Or do you still want to stand by that structure to benefit from the future synergies? And maybe related to the transaction, you said part of the proceeds would be used for a share buyback in due course, again, given the general concerns about leveraging the macro outlook, would you rethink that plan for the buyback, just like you did during the depths of COVID?

Matthias Zachert

Let me address the first one. Yes, Standard and Poor's has basically taken a negative stance on cyclical companies. So a variety of companies, including ourselves, but I mean, companies like BASF have also been put on negative watch. We have not been downgraded. We've been put on negative watch. Moody's has confirmed, Scope has confirmed. So it's a negative watch because Standard & Poor's has turned more skeptical, is this the right words or cautious. I think that is the right word on chemicals in Europe, and that was driving their assessments. So has Standard & Poor's any implications on our capital allocation, well, I think we've clearly set the scene already at the beginning of the year. I mean we don't need now rating agencies to have a common sense approach. I think our company has always pursued a common sense and reasonable capital allocation. So at the outset of this year, even last year, we said 2021 was a year of growth. And we said that 2022, 2023 is going to be a year of deleveraging.

So that was clearly announced at the outset and even last year. And this, we are pursuing ever since the polyamide deal shows you that we walk the talk. And there's nothing changed in terms of structure. We are exactly pursuing the structure. We negotiated this transaction in a way that we get with the first step i.e., moving down to 40% or less, a big capital injection or big cash proceeds of €1.1 billion or more. And with this, of course, we substantially strengthened our balance sheet. As far as the second question is concerned, buyback. I mean we think that having the opportunity for buyback is good. And should the market environment be one and the capital structure of the company be one that niche for the buyback, we will go for the buyback. Should we see that markets deteriorates and therefore, the company should be more cautious, it's common sense that we will not go for the buyback, but rather for solidity of the balance sheet. This is common sense. This is how you lead companies through downturns and up cycles. And so we've proven this over the last several years, hence we will continue doing this moving forward. I hope this clarifies both questions.

Matthew Yates

Do you mind if I just ask a related one, perhaps it's pointed towards Michael. But correct me if I'm wrong, I don't believe LANXESS was factoring receivables in the past. So that looks like a change of approach to me. Can you just talk a little bit more about what the discount or haircut you have to take when selling that and whether that is nonrecourse in nature?

Matthias Zachert

Yes. Well, I take it up and Michael will step in, in case need be. We did factoring already once. It was, at that point in time, the CFO was myself. I think it was in the time of financial crisis, so many years ago. So when you look at the factoring, this is now being implemented in a modest way in June, meaning we started the analysis and the preparation for that in March. And now I come back to crisis management. What did we do in March? Basically one, two weeks after the aggression, war started and the management team, we were sitting together on taking decisions, exiting Russia, managing costs tightly, and we basically decided in March one, two weeks after the war started to maximize liquidity. Because my experience has always been in crises, the one thing that you need to have ample of is liquidity, liquidity, liquidity. So the decision that we took together with Oliver and Michael, we said we tap and we prepare all liquidity opportunities that exist in the markets. And we assess that in March. In March, pricing was benign. And then we decided, basically, first, to issue a benchmark bond six years, €600 million, no covenants, coupon 1.75% fixed. Today, you would pay 4 to 5 percentage points.

So right timing. I also asked Oliver next to the undrawn revolving credit facility of €1 billion to establish bilateral credit facilities. And he did that with a few power banks. So on top of the undrawn €1 billion revolver, we established bilateral credit facilities, without covenants, without nothing for cheap money, double-digit basis points, commission fee. That's it. Today, you would pay several percentage points. These revolvers or these bilateral credit facilities of €750 million do cost very, very, very little money and are in our draws. Third, we looked at our working capital. I mean, we've seen brutal price inflation over the last one and half years. We inflated our net indebtedness around about by €700 million to €1 billion, which is parked on the working capital. I've never seen that before as CFO and the CEO of the company. We have now €2.7 billion, which is basically our market cap, in receivables and inventories. And in March, we decided there is no point in parking all liquidity in the working capital, let's monetize some of this. And when we looked into the factoring rates, they were bloody cheap. So if I look at the bilateral credit facilities and at the factoring compared to the bonds, they are the cheapest in our portfolio.

