LANXESS Aktiengesellschaft (OTCPK:LNXSF) Q3 2023 Earnings Conference Call November 8, 2023 7:00 AM ET
Company Participants
Eva Frerker – Head of Investor Relations
Oliver Stratmann – Chief Financial Officer
Conference Call Participants
Jonathan Chung – Morgan Stanley
Sam Perry – UBS
Andreas Heine – Stifel
Jaideep Pandya – On Field Research
Oliver Schwarz – Warburg Research
Tristan Lamotte – Deutsche Bank
Chetan Udeshi – JPMorgan
Rikin Patel – BNP Paribas
Samuel Weber – Vermögensverwaltung
Andres Castanos-Mollor – Berenberg
Operator
Ladies and gentlemen, thank you for standing by. Welcome, and thank you for joining the LANXESS Q3 Results Call.
I would now like to turn over the conference to Eva Frerker. Please go ahead.
Eva Frerker
Thank you, Sarah, and a warm welcome also from our side. Thanks for joining the LANXESS Q3 earnings call. As always, I would like to begin by asking you to take notice of our Safe Harbor statement. With me today is Oliver Stratmann, CFO at LANXESS; Our CEO, Matthias Zachert unfortunately cannot be here today as he does not feel well. However, he does send his best regards. We are however also very happy that Oliver is here today, and he is ready to start with a short presentation, and we will then open the floor for your questions.
I will now hand over to Oliver. Please go ahead.
Oliver Stratmann
Many thanks, Eva, and welcome to everybody on the call and on the webcast. Let me now briefly run you through a few charts before we then switch to Q&A. Now Q3 was strong cash generation quarter despite continued low demand. You have seen by now the Q3 results of €119 million EBITDA being more or less in line with market expectations. And I’d like to shed the focus on the cash generation of the quarter.
The strong free cash flow of €322 million was generated mainly due to our active working capital management reducing inventories volume wise. With that money, we have been enabled to address our net debt and bring it down by another €306 million, sequentially down to €2.557 billion. We are experiencing a low demand environment here, which is why we’re actively addressing what is in our hands.
More to that on the next chart, our program forward is on track and is being implemented as we speak, and additional measures are in execution. The total we’ve communicated before of €150 million savings will come. We aim to see the vast majority of expenses relating to this program still in Q4 of this year, and then we’re looking forward to incur the forward savings of €90 million in 2024 and €60 million in 2025.
Now, we’ve added the information on the redundancies we unfortunately have to go through, and you have seen that roundabout 870 positions globally will fall away, 460 of those being in Germany. We’ve also announced additional measures. We have started I think, not surprisingly, now the process of the divestment of the business unit Urethane System as a strategic step that has been clear for quite a while. As you know, we’ve been reporting this business unit in our former reconciliation segment now all other segments. And we have decided on Board level to propose a reduction of the dividend for 2023 to $0.10.
Now despite the challenging situation we are in, I’m happy to speak to you and report on our business. So let’s move on to the next chart and have a quick look on group level. Volume decline here is the dominating topic. The active reduction of inventory has of course also burdened EBITDA, and we tried to somewhat balance between a necessary debt reduction and still making the EBITDA we wanted to make.
What I can tell you further on is that customer destocking that we’ve seen for several quarters has been there in Q3, but has leveled off except for those customers that we have in the agrochemicals industry. By and large, we’re also done with sweating out the high priced inventory.
And with that, let’s move on to the segments now. On Consumer Protection, at least comparably stable is what we saw in terms of results still without a doubt not satisfying for us and we now are confronted with evidence that agro customers are starting a destocking. We’ve seen that also in announcements of other companies, and we expect to see that also in the fourth quarter and potentially thereafter.
What will also be a burden here on Q4 is that we have currently a substantially reduced steam supply after a fire at a supplier’s site in Botlack in the Netherlands. We are operational there with our Flavors & Fragrances business unit, which is now limited in what they can produce. So we’re expecting roundabout a €10 million impact in the fourth quarter on EBITDA from this lack of steam supply, which is expected to last into 2024.
