Mar 19, 2015
Executives
Oliver Stratmann – Head-Investor Relations Matthias Zachert – Chief Executive Officer Bernhard Düttmann – Chief Financial Officer
Analysts
Paul Walsh – Morgan Stanley Lutz Grüten – Commerzbank James Knight – Exane BNP Paribas Martin Roediger – Kepler Cheuvreux Oliver Reiff – Deutsche Bank Jaideep Pandya – Berenberg Andrew Stott – Bank of America Merrill Lynch Oliver Schwarz – Warburg Research Andrew Benson – Citi Andreas Heine – Barclays Markus Mayer – Baader Bank Patrick Lambert – Nomura
Oliver Stratmann
Thank you very much, Dan. This is Oliver Stratmann, Head of Investor Relations.
And without losing a lot of words, I’m happy to have Matthias Zachert, our CEO with me, to whom I like to immediately hand over for a brief and crisp presentation and usual Q&A afterwards. Matthias, please go ahead.
Matthias Zachert
A warm welcome for my side as well. I would like to move into the presentation and start with Page no 3 on which you can basically see what has been started and partly implemented in course of 2014 on the realignment or transformation of the Lanxess Group and I here of course in particular will address Phase I, Phase II of the transformation.
We’ll give some comments on Phase III as I’ve seen some press articles about this and some of you who basically addressed one on the other move already, so I’d put that into context. And then of course I would like to highlight also some business momentum that we have later on in the presentation, which would explain to you the decisions that we’re taking on Nd-PBR and EPDM in light of the new capacities that come on stream.
So all in all I would like to stress that 2014 was a very, very intensive, very, very busy year where we – I think laid good foundation for 2015 and 2016 in particular. And whilst doing this our financial numbers we’re going in the right direction as far as profitability is concerned, as far as cash flow is concerned notably in the second term of the year.
And therefore I think we are financially going in the right direction and also as far as safety standards are concerned, we improved in 2014 versus relatively modest safety year 2013. Let me please move into Phase I of the transformation to here on Page number 4.
I think we’re happy to say that despite only starting the Phase I analysis in April last year, please take into consideration that we had to start entirely planning this initiative from April onwards with the planning and analysis took us round about three months. Four months including the validation of all the initiatives, three months of negotiations with unions and workers council.
And by December, we had basically implemented Phase I already. Of course in parallel with the reduction of the number of business units from 2014 to 2010 and the start of corporate functions from 2016 to 2012 and at the same point in time, pointing round about 40% of senior management and you.
So you can see from the speed of implementation that we have advanced here relatively nicely, I think, silently and even in the market like Germany, the implementation has been completed in December. And outside of Germany I look beginning of the month, or beginning of the week and the monthly numbers.
And also here I can see that out of the 500 jobs we identified outside of Germany, we have by now implemented 400 with initiatives, who will then of course gradually at leave the P&L in the fourth coming quarter. So I think we’re here really well on track.
Savings associated to Phase I R&D neighborhood of €150 million, a big chunk of that is going to come in 2015. Importantly, I would like to stress that we started with the administration, headquarters, SG&A, first of all, because this was the area where the steepest increase in costs had occurred in the past.
And only in the second step, we are now looking at planned optimization. And I think this is appropriate and reasonable.
Let me now give you an update on Phase II, in Phase II I’ve indicated commercial and supply chain excellence initiatives, and also manufacturing excellence initiative. On the first one, I would like to stress I don’t expect a lot of savings here, this is pretty much improving process and speeds to the customer, but of course here we would like to standardize the global platform wherever possible in order to have better customer interaction in the future and delivery increase or speed increase as far as delivery to customers are concerned, so this is something which is important and haven’t been done in the past, but this is something which is lot of process than head count related.
As far as manufacturing excellence is concerned, here we started with two pilot projects and this is a process or this is an initiative that we take round about two years, if it takes us a little longer, we’d take little longer but it’s starting this year and so the focus is 2015, 2016. But here of course when you go to plants, you have to do that with care I stressed that in November last year, because here you go to the heart of the chemical industry of our production.
And therefore for me, the quality of the decision is to be the right one and not a network one therefore I do that in light of all the other topics we are handling at this point in time. I do that with care and discipline so that we don’t jeopardize the quality of the production as such.
What you can however already see today that after we have announced to you that in November we are seeing idle costs of round about the €15 million for our new two plants in Asia, Nd-PBR in Singapore, EPDM in Changzhou. We fleck that to you in November and you see that very focused in March this year we present to you how we would like to mitigate that as best as possible.
And with this I give you explanations first of all on our performance put on robust Page number 6. So here the new Singaporean plant will come and stream in Q2 this year as a matter of fact we currently are in the testing periods.
Singapore has the name plate capacity of 140 kilo tons Nd. This is the site that will definitely be a core site for the future years, it’s a world-scale plant with customer proximity and therefore this would be an anchor site.
So to say for the Asian markets, as far as Europe is concerned we have two production plants that have so far produced Nd-PBR, the one is in Dormagen, it will be the second anchor sites for Nd-PBR. It has a very, very great product quality, I think unmatched in the worldwide industry with very fine viscosity, extremely good money [ph] jump and therefore Dormagen is going to remain a coarse fight for us in Europe for Nd-PBR solely.
We have a second plant in Europe that in the past has produced Nd-PBR, this is in Port-Jérôme in France. While this plant will remain in place it will now, from now on focus on the other performance grades, notably SSBR and the Nd-PBR [ph] production we are going to relocate to Singapore.
Similar approach will be taken for Orange, here not the entire Nd-PBR production will be shifted or moved to Singapore, but all the production that in the past has been exported to Asia. And the local production for Nd-PBR would be kept what we will however change in the U.S.
is to go from four performance butadiene lines, we will go to and skate [ph] production capacity to three production lines. So with this we by and large reduced the capacity of our PBR product gun worldwide in course of 2016.
So from this approach you can basically see that we now take all steps needed in order to mitigate idle costs in Singapore, but at the same point in time, remain a global supplier for the global industry and synthetic rubber for tires. Page 7, shows the approach we will take on EPDM.
So through our plants that we will bring on stream in second quarter in Changzhou on EPDM, we will now have a global platform for the first time, so we will be present in all key markets, in all key regions, Latin America, North America, Europe and Asia. We do have currently the two plants in for the European markets, but both of these plants have exported to lots in the past to Asia.