Everything that we have in the fixed income markets is above 1 percentage points from now on. I mean the bond was at 1.75%. All other bilateral credit facilities and financial engineering is double-digit basis points, contractually agreed for the next two years, so cheap money. And then we took the decision to basically get prepared for all three financial buckets, issue the bonds, prepare factoring and to the credit facilities. And that was done in March. Today, we would pay far more than this, and this is how you prepare for liquidity, liquidity, liquidity. So this was a strategic decision, and we were happy that we started this process in March because today, it would be far more costly. That was basically the rationale behind. I hope this clarifies everything.

Operator

The next question is from Martin Roediger, Kepler Cheuvreux.

Martin Roediger

Two questions from my side. Regarding your gas supply contingency plans. My question is, a, do you or your service provider, Currenta, received natural gas from UNITEX? And what is the feedback you received from your raw material suppliers when it comes to potential -- to security of supply in case your suppliers are affected from a potential gas curtailment or gas allocation in Germany? And the second topic is on the water level of the Rhine, which is currently very low. Currently, there is no impact to what we see at you. But when do you think it becomes an issue for you regarding receiving raw materials or getting the products shipped to your customers?

Matthias Zachert

Well, as far as Currenta is concerned, I will not talk about the suppliers to Currenta. I can only tell you one thing, which is positive. And if you look into the gas supply of Germany, they are basically two zones. The south of Germany gets gas from the east, the north and the west from Germany, especially north received predominantly gas from LNG terminals and from the Netherlands. So of course, we have to see should gas embargo be imposed, how this will be addressed by the respective states. But at this point in time, the indications, and we are in close contact with Berlin, but also with Northern Australia governments. At this point in time, the indication at least that we are getting is that the situation could turn out to be rather to be not positive, but be not severely impacted. As far as raw material supplies is concerned, we don't get insights into this. I mean everybody does the analysis currently on its own. What we are doing in the Kennedyplatz, we orchestrate between the respective Kennedyplatz companies.

We help each other. We, of course, know each other very well, especially as far as Covestro, Bayer and ourselves is concerned. So we have put in place a steering group in order to optimize the situation for all of us so that we make sure that our most profitable products and system relevance products will be kept on stream. And as far as our mitigation measures are concerned for our own sites, I think we've been one of the first company being crystal clear on this in Q1. We've looked at that again over the last three months. There's no change to this. So we feel very well prepared should a complete gas embargo be imposed. Now to the River Rhine, first thing I would like to say after -- I think it was 2018 when we had the drought and the decline of water level in the River Rhine last. At that point in time, please recall we were not impacted because we are more downstream of the Rhine. We are not in the south of Germany.

We are more in the north where the level of the River Rhine is always higher. In 2018, we were at a very, very low level of 67 centimeters. At that point in time, we were not constrained, but it became pretty tight. But today, we are at 104, so clearly far away from the 67. But of course, the level is pretty low. Are we impacted today by this? Not at all. Have we learned out of 2018, yes, we have. In 2018, we decided basically to be prepared for another drought, another decline to low levels. So we basically have changed our sourcing that cost us around about €1 million to €2 million incremental costs. We have stocked up inventories in times where we might see a tightening or a drought or lowering of the River Rhine level. So we are prepared. But as of today, there is no negative implication from the low level of the water in this lovely River Rhine. I hope this clarifies all of your questions.

Operator

The next question is from Jaideep Pandya, On Field Research. Jaideep, at the moment, we can't hear you. Your line is very bad. Maybe you can change this a little bit. Okay, maybe you have to dial in again. At the moment, we can't hear you very well. I will move on with the next question. It is from Rikin Patel, BNPP Exane.

Rikin Patel

Firstly, I just wanted to go back to the conversation on gas. If we think about the headwinds or potential headwinds you sized at Q1 of €80 million to €120 million. How does that number look today, especially when you've removed HPM from the continuing business? And then secondly, just on bromine. You mentioned earlier a step-up in pricing that you've been able to put through in the last couple of quarters. I appreciate a lot of your contracts are on the duration. So should we still be expecting material increases in pricing come 2023?