Now, let’s move on to Specialty Additives. We’re seeing a substantial decline in earnings here on destocking. And let me be clear, roundabout two-thirds of the sequential volume decline in our inventories was actually achieved in this segment. So that partly explains why we have a heavier burden of low sales volumes or lower volumes being reported and causing idle costs. Now, in Advanced Intermediates, the same themes are actually hitting, mainly reconstruction industry demand for Inorganic Pigments and for Advanced Industrial Intermediates are the root causes here for lower volumes and lower EBITDA.
Now let me please shed a bit of light on the positive flip side of this inventory reduction that we have achieved when we go to the next chart. First of all, our net working capital was sequentially reduced by roundabout €260 million, which led to a net debt reduction of roundabout €300 million, which means if we compare to year-end, we have a €403 million net working capital cash inflow and a debt reduction that is north of €1.2 billion and close to €1.3 billion.
I would also like to highlight on the derisking side. Since we’ve spoken a few times about refinancing necessities in May 2025 that these refinancing of a bond have been secured by now already by bilateral bank loans. And a further topic that has been in discussion a few weeks and months ago with regard to gas prices, I’d like to drop two data points here. Firstly, in Germany, where we have the largest demand for gas, the German spheres for gas, the storages, are almost completely full already by now.
On top of that, we had started to hatch our global gas price exposure and we’re going into a fourth quarter where between 40% and 50% are hedged at prices that match the current level of €40 to €50 per megawatt hour. So I think the message should come across that we are deleveraging actively and that we are actively addressing the capital market’s concerns.
Let me move on to our guidance chart with that. Our view on the economic environment did not expect any uptick in underlying demand in the fourth quarter and now we are saying the underlying demand in Q4 is unfortunately even lower than it was formally expected. I have already mentioned burdening effects that will come on top. So the persistent Force Majeure situation, which is now on Chlorine expected to end with the end of the month of November. And on top comes, what I’ve explained for the steam limitation at our Botlek sites in the Netherlands.
In the fourth quarter, typically, there is a seasonal peak of CapEx and we had reduced our guidance to €350 million CapEx this year. We stick to that guidance, but that implies a higher CapEx in the fourth quarter, which you should bear on your mind. We stick to our net working capital ratio goal of 23% and I hope you forgive us here standing at 22.2% that we leave it at 23%. I personally think it would be academic to distinguish here between 22.2% and then 22.5%. This all results to the updated guidance of €400 million – €500 million to €550 million.
And with that, I’m very happy to get into the conversation and welcome your questions.
Question-and-Answer Session
Operator
Thank you, ladies and gentlemen. We will now begin with a question-and-answer session. [Operator Instructions] And our first question comes from the line of Jonathan Chung from Morgan Stanley. Please go ahead. Your line is now open.
Jonathan Chung
Thank you. Thanks for taking my questions. I have two please. The first one is on the steam supplier outage. Could you give us a bit more colors on the supply outage? If this situation goes on into 2024, how much EBITDA should we expect? Should we expect just €10 million per quarter times four or should we expect something else? And what’s the timeline for that to be fixed? And my second question is around the PA66 plant in Germany. I think one of your competitors mentioned, they will shut down the PA66 polymerization unit in Germany, quoting some challenges in the production cost. What does that infer to the JV? I suppose the JV will also face a similar issue in terms of cost of productions. Could you comment a bit on the cost position and what are you doing to improve the fixed cost in that particular unit? Thank you.
Oliver Stratmann
Jonathan, thanks very much for the questions. On the steam outage, what has really happened there is that an incineration plant for waste material had a fire. Fire apparently came up twice, therefore more severe, and we have been supplied from this plant with steam several different pressures. Now the steam supply was interrupted. We can supply our own steam to our plant to a certain – up to a certain limit, which obviously doesn’t suffice for the full coverage. And since this was a severe incident, we expect it to be extended into the year 2024, maybe the full year.
However, we have insurance coverage, it’s only that the deductible we have amounts to €10 million. Therefore I’ve mentioned a €10 million impact that we have to expect in the fourth quarter. For next year, the amount of burden there should be covered by our insurance. So I hope that answers the question on the steam outage.
On Envalior, to be honest, I wouldn’t like to comment. It’s a joint venture together with Advent and they decide on their individual comments with regard to their business activities. What I can say is that we have seen after the second quarter, now in the third quarter also a negative contribution. We had guided to that level of contribution and we’ve guided that it will probably come down to something like €50 million negative in the future as the PP&A allocated to inventories has been from an accounting perspective digested. And this is as far as I would like to go with regard to the operational commenting.