Here in all bitterness and all serious – in the serious decision making process, we came to the conclusion the two plants in the current over demand environment can not be maintained. Even though I have to really respect the professionalism of the Marl [ph] sites and the quality that the EPDM products has been excellent [ph] over the last several years it was our core sites for EPDM in the Lanxess portfolio.
Hence we yes to take in light of the over capacities and also the capacities we have created ourselves. Unfortunately we have to take the decision that we most likely have to adjust here the production for goods so the intention has been communicated this morning that the production will be stopped by end of the year 2015.
With this we adjust of course the EPDM capacities on a worldwide scale for ourselves and come to a plant setup, where we have from our point of view, one of the best EPDM technologies with global reach and in a better configuration than we are having as of today. Page 8 shows you the implication in terms of headcounts, cash outs and some P&L expenses.
We were – as this has been communicated now in March, we will most likely take the entire charges of that in course of the first quarter this year. So we would have by and large €1 million [ph] P&L charges, whilst the cash outs of the two initiatives will by and large be visible end of the year beginning of next year.
With this I come to Phase III on competitiveness and alliances I’ve stated last year that we are interested in horizontal and also vertical alliances, we initiated talks in 2014. Very clearly I have to tell you that this has been one element of high activity in my agenda.
And so by now I have to say that we’ve talked to the one and the other party. And we’ve taken also the decision by not to stop some of the talks because we saw that there is no win-win on both ends, which at the end of the day is always the best situation.
But of course we continue with our conversations with partners. I understand that they has been some rumors on newswires and some articles, even though I have to say that whilst I don’t comment on names, I would not be surprised if few other names surface as soon as well, because not limited just to, a few people or parties that we talk to.
It’s normal that when you look into the overall setting, you should really make sole [ph] assessments and evaluate the opportunities. What we find out is that we clearly have a flagship business, it’s a global business rubber, we have the leading technology, we have the broadest product gum and therefore clearly we see that rubber is a business which is currently of course facing some turbulences, but the nature of the business is healthy one with underlying volume growth and over capacities have been in the chemical industry and seen in many places.
And we think that we use the current time to reposition this business for good. But of course we do this only if we find very good fit, very good setup, where we think that current setup can be even strengthened going forward.
The intension here is for us to continue all the discussion with our potential partners. And if we come to a conclusion, we will most likely update you in course of the second half 2015.
With this I move to Page number 10, financial summary. Sales has been modest in light of A) the raw material deflation that we saw in 2014 and B) due to some price erosion driven by also some of the rubber grades where price concession said to be made.
As far as EBITDA is concerned, we made, I think, a nice step in the right direction. CapEx, we delivered the guidance that we’ve given in summer last year, and fortunately we were showing nice signs of improvement on the free cash flow side, which I think it becomes very visible in the fourth quarter.
Net financial debt despite the huge CapEx that we had to fund last year and also some cash outs for restructuring that we have to take into accounts, we were able to reduce net financial indebtedness more than originally anticipated in course of the year, so I think we made nice strikes in the right direction. As far as ROCE is concerned, this is clearly not where the company used to be a few years ago with 15%, 17% so they are still some mileage that needs to be closed in order to reach double digits and levels around history – historic performance times.
But again its nine months after the transformation has started and this will be a two to three years exercise after which we of course would like to see high performance ratios. Now let’s come to Page number 11.
Here the comments on Q4, that was not an easy quarter with volume decline of 8%, largely driven by Performance Polymers. And notably here due to the destocking it started in of course Q3, modestly when you saw oil price declining, but when oil price literally collapsed in Q4, we really saw that from October, there was a strong acceleration into November.
And we basically dropped round about 10 percentage 15 percentage point in utilization. And I think its no news for you when I say that December in the last 10 years, in the Lanxess history, December was in any year, it was the rule that December is weaker than November, so we had expected that destocking would continue in December and volumes rebounded.
So for that reason, we were facing a very tough volume quarter in Q4, but fortunately a lot of customers came in stronger in December especially in rubber, compared to November and that was the reason why fourth quarter ended up to the somewhat better than originally anticipated. Now let’s go into details, Page 12.
You see Performance Polymers with a volume slump of 11% and this is basically driven by what I’ve just explained. We still assume that volumes in rubber in Q4 will be down, but you will no longer see something in the neighborhood of double-digits.
So there are some customers that are still on the sideline waiting, but we clearly see that the inventory levels started to be depleted with many of our customers in Q4. And therefore are modestly coming back.
And therefore Q1 will still be a quarter where we will see some destocking here and there, but not to the extent that you have seen in fourth quarter. Second point, in the EBITDA, we of course had to take a hit on inventory devaluation.
So I’m sure that IR as diligent as they are has given an update on that this is the neighborhood of €15 million, so were compensating this and some despite decline in volumes and despite inventory devaluation with the 6% EBITDA margin, €60 million reported EBITDA, you see that now we start seeing some benefit on the cost structure alignment. And therefore into chemicals, when the volumes will comeback, it will always take sometime and unit industry underlying demand, as well.
But if volumes will comeback in Performance Polymers, once we are setup in our new cost structure and new plants optimization, this business will see different profitability levels. As far as Advanced Intermediates is concerned, so also here we some destocking activity here and there, we also had some plant maintenance shutdowns especially in our AII business.
But you can see bottom line, this business has been solid and will be solid. Q4 has been a little bit artificially increased, marginal wise 21%, we normally don’t report, it’s a business that is in the high teens, but here we saw in some our products, not in all, some windfall profits.
Performance Chems, I would say here the business last year posted strong results improvement that was the division with its deepest profitability increase in percentage terms, Q4 also went into this direction little bit milder than before. Most of the business did reasonably well; some had here and there some softness.
But, one and all I think in Performance Chemicals we also go in the right direction and this business of course on a overall margin basis, still has the room to catch up in the future two to three years and we are working on that. As far as Page 13 is concerned, ladies and gentlemen I will now address the forecasts or the business assumptions, but my personal assumption is that most them you can reach yourself or can through that after this call.
So, I come to the Page 14, with our financial outlook immediately. And here, our expectation for the full year 2014 is, EBITDA wise at levels around 2014, so 2015 somewhat comparable to 2014 profitability wise.