Matthias Zachert

I haven't understood your first question on gas. So you need to reiterate it. On bromine, I have no crystal ball, but of course, due to the tightness of bromine, especially as far as supply is concerned, we have seen over the last -- I mean, basically since we acquired Chemtura, the bromine prices on a yearly average basis, not on a quarterly, but on a yearly average basis have been trending up year-on-year. When we acquired Chemtura, it was at around about $2,600, $2,800. It has now moved from that level over the last few years to $3,000, then $4,000, $5,000 even. And now at some point in time, even in the tightening quarters to levels in spot market Asia and I referenced only to the spot market Asia, even to levels of $5,000 and $6,000. So this is not bad because we are extracting bromine. And the higher the bromine prices are whilst we are extracting bromine out of our own wells, of course, the more you get the competitive edge, the competitive advantage. But where bromine is going to go in 2023, I don't know. If you factor in a super-duper recession next year, then, of course, construction will be down and the market softens and then bromine prices should also decline. If the market remains stable, then, of course, due to the tightening of supply, you might see bromine price at a high level or even rising. I have no crystal ball. I have to confess that. If you can tell me where to buy a crystal ball, I will do this. But therefore, I can only approach this with a rationale analysis and that what I've just conveyed to you was my rationale analysis.

Rikin Patel

And just on the gas question, I'm asking about the estimated direct impact of €80 million to €120 million you put out in Q1. I'm just trying to figure out if that number looks different now versus what you told us a couple of months ago?

Matthias Zachert

Well, I'm not aware that we gave a specific gas…

Michael Pontzen

Referring to the standstill €80 million to €120 million.

Matthias Zachert

Michael will take it.

Michael Pontzen

Yes, we're not -- I'm not sure either, Rikin. Are you referring to the simulation which we run in case of a shortening of gas supply, which would lead if we reduce our asset or our sites here back in North Rhine-Westphalia, of which we have 53 by managing the different utilization rates and bringing down around 4 of our plants, and that would have an impact of €80 million to €120 million on an annual basis. If that is what you're referring to, that is still true.

Rikin Patel

Yes, that's what I was referring to. Thanks.

Operator

We try again with Jaideep. Please go ahead. Your line is now open.

Jaideep Pandya

Thank you. I hope you can hear me. The first question is on the HPM business. Well, actually, congrats on your Scope 3 climate targets. Just want to understand if this actually includes the exclusion now of HPM going forward? And how much -- if you can give us any color on how much reduction that has caused to your energy intensity and your CO2 intensity? And hence, you have this gold star from the outside agencies. That's my first question. The second question is really around your -- again, sorry to ask this, but really around the HPM transaction. I just want to understand the steps here. So is this going to be where, first, you and Advent buy the DSM business and DSM gets the money and then you get the money, the €1.1 billion? Or is it that Advent has to pay both of you guys at the same time? So I'm just trying to understand the cadence of cash flow. And if you can give us any color or confidence on whether Advent in your view, has secured all the financing around this thing or not? And then the final question is Matthias really looking forward to the CMD, but also just want to check the EBITDA level is around €1 billion at a completely different portfolio today than it was 10 years ago. But are we now going to, let's say, have after the year of divestment, a relatively stable portfolio at LANXESS. Or are we going to continue evolving? And so I just want to understand if this is now the base and how do you really see LANXESS' future? Do you think that we should think about absolute growth or you should think about the quality improvement? I'm just asking in the context because a lot of your peers have kicked the gear in terms of EBITDA generation this year. And whilst you guys obviously have been doing a lot of portfolio management, therefore, your quality has improved. So those are my 3 questions. And yes, well done on Michael, for the cash flow and factoring.

Matthias Zachert

So we can answer the quality of your questions. Let me take the two HPM questions. As far as the SBTi targets are concerned, they are definitely on the full scope of the portfolio. So when we registered three months ago, of course, the HPM deal was not announced. It was yet in the negotiations. So therefore, the SBTi, we achieved on the full-fledged portfolio. HPM is a more an energy-intensive business, clearly. It's a business that, of course, also has currently more CO2 emissions because of laughing gas, which we are working on with really top-notch projects. So it has all the potential to be lower in emissions, but currently, it's still high in the emissions. And of course, we will announce in due course a new CO2 reduction path once HPM is excluded. But definitely, it's going to be a few hundred thousands lower in terms of Scope 1 and Scope 2. Now as far as the transaction is concerned, of DSM and HPM by Advent. I mean, you can assume that DSM, but you can also assume that LANXESS are pros.