Jonathan Chung
Thank you. Just to follow-up on this steam supplier, are you able to tell us the supplier name?
Oliver Stratmann
You are interrupting, unfortunately, so I couldn’t hear the question really. Are we able to…
Jonathan Chung
Are you able to tell us the name of the supplier for the steam?
Oliver Stratmann
Yes. You can even Google it. The company is called AVR I think.
Jonathan Chung
Thank you.
Operator
Thank you. [Operator Instructions] And our next question comes from the line of Sam Perry from UBS. Please go ahead. Your line is open.
Sam Perry
Hi there. Thanks for taking my questions. A couple, please. Can you give any more detail on the committed credit lines and RCF that you show on Slide 20? For instance, if this is deployed, is it a higher rate than the 1.125% bond you’re using it to pay back? And what are the terms with regards to how long you have to use it or if you’ve used any of this already? And then secondly, I think in the middle of last year it was you began to factorize receivables. Is this still ongoing and when does it come to an end? And would you look to do this again when that agreement does come to an end? Thank you.
Oliver Stratmann
Sam, thanks for the questions. I will give as much detail as I can here, because we typically don’t disclose how we’ve negotiated our individual financing instruments here. And the good takeaway for you should be there are committed credit lines in place, plus all of them are unused. And our syndicated credit revolver, amounting to €1 billion is also unused. Of course, if you agree to financing now, it is at market rates, it doesn’t contain covenants and it is completely unused. Hence the market rates would then apply when we really draw on the financing. And the maturities have a duration that is long enough, as I said, to finance any 2025 maturity.
On the factoring, indeed, we are continuously factoring. You have, however, around about apples to apples comparison in the two periods in the cash flow. In both periods, more or less €130 million have been factored and it will come to an end if we deem that the rates we are paying become unattractive compared to other financing means. Because this financing was really put in place and still is now already – still a financing that is attractive compared to other instruments. Hence, it’s really a financial evaluation that we are doing here. And once that turns, we will terminate it.
Sam Perry
Thank you very much. Can I just have one follow-up please as well? Just on CapEx, for a couple of years now, it’s been below D&A and I know there’s some amortization of intangibles in there. But when we think about CapEx going forwards and potentially your ability to grow at or above market coming out of this weak demand. How much does CapEx have to step up over the medium term?
Oliver Stratmann
Yes, also there, I mean, you already touched on the point that the way some of our covering analysts are looking at the figures compared to comparing CapEx and D&A isn’t really apples to apples, because the depreciation of €500 million to €550 million contains around about €150 million of intangibles. So the right number goes more into the direction of €400 million.And here, of course, you do have flexibility. Now, to be honest, in order to grow, we don’t need any CapEx right now, because our plants are so substantially underutilized that we can easily, and that will be a huge thing to bear in mind once demand comes back.
We can largely and hugely benefit from a higher capacity utilization. So there is no single dime necessary to step up the speed here. We do have, of course, ideas where and in which projects to invest, but for the time being, the focus is clearly on debt reduction and hence we stick to our €350 million guidance for this year and I can also tell you that the plans for the next year won’t be far away from that. So we continue to be spending what needs to be spent and what is extremely attractive in terms of expansion or debottlenecking, because the €350 million contains €250 million to €300 million as pure maintenance CapEx. So you know that there still is a bit of expansion for attractive investments still in there.
Sam Perry
Great. Thank you very much.
Oliver Stratmann
Of course. Thank you, Sam.
Operator
Thank you. [Operator Instructions] And our next question comes from the line of Andreas Heine from Stifel. Please go ahead. Your line is now open.
Andreas Heine
Thanks for the opportunity to ask question. Actually, I have three. Going in – starting with the first one, going into Q4, how do you see there your net working capital? You did a lot in bringing it down seasonally usually net working capital declines once more in Q4. But I’m not sure whether that is the case this year with all the efforts you have already done. And I obviously appreciate that you do not have a crystal ball and hesitate to talk on 2024. But let’s say, if everything stays equal and we don’t see any recovery, could you help us a little bit in the bridge of EBITDA and cash flow?