As far as Q1 is concerned, I make my comments on some elements of destocking volume wise you will see. I think ramp up costs are known to you.
But all in all, we started Q1 reasonably well and for that reason we can give you a preliminary guidance in March, where we still have two weeks of trading, but on the basis of what we have seen so far we would like to give guidance of €210 million to €230 million. With this I would like to finish the presentation and immediately together with Bernhard and Oliver would open the door for your questions.
Operator
Ladies and gentlemen, at this time we will now begin the question-and-answer session. [Operator Instructions] One moment while we assemble our roster.
Oliver Stratmann
Can we start with the first question please?
Operator
Our first question comes from Paul Walsh.
Oliver Stratmann
Paul, go ahead.
Paul Walsh
Thanks very much. Three questions if I can, thanks for taking the questions.
Firstly, just in terms of the asset or capacity optimization, that’s now in process. I was wondering weather or not that reduced the idle facility cost guidance that you gave before, of €50 million for this year, €50 million for next year, it seems like you’re making progress on that front.
Does that reduce the burden, yes or no? And secondly, on pricing, obviously we’ve seen a fairly significant game changing reduction in the oil price and in some of your raw materials, as well.
I guess pricing wasn’t perhaps as negative as I thought it was going to be in the fourth quarter, I’m just wondering what your view is on that dynamic moving through 2015? And just final question which is rather an obvious one I am afraid, but on the Advanced Intermediates Business, how sustainable, do you think that raw material windfall is in that business, is there still some benefit baked into the Q1 guidance, how should we think about that dynamic?
Thanks a lot.
Bernhard Düttmann
Hello, Paul. Let me address them one by one.
I think as far as the idle costs are concerned, we’ve given some what rule of some last November 50-50 and after some of you raised the question how precisely is the split I gave the indication, well in 2014 idle costs will be rather little bit higher tilted towards €60 million and the next year tilted towards €40 million. But the rule of some that we gave out was €50 million idle costs this year, €50 million next year.
With the feedback we provide on EPDM and Nd-PBR, we’ve indicated that we take of the fixed costs by roughly €20 million and all of that’s will be implemented in course end of the year, beginning of next year. So automatically, you should assume that the €50 million, €60 million idle costs for this year will come through, but when we run down the production EPDM and when we change the configuration in Orange, of course we reduced automatically €20 million of the idle costs in 2016.
So you will see that the decisions we are taking right now will not impact 2015, however, on the OTC wise, but the benefits on the idle costs will come through then 2016. So that as far as question one is concerned.
Point number two, on oil, of course you’ve seen already in the fourth quarter some dynamics on that. Also the €50 million of write-downs on the inventories are result of the oil price of butadiene.
Let’s say inclusion that was really dramatic what we have seen in Q4, but be prepared that 2015 will be a year at least for the first half. Let’s see where the second half will go for oil and its derivatives, but definitely in Q1, Q2, you will see all oil related products will face price erosion and I think competitive of ours and also other chemical companies have clearly alluded to that.
So you will see that oil products buy and large, will have negative pricing momentum for especially oil products that have escalation closes like we have in many of our rubber grades. Now for Advanced Intermediates, I think here Saltigo has no big impacts from raw material changes.
So here this business is relatively – has a relative different business model, not really raw material price driven, but technology driven. The second business unit in Advanced Intermediates is AII, Advanced Industrial Intermediates.
Here, you’ve seen some benefit in Q1 normally we have a lack effects of round about one quarter in general, so you would see for the decline in oil price, you’ve seen a raw material benefit in Q4, as oil price continued also in the [indiscernible] to go down further in Q1, you will also see a certain windfall profits in AII in Q1.
Matthias Zachert
Yes, yes.
Bernhard Düttmann
And then it should basically level off in second and third quarter. But of course, what we see right now is slight increase in second quarter than you could potentially see the reverse effect even in third quarter in Advanced Industrial Intermediates.
And I think with this all questions should be answered Paul.
Paul Walsh
Yes, that’s really, and thanks very much.
Bernhard Düttmann
You’re most welcome. Next question please.
Operator
Our next question comes from Lutz Grüten of Commerzbank. Please, go ahead.
Lutz Grüten
Yes, thanks for taking my question, one is left with regarding the hedging. I tried to understand the €100 million additional hedging cost coming up in 2015, you’re guiding that $0.01 change euro, dollar has an impact of €9 million on the EBITDA line before hedging cost.
Now you have hedged 80%, 50% on 2015 and another 30% on 2016, so for the hedging of 80%, we’ve got cost of €100 million and I try to understand these €100 million seems to be quite high or am I look at these numbers on the right – on the wrong way? Thank you.
Bernhard Düttmann
Lutz, I will take your call. Your question, the hedging when we look hedging cost, we look right away, right now just at the hedging cost for 2015 and not for 2015 and 2016, just 2015.
And you’re absolutely right, if was a real fund up to $0.09 benefit per $0.01 change before hedging, now we get to the hedging, our hedging rate is about 50%, but you have seen this deep decline of the Euro, that means our hedging rates are higher and that’s the reason we have given and the back up of this presentation you see the bandwidth our hedging rates for 2015 right now is between €1.25 and €1.40. So it’s a considerably high level of euro still in that hedging rate.
And that explains the difference. So the gross gain is about €100 million – €160 million sorry, but we lose about €100 million for hedging.
Oliver Stratmann
I hope this clarified your question, next question please.
Lutz Grüten
Thank you.
Operator
Our next question comes from James Knight of Exane BNP Paribas.
James Knight
Good afternoon. I’ve got three.
Firstly in terms of the aborted talks, chancing my arm here but is it reasonable to assume them more likely to have been with the horizontals rather than the verticals. Secondly, returning to the raw material build and around Paul’s question, if I take the raw material index or if I look what’s happen to butadiene and the rest, and your raw material deliver around €3 billion.
We should be looking at around €0.5 billion or maybe the more low inputs in 2015, is that right? I know prices will follow that, but I just want to make sure we get the scale in the modeling right as you said.
And then lastly in for agrochemicals, the outlook robust demand, what do you mean by robust is that flat or should we expect some growth little bit lower than may be we’ve been used to in the last few years. Thank you.
Bernhard Düttmann
I think I’ve noted down everything James, so let me address them one by one. On the aborted talks its in both directions.