I think, I mean, we are not doing transactions with companies without secured financing. And DSM, definitely, is a very knowledgeable M&A powerhouse as well. They wouldn't do that either. They are pros too. And therefore, what both corporates have made sure is that we only engage in a binding transaction, with binding financing and the financing houses for Advent. I mean, Advent is a global powerhouse in the PE world. They are not operating with Mickey Mouse banks. They are operating with global leaders in the Western Hemisphere. So the banks that are guaranteeing the transactions are true global players, all known to you. Some of you work for them. So that's point number one. And I'm -- I mean this is keeping us now very busy. We are very actively working with Advent, but now I have the next conference call tomorrow. We are currently in the process of making the due diligence on both management teams. So we would like to assess the management teams of both companies in a neutral way.

And then hopefully, in September, we are going to announce the first line of management for this global powerhouse. This keeps us busy because we want to have the best A-team for this new polymer group. And this is the first priority of Advent and ourselves. And I think we go in the right direction. And I see that Advent is very professional in approaching this. We are, of course, knowledgeable on how to do this as well. So this creation of a new polymer group keeps both companies pretty busy with positive mindset. Now on the portfolio, I mean the new configuration that you see Intermediate Additives and Consumer Protection, we have now turned into a chemical group. We used to be a chemical and polymer group. If you rewind 5 years when rubber was still there, the majority of our portfolio was polymer based. This has changed completely. We are now a true chemical value chain-based company, once the transaction is completed. And this will now be the configuration. There will be some -- there is still some alignment here and there, but the big strides have now been made on portfolio configuration. And now the next target definitely is not to increase quality.

Now the next target is going to be absolute EBITDA growth. From this level now, we have to bring this business in absolute terms upwards through growth, unlocking synergies, putting in innovation, new potential application from innovation and increasing margins. So that is going to be now what will happen over the next few years. And I think we do it now on a platform where in any business that we are in, we are having a leadership position, we are having high quality of assets, and now we have to get quality of earnings, quality of cash flow. I hope that answers everything, Jaideep.

Operator

The next question is then from Chetan Udeshi, JPMorgan.

Chetan Udeshi

A couple of questions from me. First is, Matthias, can you give us some indication at this point on how you see the third quarter EBITDA developing versus Q2, flat, up, down? Any sort of color there would be useful. The second question was just going back to the HPM transaction. Can you remind us if there are any termination clauses from either of the parties in terms of like you mentioned even the macro environment is becoming a bit more choppy, et cetera. I mean, are there termination clauses that we should be aware about from either of the parties and any associated payment to be made?

Matthias Zachert

Well, Michael will take third quarter, and I will take the transaction.

Michael Pontzen

Chetan, as you saw our guidance for the full year, obviously, there is a certain implication as well that with regards to the third quarter, you should expect a further slight increase in our overall EBITDA for the group. There are different elements to it, obviously, but we focus our guidance now for the full year to give everybody comfort when it comes to the range in which we're in, given that the range obviously is in a way that the uncertainty out there in the market, especially with regards to the fourth quarter. With regards to the third quarter, I would like to remind you that everybody that we're already near the mid of August. So Q3 should still be okay, but Q4, as Matthias mentioned as well, there is a little bit more uncertainty out there in the market.

Matthias Zachert

So on HPM and the contract termination clauses, no, there are no termination clauses. I think nobody would do this, neither DSM nor ourselves, we are all geared up for making this transaction happen. We don't think about termination. There is no MAC clause whatsoever.

We want to get this deal done, both sites, and Advent is very active on this, we are very active on this, and we better should be very active and intensively working because there's a lot of work to be done and termination clauses drag you away. So we are geared towards making this transaction happen, creating a powerhouse, a global powerhouse in the polymer space.

Operator

The next question is from Rob Hales, Morningstar.

Rob Hales

I have two. The first is you talked about regional demand earlier, but can you tell us what you're seeing in some of your key industry end markets? And the second one is just on Advanced Intermediates. I'm wondering if you can isolate the impact from the turnarounds on EBITDA?

Matthias Zachert

Rob, well, region, I mean, going by region and industry would be taking most likely a few hours. So I think as far as regions are concerned, I categorize the momentum in the regions, I would like to go for then globally and industries, but not at industries by region that would take too long. Construction had been very strong '21. We see construction, especially in Asia softening and also worldwide softening. My assumption is that construction with the increase in interest rates will no longer be as strong as in the past. In Europe, definitely due to the constraints in living space, et cetera, will be more stable and less stable than again in the United States. But overall, construction, I no longer consider to be as strong as we've seen, especially in the year '21. As far as automotive industry is concerned, this has always been more volatile. So we are prepared for automotive to soften globally going forward, whilst automotive, especially in the e-mobility space will be on the rise. But all in all, in absolute terms, that we are more cautious on automotive.