So what is the special inventory effect you had this year negatively on EBITDA? What are the net cost savings next year? What is all the Force Majeure impacts you have this year and hopefully have less next year? And also the impact of these high priced inventories where you basically were in your inventories you used well above at least my understanding the raw material cost at that particular part in time. And if you go the same on cash flow, what is all these restructuring impact you had on the negative side and the net effect of saving the bonus payments and the dividend? This would be my questions. Thank you.
Oliver Stratmann
Andreas, [indiscernible] thank you. Well, Q4 net working capital seasonally, you are right, is typically a quarter where net working capital is trimmed. And the word typically already bears the idea in it that there is hardly anything that is typical in this year. So we’ve trimmed working capital substantially. We are having the typical Q4 maintenance turnarounds.
On the other hand, our utilization in some plants is so low that you also need to, as I understand, it as a non-chemist take care of a stable plant running here. So I wouldn’t exclude that to a certain limit, we will be ramping up production, maybe producing a few kilotons on inventory. This is why we’ve continuously guided to 23% of sales and including now movements in prices here. I would shy away from doing that and rather say if you assume something around the 23%, I think we feel confident that we can achieve that.
On the 2024 bridge just now and without going into all the nitty-gritty details that we’ve had, but at least mentioning some of the bridge steps, which I fully get you need. Let’s assume midpoint of guidance is reached. What we have is, first of all, and we’ve mentioned that before on a call, around about €100 million EBITDA burden that will not reoccur from reducing our inventory and sweating out the high priced costs.
I would like to leave it in your hands, how much comes on top from customers that have destock, because that in essence is then a pickup of demand question. We have a net positive number of savings that comes on top of €40 million, which is the temporary €50 million this year, translating to the permanent €90 million of next year. Then I’ve already mentioned a €10 million Botlek impact in the fourth quarter, which should also not be there next year. We had the long persisting limitation in chlorine supply and we said that is around about €10 million to €20 million, so pick €15 million impact and we continue to expect synergies from our M&A integration coming on top in the magnitude of €15 million next year.
Now that would still leave you with zero change in utilization rate and of course being now for Q3 three in the low 50s only. There is, as I also mentioned, relation to CapEx, a huge headroom that we have to perform. So that should give you, I think an indication where next year. Without that we can see any pickup right now on the basis of order books where that can really move to.
Andreas Heine
Oliver, maybe the same for cash flow, only the extra stuff. Not a real forecast, but only bridges.
Oliver Stratmann
I just realized I had forgotten the cash flow question. Try to note it down here. Well, on cash restructuring, we’ve said that €50 million will occur next year. And then depending on how you want to calculate, we have, of course, the €82 million roundabout should the AGM agree to the intended dividend proposal, €82 million that we are saving. And that is with regard to restructuring and the forward program from a cash perspective. On working capital next year, I hope you don’t ask me to speculate how that could develop that would go beyond my imagination here.
Andreas Heine
May I – sorry for that to ask again. In the second quarte,r you had in the cash flow statements minus €98 million for others. And I thought that is one-time payment for employees and bonuses and both will not come again. Is there any number you could give for this item?
Oliver Stratmann
Yes. For Andreas, the question is there, if you tell me what my bonus is going to be next year, then I can tell you how much the provision is that will be in Q3.
Andreas Heine
I know that was cash flow, only on cash flow, so cash flow would bonuses for 2023.
Oliver Stratmann
Got it. Yes. I can tell you that there’s not going to be any bonus, because with our EBITDA here, we will not make any of the goals that the supervisory board has given us. So that relief will be there. Now, in the past, we had this cash out and we had quantified it with €80 million to €90 million. So this €80 million to €90 million already this year will not be paid out?
Andreas Heine
Yeah. And the last point, were there sizable one time payments in Germany for your workforce, which were agreed by the unions? Is that also an item having in mind, or not?
Oliver Stratmann
Well, there are items, but I don’t think that that really helps you in building a bridge. We did have…
Andreas Heine
Okay, that’s fair. Then it’s fine. If it’s not important, then we don’t have to.
Oliver Stratmann
No, I don’t think in the grand scheme of things you’re talking about next year that really matters. It would be in the magnitude of like a Q4 Botlek or synergies item.