So we see that the end of the day you don’t meet only with the few parties, but when you start talking, you have the target lists where you talk to you find out when you make announcements that you are interested in the alliances that suddenly people are calling. You had expected some of them are unexpected.
So at the beginning you are relatively broad and you talk to variety of people and then it’s normal that’s in both categories you find partners that are very interested and then you find out that some partners either you’re not interested or they are not interested in that goes in both directions. So that’s I think quite normal for such a process.
As far as the second point is concerned James, I would like to select early that none of us knows truly where raw materials will be end of the year that oil deflates so extremely fast like you’ve seen in the second half nobody had anticipated January 14. And we are now in March 15 our assumption is that first half will be on low raw materials, but we don’t rule it out that the second half of the year, we’d see an increase in raw material prices again.
So I think this is equally flecked by refinery and petrochemical companies, but everybody is assuming that it will not again go for triple digit absolute dollars. So here, your indication is not completely round, but I would recommend to you that you validate your number with the DIO activity, you need to do that because in December of course a lot of the inventory has been adjusted and therefore you’ve seen already devaluation in our accounts in Q4.
And therefore you should potentially make the calculation again with the IR team in order to have a better assessment on the €500 million you’ve mentioned, but it’s a first very good start. On the agro side we see it’s robust, so you can clearly see from the comments made by the agrochemical companies that the tonality is softer for 2015.
They enter into 2015 lot of them with higher inventories and therefore we fleck our end, don’t expect growth volume wise in agro, but you should assume for our Saltigo business stability and profitability, so this is what we are shooting for. So therefore we don’t see a deep sudden decline in volumes, but we see that the underlying momentum in the business is somewhat similar to previous year levels, volume wise but not showing the kind of growth that we were used to in the last two years to three years.
James Knight
Thanks guys, thank you very much.
Oliver Stratmann
You’re most welcome, James I hope your training is advancing well.
Operator
Our next question comes from Martin Roediger of Kepler Cheuvreux.
Martin Roediger
Yes, thanks for taking also three questions my side. First on the closure of the EPDM plant in Marl, fixed cost savings €20 million, is that also a net saving figure, or should we take into consideration that this plant eventually was EBITDA positive and therefore you missed the earnings from that plant’s future?
Second question is on the financial result can you give us indication of about what will be the most likely figure in financial result in 2015, as to we’ve seen this strong increase in the other financial income and expenses in Q4? And finally may be one clarification hedging you said this range of €125 million to €140 million of hedge for 2015, is there any chance that in 2016 assuming that today’s dollar rate remains the same that you have substantial hedging gains in 2016?
Thanks.
Matthias Zachert
Well I will take the first question and some – Bernhard will address the financial results. And so, I think also question number three on 2016, and therefore let’s take it one by one.
As far as net savings are concerned, Martin in this particular case we clearly say yes to the question, because whilst we still have some gross margin in Marl, of course the intention is to keep this gross margin, because we will relocate the existing volumes to the Geleen sites to satisfy European customers, or to the Changzhou sites to satisfy the customers in China. So this is something that we wants to neutralize, so that we keep the current margin that we have, but of course when you take the fixed cost structure out of the one plant you then automatically through loading the other plants mitigate the ideal costs and for that the reason I gave the indication that ideal costs in 2016 and the assumption that we, this year have €50 million automatically they should come down by round about €20 million in 2016.
Hence with this I pass on the words to Bernard.
Bernhard Düttmann
Martin, you raised the question about the financial results, as a result, the result in 2014 has certain influencing factors, one is that we have a larger pension obligation, which leads to higher pension interest and we also had some prepayment penalties, because we paid back some bank loans earlier. And the main part is our FX results for our financial transactions, is worse than 2013.
Going forward, definitely the prepayment penalties will not comeback, this is a onetime shot. On the pension it depends very much what’s the interest rate development will be.
And but in general we have a higher base of pension obligations, or pensions provisions right now, which leads definitely to a high pension interest. And the on the financial results that is expected to be at least as current foreign exchange development, we have a continuous burden in 2015 what we would compare to 2014.
The second question hedging 2016, I mean the ratio for 2016 in hedges is right now currently, we are hedged about 30% in the range of €115 million to €135, so the hedging rate is already, clearly better than the one in 2015. Still to make a gain out of the hedging, you can translate that in your own calculations it would mean that you need to have the dollar reverting or getting weaker gain, at a level below 125, otherwise that will not lead to any hedging gains.
Martin Roediger
Okay, thanks.
Oliver Stratmann
Next question please.
Operator
Our next question comes from Oliver Reiff of Deutsche Bank.
Oliver Reiff
Thanks. Two questions for me, the first one is on FX, annual guidance you mentioned the euro dollar rate that you assume, the other key rates that are important, if you mark-to-market the current spot rates just broadly how that would impact your guidance.
And the second question is on engineering plastics. And the reason why I’ve expected good development is to see ongoing progress on increasing the captive use of caprolactam.
Thanks.
Bernhard Düttmann
Can you please repeat the second question, Oliver?
Oliver Reiff
The second one was on engineering plastics.
Bernhard Düttmann
Yes.
Oliver Reiff
You mentioned that you expect a good development in 2015, I just wondered if that was due to the expectation of the increased captive use of caprolactam in that business.
Matthias Zachert
Understood. So Oliver, on FX the – I think the comments that Bernhard has just made on dollar we’re very clear.
So of course, we have other currencies that you have to also take into consideration, but if you look at Lanxess, I think the key topic that you need to take into consideration is importance, currency importance as dollar, dollar, dollar. And therefore, there are mitigating sectors in some of the other currencies, I think, I’m sure that IR has alluded to the fact that in Performance Chemicals, we do see more competition due to the Rubel, which has of course, substantially weakened and therefore leading to some more competition on chrome ore in our markets.
So there are some negatives currency developments that puts other competitors into a better position than 2014. But if you should look at one currency that goes in our favor, the most important definitely is the dollar and therefore we are not complaining too much about the strengthening of the dollar right now.
As far as your second question is concerned the point that you are alluding through is totally correct we’ve made them second half last year progress on our engineering plastics, our high performance materials as we opened up this polymerization in Antwerp with a nameplate capacity of 90 kilo tons. And therefore automatically we will have higher captive internal use and therefore are less exposed.
I think we’re one of the companies in Europe that’s least exposed on our capital chain and for that very reason this is a very good step in order to improve the HPM business, 2015 versus 2014. I hope this clarifies all your questions.