And we see automotive also softening, except e-mobility. As far as chemicals are concerned, it's also big end markets and agrochemicals are concerned, it's also a big end market of us. Agrochemicals are strong. I mean should be strong because they went through 5 years of toughness. And clearly, over the last 4 quarters, agrochemicals rebounded volume-wise. And all in all, the chemicals end markets, where we sell intermediates, precursors, et cetera, is also still in a positive momentum. And aviation, as I indicated, it's not that big, but aviation has returned, but from nothing. I mean they really returned from you know that nobody traveled in 2020. '21, there was a slight rebound, but '22, aviation clearly has rebounded. And therefore, you see this aviation implications in one division or in one business units, that the lube add business. And here, we clearly see that aviation has come back. Michael, will do that.

Michael Pontzen

Rob, we don't quantify now all the different elements with regards to be it now logistic constraints or utilization/impact from turnaround. But as we mentioned it very clearly in our commentary on the segment, you should assume that it does have an impact, which is visible, but we don't truly quantify now if we have larger turnarounds. But I can assure you, we're not talking only one of our parts had a turnaround, there were a few with regards to Advanced Industrial Intermediates.

Operator

The next question is from Markus Mayer, Baader Bank.

Markus Mayer

Two questions from my side. First one is on the -- if you expect a change in trade flows for European products, which are produced in Europe. Do you see already something there or expect a change in trade flow? That would be my first question. My second question is then on the Advanced Intermediates segment. With the recent benzene price drop in Europe, do you already see a change in order patterns of your customer due to potential risk of inventory devaluation or at least lower prices they expect?

Matthias Zachert

This is a very strategic question on trade flow and then a very operational one. Michael will take the second. I will take the first. This is something we are currently strategically assessing in detail, trade flows. I've seen that one implication from corona was a change in trade flows. We went from where we saw a tendency, let's put us like this, that corona led towards more regionalized purchasing behavior by customers. So I've seen over the last 10, 20 years that a lot of companies, customers, rents and dedicated themselves towards global sourcing. And you saw that, for instance, in the custom manufacturing worlds, in the pharma space, in the agro space, sourcing of ingredients were done by -- from India and from China, but this changed through the pandemic. Through the Ukraine war and the announcements of this new trade combination of BRICS, we have to see if this is going to accelerate further, and we are going to see kind of systems that develop and compete eye to eye. This is something you have to get prepared for. It's not happening today, but it has to be on the radar of management boards, I think, in the next 6 to 12 months. Are we going to see the separation of trade unions of the Western Hemisphere and the Eastern Hemisphere? And if so, you might be negatively impacted if you have too much trading in the wrong hemisphere. This is something we are strategically assessing in detail right now.

We are not ready yet with our assessments, but that might lead to even further regionalization. So clearly, the answer today is we've seen over the last two years a reorientation towards North American and European production by customers. So stepping away -- customers were stepping away from global sourcing from India, China due to disruptions in value chains. And this might be further accelerated due to the current geopolitical tensions. And I think every management board over the next six to 12 months will look at that. At least we are working on this already. We don't have the final answer to it, but we are getting prepared for this because you should always have a Plan B in your draws. And like in the past, you should assume that LANXESS will have a Plan B in its draw. And Michael will take up the second one.

Michael Pontzen

Markus, with regards to the benzene price development, you're right. In August compared to July, we saw a rather sharp drop in pricing from a spike in July. Still, I must say there were some €1,800 per tonne for benzene in July, up from around €1,200 per tonne in June. So there was a clear spike in July, and it's coming down, still down in relative terms. We're still having levels of benzene prices, which are rather high. Nevertheless, in the past, we managed to forward the prices, and we yet do not see any, let's say, immediate impact from this very volatile raw material market. But like Matthias said earlier, there is still some volume decline and some softening in one or the other industry, but I wouldn't now point it out to the latest development in the benzene prices.

Operator

The next question is from Georgina Fraser, GS.

Georgina Iwamoto

I've got one question kind of with two parts. If I think about -- when I first got to know LANXESS, the key mega trend that we were always talking about in terms of growth drivers was light weighting and transition to electric vehicles. So I was just wondering if you could summarize what are the global growth drivers, the key mega trends that you think fit the portfolio today? And then just a follow-up to that is what exactly are the key end markets? And how is your geographical exposure evolving with all of the portfolio changes the last year or two?