Andreas Heine
Thank you very much.
Oliver Stratmann
Of course, Andreas. Take care.
Operator
Thank you. [Operator Instructions] And our next question comes from the line of Jaideep Pandya from On Field Research. Please go ahead. Your line is open.
Jaideep Pandya
Thank you. The first question, sort of a two part question, really is sort of around your competitive landscape. It feels a bit like, you guys have lost touch more volume than some of the other sort of chemical companies who cater to other end markets. A few of the chemical companies have started to elude to competition out of China coming into Europe and the U.S. You also mentioned this. So could you give us some color in terms of the volume loss you’ve had this year? How much of it has been due to sort of cheap competition on pricing from Asia where you had to walk away from the volume side?
And the second part of that question for me is, when you look at the price versus raw material/energy bill that you had this year, is this roughly a wash or is this been a headwind or has that been a tailwind for you? And there’s a second question I have is around IFF and around Emerald. How have these two businesses done this year, especially in context of goodwill test, which will happen in few months? Are you significantly behind the plan or are you sort of in plan considering the demand landscape? Thanks a lot.
Oliver Stratmann
Jaideep, thanks for the questions. Now, to be honest, it’s a bit artificial to try and break down a volume loss that we’ve incurred because material from China at a cheaper price, sometimes extremely low price is sold in our markets. The fact is, however, absolutely true, and I can confirm that in some of the products we are being confronted with Chinese competitors who, based on cheap Russian oil and derivatives being produced from that are – as we see it, temporarily selling in our markets here. So we are looking at this very closely and the question you have to ask yourself and our businesses are answering this question as they go for any price relief, do they really get volumes or don’t they get volumes? If you don’t get volumes, it’s not a wise decision to decrease prices then you rather let the volume go. You will be sure to regain the volume.
Now, on the price versus energy and raw material bridge, I can tell you that the price declines we have passed on in large parts contractually to our customers have been to a lesser extent than the relief we have gotten from cheaper raw material, cheaper energy and also lower freight costs. Then you asked on IFF and Emerald and how they are doing, also I can understand the question, but as a corporation you are happy to have these businesses integrated. This is what we’ve been working on.
So to split them out now and exactly say how they’ve performed is difficult. What you can see though is that consumer protection, which includes these businesses, is comparably more stable. Still I said not to our satisfaction. So they have also seen weak demand and the impairment testing, which will be done for all cash generating units towards the end of the year, will be done, indeed, in the fourth quarter. So that’s a question of the fourth quarter.
Jaideep Pandya
Okay, thanks a lot.
Oliver Stratmann
Of course, Jaideep. Thank you.
Operator
Thank you. [Operator Instructions] And our next question comes from the line of Oliver Schwarz from Warburg Research. Please go ahead. Your line is now open.
Oliver Schwarz
Hello, Eva and Oliver. Thanks for taking my questions. Firstly, the Botlek incident, the Force Majeure there. I heard you say that the impact in 2023, so in the fourth quarter is €10 million due to the deductible. So does that mean that, let’s say, the loss in earnings just coincides with the deductible. So it’s like €10 million that was lost and the deductible is €10 million. So it’s a wash in Q4. Or is, let’s say, the loss higher than the deductible, and we’ll see that compensated with payment from the insurance, most likely in 2024.
And that would also basically allude to the second part of the question. How is that to be estimated for 2024? Let’s say, the Force Majeure would last the full year. Then the payment by the insurance is likely to come, as far as I know it, only in 2025. So we would see an EBITDA impact of that incident in 2024. How much would that be in that hypothetical case? That would be my first question.
The next two are rather basic here. What is it you currently discuss with the rating agencies? Given that LANXESS has a very low EBITDA generation at the moment, and from what I heard you saying, you’re not that optimistic for that to jump to a new level already in the beginning of 2024. So are those rating agencies concerned, is your rating in jeopardy and so on and so forth. And third question is about the Urethane Systems, the upcoming divestment. Can you give us an idea in regards to timing, please? Thank you.