Oliver Reiff
Yes, it’s actually, thanks very much.
Oliver Stratmann
Thank you. Next question please.
Operator
Our next question comes from Jaideep Pandya from Berenberg. Please, go ahead.
Jaideep Pandya
Thank you. I hope you can hear me.
So few questions. First of all, I just want to understand how do you see the business either from an absolute point of view or from a margin point of view, because if I think about what’s going on you have FX tailwind that’s there and you are doing cost savings, but then there is a clear structural pricing issue in synthetic rubber and there is idle cost burden.
So, longer-term, how should we think about Lanxess, in terms of absolute EBITDA as we thought before or in terms of actually margins and ROCE as you were alluding to in your presentation? That’s my first question.
Secondly, if you can just give some qualitative color on the utilization in EBDM and Nd currently versus the group number that you published. And then finally, with regards to DueDil [ph] given the fact that you’ve highlighted several times now that there is pricing issue there.
What sort of pricing negative headwind are you sort of accounting on a structural basis given that capacity from some of your big competitors is pretty clear that it is coming over the next couple of years? Thank you.
Bernhard Düttmann
Jaideep, thank you very much for your questions, and I will take them one by one. On the business where do we see the EBITDA and absolute terms and the margin in I put absolute terms, relative terms rather in the future.
Here, my feed back to you is, our – my personal point of view is that I think this is your job to analyze all communications we are doing and to make your call on where we are going in the next direction. The clear intention that the management team has to make sure that’s margins and absolute EBITDA will improve.
We are working with all the measures hard to go into this direction and give you all the clarity and guidance, especially for 2015, but the environment is very volatile. As you can see we have seen over the last several quarters, volatility on currencies, raw materials, on geopolitical economical situations that we have not seen every year.
And therefore I think we operationally are going in the right direction and extremely speedy. But I will not today give you more financial color than the information we have provided to you for 2015.
As far as the second question is concerned, the utilization that we had at group level last year was round about 80%, so that’s the communication we have given so far. I would not be very well advised to give now a utilization break-down to our competitors on where we are on Nd and EPDM, because at the end of the day, I’m committed to creating value in this organization like my colleagues are.
And with this information, we will definitely not create value, if we flag out to everybody in the world where our current product utilizations are. Now as far as butyl is concerned where our capacities are and so what our pricing level would be.
My message here is, of course you need to understand the oil price implications, so raw materials of course have come down also for butyl and this is something that we will adjust also product pricing wise as we go ahead. As far as structural price reductions are concerned, I think, I’ve indicated to you in fourth quarter that currently we also here in butyl accept to let go off volumes, in order to stabilize pricing to some extent, because we are one of the big players in the markets.
And for that very reason, Lanxess was the company that started with price erosions in 2013. I’ve clearly communicated last year that we are not throwing our volumes away for margins that are not appropriate and acceptable and that we need in order to keep on running this business professionally long-term and for that reason we see that here there’s of course still pressure in the industry and on this products.
But we’ve also seen that some of the competitors are taking out capacities and therefore it’s something that’s we watch, analyze very careful. We are a global company, global product base good quality.
The business is still tough, but where we would go precisely on pricing is again internal discussion that will not be communicated.
Jaideep Pandya
Okay, thank you.
Bernhard Düttmann
Thank you very much. And with this I would like to move to next questions.
Operator
Our next question comes from Andrew Stott of Bank of America Merrill Lynch. Please, go ahead.
Andrew Stott
Yes, hi and good afternoon. I have a couple of things, both in similar field.
Firstly, on the plans for Phase II that you’ve already announced today, I’m just wanted to check I’m right in assuming there is literally zero impact on volumes. So this is an effort to reduce cost, but not to reduce your capacity.
That’s a first question. The second question, unless I’ve mistaken I think its a fairly significant revision in your CapEx guidance for this year and probably about $75 million down from your mid-point back in November.
So what’s changed? That’s it, thanks.
Matthias Zachert
Andrew, as far as Phase II is concerned, we’ve, I think, very clearly addressed that it’s volume and costs. So the volume decisions have been taken for the new plants today.
So we take our capacities in both regards a) Nd-PBR, but also as regards notably EPDM. So here that should be read out of the communication we’ve given today.
And as far as the overall manufacturing excellence initiative is concerned, of course, overall, we would see how we can optimize non-personal costs and personal costs in our international worldwide sites, notably in performance polymers. So indicators show us that in the one and the other sites we have not reached our ultimate competitive position yet.
Therefore we will go through the sites. And we therefore see if we can find improvements on non-personnel costs and personnel costs, as we have explained to you in November.
If this then leads to further volume reduction, I cannot confirm, but I can also not include that, but we first of all start with assessing the competitiveness by sites. So that is something that we’re working upon.
But I’ll only disclose information on this once we advance on that’s. And here that is going to happen earliest in the second half of this year, because I clearly would like to stress you see that we are working on a lot of topics at this point in time.
And we think we can handle all of them, but the most important element to take right qualitative decisions that we don’t afterwards regret. So therefore, especially when you go to sites, you have to make a very diligent site by site approach and not just go for fast vague analysis it has to be a thorough analysis.
As far as your second question is concerned on CapEx, your assessment is pretty right. Our previous guidance that we’ve given for 2015 was just €500 million to €550 million.
So we are taking of some big chunk of investments, but I would like to indicate that last year when we gave the guidance on CapEx, we gave you the willingness to go down further. But we needed to go project by project.
And we’ve done that in the second half. We’ve had various sessions with the business, within the management board, we came together looked at project by project, validated that.
And Bernhard and Michael Pontzen had various analysis, recommendations, we took the decisions then together with the business and could therefore scaled on [ph], the investment now to €450 million round about. We feel comfortable with this number, so I think we will get there.
And it shows you clearly the commitments that we have to bring this company back to cash flow generation, which by the way was visible already in Q4 numbers. But of course, we are far away from reaching cash flow that we had in the past.
So we have to continue with our efforts in order to bring back the company to where it used to be.
Andrew Stott
Thank you.
Oliver Stratmann
Thank you Andrew. Looking forward to see you 21 of June.
Next question please.
Operator
Our next question comes from Oliver Schwarz of Warburg Research. Please go ahead.