Matthias Zachert

Well, Georgina, thank you for your question. Light weighting was always a key theme for our HPM business, it was not the theme of the company. So they are different themes that we have business unit by business units. And to give you the underlying trends by our business units, I mean, this is a very broad question that would rather qualify for a real big session in the Capital Markets Day. To address that in this quarterly call to go by business units or by segment that takes too long. So I would simply like to allude to the fact that we have three segments: Consumer Protection is, of course, consumer related. And the underlying trends here, we consider as positive. As far as Additives is concerned, we are electronics and construction imposed with improving, of course, the insulation of buildings, which is an underlying positive trend. And Intermediates, we are very much exposed to the construction on our pigments business, but also in the Intermediate space to agrochemicals with a very diverse portfolio. But now going through business unit, mega trends, et cetera, I mean, that would take too long. I would like to park this question for the Capital Markets Day potentially.

Georgina Iwamoto

And is there anything that you can give us on the kind of new regional balance ahead of the Capital Markets Day? Or we can look forward to that, too.

Matthias Zachert

Well, as far as the regional balance is concerned, we used to be around about, you know, country specific. We used to be, by and large, to cut a long story short, we used to be a very strongly European-based company, as you know, sales-wise, we are around about 50% of sales in Europe; in Germany, 20%; and rest of Europe, 30%. So we were pretty much sales-wise European-based. We used to have an asset base in Europe of 70% if you go five, six years ago, when you started looking at this company. And production-wise, we had something like 3%, 4% of production assets in China and around about 12% of sales. If you now look at the new configuration over the last few years, what has happened? We acquired Chemtura, heavily focused asset wise and sales wise in the United States. We acquired Chemours disinfection. We acquired IFF microbial control with two sites in the United States. We acquired EKC with one site in Europe, with one site in U.K. and with one site in Rotterdam.

So if you look at the inorganic investments that, of course, have catapulted us heavily upward in terms of change in asset base. The focus on consolidation and the focus on growth of asset base was predominantly the United States, where we have today different to six years ago, around about 25 upwards assets. So we have clearly enlarged our footprint in the United States, production asset wise, but also sales wise. This is the most fundamental change. And what we have done in Europe, we basically consolidated our market position, gained market share. But asset wise, also through the exclusion of the big end website, which is yet to come, we've reduced our relative size of assets and relative size of sales in Europe. So clearly, the winner of the strategic change over the last few years in the portfolio, the winner clearly is the United States. As far as China is concerned, we kept our around about 10, 11, 12 percentage points on sales. Asset wise, there was no change in the footprint.

If we exclude now HPM, the asset base in China will diminish, the sales exposure in China will diminish. And if I -- I don't want to convey today something which we yet have to finish in the analysis. But this might turn into rather into an advantage than disadvantage, especially should the worlds go into a more separation with higher trade barriers also to the Chinese markets and economic isolation of the Chinese markets, the strategy might pan out to be exactly the right one because I assume we are going to see in the next decade due to low energy prices in the United States and a refocus to the Western World's reindustrialization of the United States. And therefore, that is the change that we have seen on a regional base over the last five years.

Georgina Iwamoto

That was really detailed. Thank you so much.

Operator

The next question is from Sebastian Satz, Barclays.

Sebastian Satz

I just want to squeeze in 2 questions as well, please. Firstly, I wanted to come back to the volume development that you've seen in Q2. How confident are you that you're not losing share because you're quite aggressive on pricing because you have to offset the higher input cost and energy cost and your competition might not be as aggressive on pricing? And then secondly, could you just update us, please, on what share of your contract now has energy pass-through clauses incorporated into them? And where do you expect that number to be at the year-end? Those would be my questions.

Matthias Zachert

My feedback to you as a long-standing analyst in the chemical space, I mean you are tracking our peers on volumes. Look at our peers, most of them have reduced their volumes as well. Best sanity check look at in the specialty editors space, look at Albemarle, look at ICL, same ballgame. If you look across the sector, in the chemical space, same ballgame, was in the first quarter, you -- by and large, you could see in our peers, stable volume, slight growth. The underlying theme in the second quarter was rather strong pricing, but softening on volume. There is no major change. I mean we are talking about a few percentage points give-and-take, but that's it. And on contracts. We made strides further in the right direction. I mean, we have further increased on the relevant contracts our share. I'm not going to give now each quarter an indication on where we stand with contracts, but compared to what I've said 1 quarter ago with Q1, I said we are now more than 50% through with the contracts. This has further increased. And reference base is Q2. I mean, I stated before that we were able to pass on all energy cost increases. This shows you that we are well on track to address energy prices. I'm not saying that this is a piece of cake, by no means this is a piece of cake. It's a major, major, major challenge. But on the contractual side, we are no longer at 50%. We have definitely further advanced, and we still try to get to the 60% to 80% by year-end.