Oliver Stratmann
Oliver, thanks. Well, on the Botlek burden, let’s make it brief, because it’s not so complex as it apparently came across. There will be a burden that we have in Q4. This burden is €10 million and our deductible is €10 million. So the burden is €10 million. Next year, you are absolutely right. In every quarter, should it last the whole year, there will be a burden. And we right now expect that we can obtain coverage of our insurance on a quarterly basis. So not after one year, but once the incident is clear and the lost contribution margin is discussed with the insurance. Unfortunately, we’ve had some experience now with insurance cases.
We feel comfortable to say that we don’t think that there is an impact to be expected on a quarterly basis. I also think, frankly, it’s premature to discuss the impact on next year as this has just happened a few weeks ago. But insurance coverage for the incident, except for the €10 million that we’ll have to carry as a burden is there.
On the rating agency’s discussion, look, we clearly have demonstrated over the last years that management, in whatever composition, has since 2004 demonstrated a very strong and undisputed commitment to a solid investment grade rating. So the conversations that we’re having very frequently with our rating agencies circle around our active measures, what we are taking and going above and beyond that into what we are discussing with the rating agencies, we can do if we make you an insider, as the rating agencies are and then we can go into more depth.
And I sense that was almost like a Matthias Zachert’s joke. So forgive me for that one. On Urethane’s timing. Look, we have said we are starting the process. We’re now around year end. It’s an asset where we deem there is interest in the market, undoubtedly. But as you know, with your experience, to forecast a precise timing here on M&A is not a wise or serious measure. It won’t take forever. I think that is an asset that is wanted in the market. So simply the fact that these processes shouldn’t be forecasted keeps me from doing that. But it’s – I don’t think it will take forever.
Oliver Schwarz
Excellent. Thank you.
Oliver Stratmann
Thanks. Next question, please.
Operator
Thank you. [Operator Instructions] And the next question comes from the line of Tristan Lamotte from Deutsche Bank. Please go ahead. Your line is open.
Tristan Lamotte
Hi, thanks for taking my question. A couple, please. Firstly, do you have any comment on the current likelihood of an energy subsidy in Germany? And is this something that you see is necessary to support the competitiveness of your German assets, for example, against these increased Chinese exports that you mentioned are currently benefiting from cheaper than normal feedstocks? And then secondly, given that performance is still quite weak and invaluable, would you be able to comment on the likely need for additional financing, given that presumably the conditions are still quite similar to where you provided the financing in the first place? Thank you.
Oliver Stratmann
Tristan, thanks for the questions. On the energy subsidy, as an officer working in a German company, you almost have to smile because there have been so many attempts to come up with energy subsidies, which in the end, ended up with precautions and requirements that no industrial company was able to fulfill.
So if the question is, is it desired? Absolutely. There’s no doubt that energy costs in Germany are higher than elsewhere. Will it come? I personally have my doubts. The question on competitiveness however is something that to me should be seen in conjunction with demand levels. And I’ll give you a brief example.
If you look back at last year, we are actually comparing Q3 over Q3 2022 and Q3 2022 had the highest level of raw material and the highest level of energy prices that we were comparing to. So the input costs had even been higher. But our profitability, on the flip side was much higher as well. And the difference here to me lies in the substantial underutilization compared to last year that we are seeing today.
So, energy subsidies wanted? Yes, likely probably not. And we are doing everything actively to strengthen our competitiveness here, despite an environment that our politicians do not seem to be able to cope right now with.
On Envalior, look, Tristan, we are absolutely convinced that Envalior has everything it takes to perform as a market leader, be it presence in the market, be it market positions. They have been solidly equipped. And it’s also not a surprise that their financing in a situation like these – like this of multiple crises, leads to a negative net result here, which as you know, doesn’t necessarily mean that this business is from a cash perspective negative. And as we are convinced of the business model and the combination, we stick to that strategic view. And we are also convinced that asset will perform in the future. This is why we’ve decided for this structure.
Operator
Thank you. [Operator Instructions] And our next question comes from the line of Chetan Udeshi from JPMorgan. Please go ahead. Your line is now open.
Chetan Udeshi
Yes. Hi, thanks. Thanks, Oliver. And it’s good to see a strong free cash flow generation this quarter. My question was more on your JV with Envalior…
Oliver Stratmann
Chetan, I unfortunately don’t understand a word. There’s so much noise in the background.