Oliver Schwarz
Hello, gentlemen thank you for taking my questions. Firstly pension applications, given that the interest rates have moved on since 31 of December, are we likely to see another tough of pension provisions also in 2015, if everything stays the same from here?
Secondly, since – I heard what you said about raw material price being very hard to predict, but I guess you will have included something into the guidance for the full year of 2015. And I heard that you said that maybe in the second half of the year we will see some price increases, is that already factored into your guidance or would that come as an additional factor if those price increases would happen, H2?
And lastly I’m still trying to get my header around this €100 million of hedging cost in 2015. I assume that you only hedge profits in your cash generating units, what should come at a level perhaps around €1 billion in 2015, 50% of your business is in outside the EU, what cut that to €500 million and 50% of that is hedged, which is around €250 million of EBITDA left to be hedged.
And do you have costs for hedging of around €100 million? That seems rather full number, so I guess there’s something behind that.
Could you please elaborate of that as well? Thank you.
Matthias Zachert
Let me take the liberty to address question two and three and some I would ask Bernhard to start with the pension question.
Bernhard Duettmann
Yes interest environment is stated as exactly right, as you stated the interest environment has gotten weak, a little bit weaker in the first quarter, for that reason we can expect another drop in our interest rate for pensions, which would lead as it currently stands to increase our pension liabilities of another €50 million to €55 million in the first quarter.
Oliver Schwarz
Thank you.
Matthias Zachert
So then I will take the question number two. First on raw materials, we have in our current full year guidance, not factored in raw material devaluations or raw material profits none of the two.
So therefore please assume that here, we are not forecasting currently any devaluations or increased evaluations on inventories. What we’ve indicated most likely in course of this morning by IR, we’ve indicated to you that’s we had to take charges in Q4.
If March would not have gone up in terms of raw material prices, you saw that we saw no longer decline in March notably butadiene. We saw here rollovers and then some markets, even slight improvements and therefore had butadiene continued falling in March.
We would have seen most likely slight hits on the inventories again. If we will see hits in inventories in Q1, I cannot today for schedule, we will comment on this once we go for reporting of Q1 in the next few months.
But for the full year no impact currently has been taken into consideration, in the one or the other direction. As far as hedging costs are concerned, I think, the details that Bernhard has given to you before are the numbers that you have to take into consideration.
If you look at the hedging ratio of 50% that we have for 2050, please understand that hedging that were in the part of the 50% were not only taken in the last few quarters. They’re hedge positions that were taken 12 months or 18 months ago and that results in rates around €140 million.
And now on your methodology that’s more over the part [ph] would like to take. If you hedge, you don’t hedge on the bottom line profitability, you hedge on the sales that you are having in the countries and you also hedge on your contracts on the raw material sites.
And therefore, starting with the EBITDA number jumps too short, you have to look at the global exposure on all your contracts that you are having on the sales and procurement sites. Then you come to a net exposure at the group level and this is not just €1 billion, the net exposure that we have in the dollar area, euro based is clearly about a €1 billion number and that brings you to the hedging loss of the roughly €100 million that Bernhard had explained earlier on 2015.
I hope that clarifies everything. And I’m looking forward to see you soon.
Next question please.
Operator
Our next question comes from Andrew Benson of Citi. Please, go ahead.
Andrew Benson
Thanks very much. Just couple of points, on your slides accompanied you probably [indiscernible] I think it is you surpassed over that and I’m just saying we could rate which obviously we can, then also may be to Performance Chemicals delivers what should deliver, roughly speaking two-thirds of EBITDA this year.
So for the critical I don’t think much of the attention has been on the Performance Polymers, success with the – I guess the scalable recovery is. But the comments are somewhat guarded or even cautious and you are looking to at least maintain a profit.
So I wonder if you could sort of give us the if you like the good bits. The tax rate you say I think it’s about 30% coming down, to the low-to-mid 20s.
Can you just explain that and the timeframe for that coming down. And on, I think, it’s Bloomberg or Reuters you’re commentators are saying, you are looking for or you in talks with potential, strategic partners in three world regions.
So I just wondered if you could clarify that comment and did is – is that where your works and thanks very much.
Bernhard Düttmann
Thank you, Andrew. I was not trying to brush over the Page Number 13, but I thought that’s for the sake timeline would speed up on this one.
So let me dwell on Performance Chemicals. I think here we have good momentum in our one big flagship, Inorganic Pigments.
So the construction industry here, I think, would be healthy in course of 2015. And this holds true for most of the regions except for Latin America.
So but the other regions we think that we will do reasonably well. And therefore this is definitely a flagship which is on track, the same we assume to be the case for our new additives business, the Rhein Chemie Additives business.
And therefore the two big flagships in this division should be on course. For leather we’ve made our statement as far as the competition on chrome ore is concerned.
So this is the mitigating effect and on the other two businesses I think they will be on track. So here, our expectation for Performance Chems in course of 2015 is that they will do better than in 2014.
Tax rates, I will ask Bernhard to comment on that, I’d just move through the talks. As I indicated to you before, we are in talks.
The question was by Bloomberg in the morning press conference, can we give any color on any region where talks are more intensive and less intensive. And my basic feedback was there are names being rumored by the press and potentially there will be new names that have not been rumored, but that we also talking to at this point in time.
So therefore I cannot exclude any region, but I indicated out of the four regions they have regions with higher intensity on talks. And that doesn’t mean that there is only one player by region that we talk to and the other remaining region is a little bit more softer, but I – that doesn’t mean that there are no talks ongoing, but clearly the intensity that we have are bigger in three regions.
And how this is going to develop we are going to see over the next couple of quarters and therefore I assume that in the second half of 2015 we will provide more color on that should we advance in the reasonable way and should it be something that we consider as a good fits on both sides. That’s basically all.
Matthias Zachert
Andrew, your question regarding tax rate for 2015. For us it’s right now very difficult to give a clear forecast on our tax rate because the profitability level is very low.
It also depends very much on the treatment of exceptionals. And as a lower level of profitability the regional differences play out of lot stronger.
For that reason we gave the clear guidance, it will be above 30%, but we don’t give – we didn’t give a bandwidth, we just said it will be above 30%. Mid-term after the realignment, we expect the tax rate to go down again to 22% to 25%.
Andrew Benson
Okay that’s it thanks very much.
Oliver Stratmann
Most welcome, Andrew. Next question please.