Operator

The last question in the queue is from Andrew Stott, UBS.

Andrew Stott

I had a couple. Just on the contribution from Kalama. And I guess, looking forward, IFF, I see you're not choosing to split out at this stage. Is there a plan to change that? I'm just thinking that I'm sure shareholders would appreciate seeing the specific return on the €2.3 billion you spent on those two deals. That's the first question. Also if there's any indication of what Kalama did from the policy of that 27% growth in Q2, that would be also useful. And second question was on CapEx intensity of the group. So you're guiding to €450 million now. Obviously, that's the adjustment with HPM going. Is that typically now what you see as a midterm number and putting standard aside and what may come with the standard investments. But yes, any indication of how you see things on CapEx midterm would be great. I'm sorry, I said I had 2. I just had a follow-up on Michael's comment on Q3. Can I just check, when you said slight growth in EBITDA, you were referring to the €229 million base of Q3 '21, I assume. I just wanted to double check that.

Matthias Zachert

So Michael will take CapEx and Q3 and also the base from which we compare ourselves. I will take the first one. I fully understand your question. However, please understand this business is now integrated. We are not running a business with ex Kalama and ex LANXESS. In the F&F business units, we have married the so-called benz products. So the pricing, the product allocation is now decided together. So for instance, some products went from the Emerald site into our LANXESS site in order to optimize production. We -- if you, for instance, had 1 kilo tonne, I'll just give an example. We had 1 kilo tonne produced in -- of benzoate being produced in Kalama and we had 9 tonnes produced in Europe. Of course, then we optimize production going for one run in one site instead of having two runs in two sites, which, of course, leads to worse production costs. So this is really a simple example. The message I would like to convey here, there are not two sales forces. There are not two production pricing decisions separately.

Everything has been moved together. It's run globally, and we optimize the business in one business unit together. You cannot separate that anymore. So this is a statement number one on Kalama. Statement number two on IFF. IFF will be done in the same way. It's integrated in our -- the disinfection business will be integrated in the disinfection. The biocides business will be integrated in the biocides business. It will be run globally. Pricing will be decided centrally. And we will no longer after the integration be able to separate one from the other because this is the beauty of the combination. We want to go for synergies. If you want to go for synergies, you have to run these businesses together. We are looking at this from an absolute EBITDA perspective versus our integrated business plan. And that is how you then eventually unleash synergies. And Michael, please take CapEx and Q3.

Michael Pontzen

Andrew, first, with regard to CapEx, the guidance for this year indeed is around €450 million. But please keep in mind, when you look at the data, which we provided to you when we firstly announced the transaction of EKC and IFF, we told you guys that we as well need additional CapEx to bring up the assets to a standard, which we expected to be. And we earmarked at that point in time, an additional €15 million CapEx for Emerald Kalama in '22 and for IFF, a number of around €10 million in '22. And you can find that number for Emerald Kalama already in the second quarter. If you take a look at the spending for consumer protection, you see that there is a rise in CapEx, and that is related to that number, which we provided. So in that €450 million, you basically now find a number of around €25 million relating to upgrading the assets. So therefore, it's probably too early to give a midrange, but I guess €450 million is rather the upper end of a potential range for the future to come. With regards to the guidance for Q3, so it's not a clear guidance, but I was indeed referring to last year's Q3 as a basis.

Matthias Zachert

Well, ladies and gentlemen, I understand that there are no questions anymore in the call. It has been a pretty intensive call on the Q&A side. Thank you for participating. We wish you all a wonderful summer. We will most likely here and there, see you on the road, stocking forward to this, and all the best, take care and bye-bye from Cologne.

Operator

Ladies and gentlemen, this concludes the LANXESS conference call. Thank you for joining, and have a pleasant day. Goodbye.

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LANXESS Aktiengesellschaft (LNXSF) CEO Matthias Zachert on Q2 2022 Results - Earnings Call Transcript