Chetan Udeshi
Okay. Is this better now?
Oliver Stratmann
Yes, much better.
Chetan Udeshi
Okay. So the question I had firstly, it’s good to see a strong free cash flow quarter in Q3, so congrats with that. The question I had was, can you remind us about your exit terms for Envalior in 2026 because I’m a bit confused. Did you have a guaranteed EV secured for that business in terms of exit value? Or was it a guaranteed multiple of 12 times on whatever the EBITDA is in 2026? Or is there no guarantee on anything? So it will depend a bit on the earnings of the company at that point in 2026, and then you will have to negotiate a price with Advent at that point if you do decide to exit.
The second question was, of course, you guys are doing what you can to improve the leverage situation. But at the same time, you also alluded to the fact that Q4 clearly has been a bit more challenging than you guys had thought in terms of trading environment. So what sort of holds you back from using equity as a means to delever the balance sheet and hopefully give a bit more comfort to the market and investors that we are not sort of kicking the can down the line in terms of having to do that eventually at some point in the future?
And the last question, sorry, was again just going back to the JV, you said we should be expecting about €50 million losses per quarter. Is that all because of PPA or have you also included operational loss within that €50 million for Envalior? Thank you.
Oliver Stratmann
Chetan, thanks for your two or three questions, and thanks also for mentioning the good and strong cash flow, appreciate you highlighting that as well. On the exit terms of Envalior, we have clearly mentioned two or three points. First point is we have a possibility to exit after three years. Second point, that period was very consciously chosen because we build on quite substantial synergies that can be implemented typically in this time frame.
And what we’ve done in the past in this discussion around multiples, because in this specific deal, non-disclosure was agreed. We’ve said it’s not the first deal we’ve made. We have had other deals in the past and in these other deals, multiples had been negotiated in advance. And it was with that I think something that gives you an indication of what you should be planning for.
And look, the first exit possibility will be in 2026 then. What we wanted to make clear, however is that the reduction of our equity asset on the balance sheet by realizing the negative result and our portion of that shouldn’t bring you to the wrong track to believe that that is an indication of the value. It will be an EBITDA multiple.
You expressed your concerns on equity and why we would not be doing that. Now also let me reiterate. There is no plan for equity. I think we have demonstrated that there are means after having just reduced our indebtedness by another €300 million in a quarter, €400 million year-to-date and that we are indeed pulling all levers to address indebtedness.
And by the way, an equity increase at this level simply mathematically, when you are valued at the equivalent of your inventory and part of the cash that you have on your balance sheet doesn’t make any sense.
On the accounting and the €50 million losses, which is our portion of the Envalior JV, no, it’s not the PP&A. PP&A is a tiny portion of that. The fact that we have seen €66 million showing up in the P&L is the remainder of the PPA allocated to the inventories, which has now been taken with the third quarter. And the big chunk of the burden simply comes from the fact that they have a high indebtedness with market equivalent interest rates, which now leads to a debt or an interest burden on their end and that’s it.
Chetan Udeshi
That’s clear. Thank you very much, Oliver.
Oliver Stratmann
Thank you, Chetan.
Operator
Thank you. [Operator Instructions] And our next question comes from the line of Rikin Patel from BNP Paribas. Please go ahead. Your line is now open for your question.
Rikin Patel
Hi, Oliver, thanks for taking my questions. Just wanted to go back to your comments around the competitive situation versus China. Could you maybe give a bit more detail around which business units and products where you’re seeing the most pronounced impact and possibly where the pricing pressure is the most intense? When it comes to looking at this trend over the past year, is this something which you’ve seen materialize more in the last couple of months, or has it been ongoing at the same time that we’ve seen this the destock.
The second maybe…
Oliver Stratmann
Rikin, sorry, the second question has what been going on? I didn’t get the first part there.
Rikin Patel
Yes. Have you seen these competitive pressures over the past year, or have they materialized more so in the past quarter or two?
Oliver Stratmann
Okay. And with competitive pressure, you were referring to Chinese competition or which competitive pressures, okay.
Rikin Patel
Chinese. Yes.
Oliver Stratmann
And that was the question.
Rikin Patel
Yes. Feel free to answer that.