Operator
Our next question comes from Andreas Heine of Barclays. Please go ahead.
Andreas Heine
Three questions if I may. I start also with the [indiscernible].
So flat EBITDA for the via – on the extension right you have mentioned basically means the €100 million you have a hedge losses in the recon line will be than offset by €100 in the operating line. Is that the way you have kind of related these hedge losses or hedge expenses in the years before, is that a new way of to see it?
And the second is also on the U.S. dollar that’s it’s very help that we have this U.S.
dollar sensitivity, could you run a little bit through the three segments, how the U.S. dollar plays only in qualitative times – qualitative terms of course.
So I would expect, for example, that Advanced Intermediates and Performance Chemicals have more transaction issue and that it was a global base in Performance Polymers, you have mainly translation, but it mid be that you have also global pricing in U.S. dollar in the Polymers section.
So any information here would be very helpful. And last but not least, you have now done the realignment in neodymium PBR and EPDM whether it’s the most obvious issues and more have to come or is now that you feel comfortable with the site concept you have in your other division?
Thanks.
Matthias Zachert
Thank you Andreas for all three questions. I will just very quickly address on the first one on hedging.
We basically always have the philosophy here in the company that hedging is a risk management that the Group is doing and for any kind of loss or profit that we have move forwards or swaps is taken into the recon line into corporate, and we don’t allocate costs or profits into the business. So therefore any profit and loss has been always the methodology in the past and also as we speak, it has always been absorbed in the other income, other expense line, recorded under recon.
What you’ve seen in the business, you saw the operational implications, the prices according to contracts and therefore there was no change in methodology whatsoever, it’s the same as it always has been. On the second question, I will be not giving you the sensitivity on currencies and dollar by business units I would be very, very aggregated in my comments.
You know the guidance on sensitivity that we post for the group, and therefore the businesses or the divisions that benefit in general most strongly is of course, the Performance Polymers business. The second one to a definitely lesser extent, is Performance Chemicals.
As far as Advanced Intermediate is concerned, you have a slight benefit, but not a big one. So this is the most balanced one.
But therefore the most visible effects you can see in currency movements out of the U.S. dollar on the safe side is Performance Polymers and then Performance Chemicals.
What you need to take into consideration, however, on the other side is Performance Polymers has also swing, as far as raw materials are concerned. So you need to look at sales and you need to look at raw materials how we source region by region.
And then eventually you have to look at the cost position that’s the assessment that we are doing. But net-nets bottom line it’s PP PC that benefit from strong dollar.
Now as far as your third question is concerned, on neodymium and EPDM, I think, we made our right steps at the right point in time. And this is all I can say for our production platform as of today.
I don’t expect now that we will come out in the next 12 months with any further update on ND and EPDM. But as far as the other rubber grades and product are concerned of course we now start the analysis and we’ll see where non-personnel costs, personal costs are, how competitive the processes are the energy softening everything.
And then we’ll provide update. Today, we’ve only given an update on the most obvious areas that we needed to invest.
In light of the new capacities that we’re putting on stream ourselves in the second quarter. So that’s the feedback on your third question.
Andreas Heine
Thanks guys.
Matthias Zachert
You’re most welcome. Next question please.
Operator
Our next question comes from Markus Mayer of Baader Bank.
Markus Mayer
Yes, good afternoon, gentlemen. Three questions for you.
Firstly, again on CapEx on the €50 million to €100 million CapEx you’ve got, so can you give us a split on from which business units is it coming from and how much is CapEx, maintenance CapEx and growth CapEx. As it seems €10 million CapEx cut from the capacity closures is mainly maintenance, but what is the remaining one?
And then secondly the volume chop in Advanced Intermediates and Performance Chemicals in Q4 below the 2013 levels, how much is coming from maintenance shutdowns of how much of de-stocking. Then lastly, you said that Ruble resistant the Russian competition in chrome, or has effect on you, how is it that the Russian competition and the robust do you also see some side effects which are negative?
Bernhard Düttmann
Thank you very much. Can you please repeat the third question?
I was to running out of ink in writing, because so many questions were waiting. Can you repeat number three please?
Markus Mayer
Sure, I’ll make it sure. And the Russian Ruble and effect on…
Bernhard Düttmann
No, no, before.
Markus Mayer
The volume drop, yes. So when I do a volume and price index for your business units then it’s clear that the Advanced Intermediates and Performance Chemicals in Q4 dropped below all levels in 2014, and 2013 and 2012.
And Russia was how much from this volume drop came from the maintenance effect, short-term effect and how much from the de-stocking effect?
Bernhard Düttmann
Okay, good. So let me address them one by one.
And I’ll start with your first one. The CapEx reduction that we have taken for 2015, we will not give you the break-down by projects.
So and we will also not give you the break-down by division. So what you should assume simply is that we reprioritize our projects and we look that the absolute amount that we expensing or that we are investing and we look at the profitabilities and then we came out with or came up with recommendation, how we can move ahead.
As far as the break-down on growth maintenance is concerned I give you rough indication, so we have in the €450 million still round about €80 million of growth projects, because the two plants in rubber only finalizing in course of Q1 this year. So they will come on stream in Q2, but in the €80 million, there is still a visible chunk that we had to pay out for the two new plants in rubber, but definitely there’s some other plants that we are nourishing still in terms of growth and this especially has to do in the Saltigo business, but especially also in the Inorganic Pigments business.
So these are the growth project that also in the investments area. And for that very reason, we are clear in the communication that we with 415 are not jeopardizing the future we are still following a project that we consider as reasonable.
The remaining part by enlarge, you can assume or maintenance in the area of 300, 320 and then of course the investments for efficiencies restructuring that we have started last year. So that’s basically behind indication of 415.
Now your question on the volumes Q4, the volumes in Q4 2014 were down by as I said before in Performance Polymers and Advanced Intermediates basically because of: a) destocking, in Advanced Intermediates because of destocking plant maintenance, but c) if can you listen to the conference call that the company gave exactly one year ago, and you will hear that the company at that point in time was in some business units, unfortunately, loading a year-end in the preparation for higher Q1 anticipation. And therefore the base was a little bit high and we have not – we have of course not – we could not mitigate this in course 2014 anymore.
But what we did not do in fourth quarter 2014 that we’ve loaded our inventories. In the debt net you can see that we were working – our working capital improved.
We have therefore in the fourth quarter reduced our inventories, whilst the approach was apparently in some business units a different one in Q4 in 2013. That basically gives the three indicators for the volume decline in Q4 2014 versus Q4 2013.
Now as far as Russia is concerned, chrome has been mentioned, I cannot rule out that the one of the other rubber producer in Russia benefits from the rubel. This automatically should be the case by defaults, but we have to clearly also state that the producers in Russia, they of course can produce in Russia exports with a cheaper rubel, but it’s up to the customer to decide if he wants to move to Russia and increase the market share to exporters in Russia, in light of current geopolitical issues, it might be a big risk.
If you simply for raw material conversion pricing that’s too much on one supplier and therefore, that’s the only comment I would like to make on the rubber products that we might see ruble-based.
Markus Mayer
And just to add on the second question on this volume drops maybe I was mistaken. It was not only a comparison for fourth quarter of last year, but I was the comparison to the level of the last year, basically I asked.
When you make a index than you see that the volumes currently in Advanced Intermediates and Performance Chemicals and of course also in Performance Polymer are below that all kind of levels of all quarters. And then 2014 and 2013 and question was basically this level we currently you have here is this how much is sustainable and how much has really will it been just a one off Q2 the shut off, helpful.
So what is really the level I should assume as a good run rate or good base to start Ben in 2015?
Matthias Zachert
I’ll make the point again, I do understand from discussions I had with our business guys and also with Bernhard. Loading in preparation for an anticipated better Q1 quarter was done in the year 2012 and was done in the year 2013.
I cannot go back to 2011. I assume that this was not done in that year, before 2011 I can confirm to you that we never loaded year end inventories.
So here my comments are very clear on loading that this had been not only in Q4 2013, but also Q4 2012. As for as de-stocking is concerned I think it was not something that was visible in 2013, it’s clearly visible because of oil price in 2014, that’s the second effect.
As far as maintenance is concerned we had the big maintenance in Advanced Industrial Intermediates in November for one month and we also had a clear standstill in a couple of times in September and October, which occurs only every three years. So that was somewhat exceptional.
So I would say generally speaking, Q4 is the quarter of maintenance, but in Q4 last year it was a little bit more visible, compared to the years before.
Markus Mayer
Okay, perfect, thanks.
Operator
Our next question comes from Patrick Lambert of Nomura. Please go ahead.
Patrick Lambert
Hi, good afternoon. I feel a few more questions left.
Again, hedging sorry, just to make sure I understand the EBITDA impact and that must EBITDA calculated on net exposure and safe measure as cash cost [indiscernible]. Can you confirm that your hedging strategy is also on those net exposures especially in the U.S.
dollar one I suppose, and not just on contracts, cost, and you could other cost that you know about and you plan about in terms of U.S. dollar your cost?
That’s the first question, a methodology question in calculations. And then the second questions we got pricing on our metrics, I think, is from our index is still down year-on-year between 30% and 40% and I’ve tried to calculate the impact on prices for Advanced Intermediates, which give more input impacted by those benzene [indiscernible] in places.
Could you help us quantify with the, with number of steps on average away from the cracker you are in that division, or basically give us the sensitivity to the aromatic prices in 2015, you are seeing? That’s the second question.
And last one, very quickly on Singapore, could you comment on how many turns you expect to produce and sell in both Singapore plants next year, 2015, sorry? That’s it.
Bernhard Düttmann
Patrick, thank you for your questions. The answer to your first question is yes, as far as the second question is from concerned, of course consoled for all are just parts of our raw materials that we have in our aromats we do not only produce aromats it’s one of our business lines.
And therefore your analysis that’s here we are on our way down in Q4 I confirm. In Q1 we are still on our way down, but it came to a standstill and now moves little bit upwards.
And therefore I alluded to the fact that was a certain windfall profits in Q4, and we cannot out rule a certain windfall profit in Q1. Now as far as Singapore is concerned I gave the indication for 2015, that we will have most likely a utilization rates of round about 25% to 30% in Singapore and I will not say anything more, but that will be the utilization.
For the Nd-PBR plant in Singapore, Nd not for both plants, we have also about two plants in Singapore, but the indication so far was that intent in 2015 to have a buy and large utilization in Singapore about 25% to 30%. We will only get to this break-down by sites, because of the specific case that we opened a site it’s not the standard of our company to guide utilizations at planned level.
And that’s therefore for this year we give the indication and the intention is to then ramp up Singapore next year also for the decision we have taken today. So that’s basically on utilization.
Oliver Stratmann
I will like to thank everybody on the call for your questions and should anybody remain left over with questions then please get in touch with me and my team. And I pass over the last words to Matthias and I’m looking forward to seeing some of you guys on the coming road shows.
Matthias Zachert
So ladies and gentlemen I think we are looking at the year 2014, which was quite tough in tense, but we I think have laid a good foundation. But of course it’s going to be still a tough environment as far as 2015 and 2016 are concerned, but I think we move into direction that we see more and more that the company is going to not only stabilize, but to improve then going forward.
What I also would like to convey here is my thanks to Bernhard’s that he has been in the company for the last four years. I think you will seen Lanxess moving into the ducks, which is the phenomenal thing.
And therefore there was the way of one two good years in the 2011 and 2012. Of course the chemical industry is not only an up cycle, but also a down cycle.
So we have experienced this in the last two years. And so therefore I think with everything that was done the company would like to express the – directed towards to him.
At the same point in time, I look to Michael Pontzen, he’s sitting in this room, he was silent today, I think he will be more outspoken in the future calls. I welcome Michael, most of you know him.
You see that Bernhard is sending over to professional, who has done Lanxess for the last 10 years. And I try to steal him in Mercks but he resisted, so you see you that he is fully committed to the company, which I appreciate.
He has led the restructuring on SG&A last year, and he was tested and was proving that he can do that, as well. He was Investor Relations Head, Treasury, Corporate Finance, under the leadership of Christoph Koch was well educated there and then was spending the test of time in controlling also one year under my CEO stewardship.
And therefore I’m welcome having Michael on board, I think, I’m very happy to therefore welcome somebody that also is known to you. So both of us will see you in the next few quarters together with the IR team and therefore looking forward on the interaction and the latest seeing you on the 21st of June.
Thank you very much on behalf of Lanxess bye, bye.