Oliver Stratmann
Okay. Well, look, and I think one of your colleagues mentioned it before, we have already earmarked with the second quarter definitely that there are Chinese competitors in our markets. We’ve seen that in inorganic pigments. We are seeing that in parts of advanced intermediates. It is naturally lesser so in the more specialized segments. But I wouldn’t overemphasize the pressure from Chinese competition here. To us, it’s more that industry-wide demand is weak.
If we look at construction, for example, you see project development companies robust. You see real estate companies clearly say that they are not starting new projects. And if you then think about our exposure here of, let’s face it, color pigments, yes, which is not used to make a house more efficient in terms of CO2 emissions, but it provides a very stable and persisting color.
But of course, here you can reduce the content and if lesser buildings are being built, then you are impacted. So I wouldn’t overemphasize the Chinese competition here. It is there. It has been there for a while. And whether it’s been now two quarters or less or more, I don’t think really matters. We are seeing that in these products.
Rikin Patel
Okay. Thanks. And then just had a separate follow-up on the Urethane’s business. Could you maybe give us a sense of what the mid-cycle EBITDA is there in your view?
Oliver Stratmann
Yes. I mean, you know that we are not reporting or guiding on individual business units here, but what I have read in some of your colleague’s reports is that people assume something like a €40 million, €40 million or roundabout EBITDA level. I’ve read in reports. Now, I don’t want to comment on that, but that seems to be something like a consensus.
Rikin Patel
Okay. Thank you very much.
Operator
Thank you. [Operator Instructions] And our next question comes from the line of Constantine [indiscernible] Please go ahead. Your line is now open.
Unidentified Analyst
Yes. Hi, Oliver, and thanks for taking my questions. Maybe first one regarding on inorganic pigment, I think in the past you’ve also mentioned the increasing use of LFP batteries. Is that something where you have already successfully contracted volumes to or where you are in advanced discussions with battery clients? And should we therefore expect something there in the next year already?
Then maybe my second question, sorry, again, that also involves Urethane’s. When I look at the other slide and the sequential improvement here, was that mainly from your cost savings or also probably by some sequential EBITDA improvement in the Urethane’s business?
And then maybe the last, just a clarification when you talked about the somewhat positive price spread you currently see, is that just because of the delay you have on passing on lower raw material costs to your clients or is there any other mechanism involved in that?
Oliver Stratmann
Constantine [ph] also here, thanks for the questions. On inorganic pigments, iron oxide is what we are producing and what we had mentioned is that there is the possibility of a functionalizing of these elements to get to lithium iron phosphate batteries. So we would be one potential part of an ingredient that goes into these batteries.
As soon as there is anything contracted, you can absolutely rely on us. We will be the first to put that out. But we are still working on that. On Urethane’s or you said the reporting in all other segments, indeed, you see cost avoidance here and you also see the falling away of a hedging burden that has been in this result.
On pricing, I’d like to reemphasize that for more than a year now, I think 1.5 years we’ve been demonstrating that due to the fact that we have pass on clauses in our contracts wherever raw material and energies really matter, that are mechanically taking care with a certain time delay, that raw material and energy costs are a pass-through. So that has worked towards the end of 2022 and unfortunately also works now. We are passing on with a time delay what we get as a relief. And if there’s one or the other quarter where it’s not 100% match, then we prefer not to apologize for that. But the mechanic is working. And therefore raw material and energy prices from your end should simply be considered a pass-through item.
Unidentified Analyst
Perfect. Thanks.
Oliver Stratmann
Thank you.
Operator
Thank you. [Operator Instructions] And our next question comes from Samuel Weber from Vermögensverwaltung. Please go ahead. Your line is open.
Samuel Weber
Yes. Hello, thank you. Can you hear me?
Oliver Stratmann
We can hear you loud and clearly.
Samuel Weber
Perfect. I have two questions, first, a short one regarding net debt for Q4. Should we expect it to remain more or less stable? Can you say something to this? And the second question more generally. You have spoken several times today of the low utilization, the very, very low utilization of your plants now, you are either very confident that volumes will come back up significantly.
And maybe you can speak to your reasons why you expect this to happen, or otherwise why you don’t adjust your capacity even more. It seems you are doing a lot with your forward program. Do you think you can get in front of the development or is there a risk of doing too little, too late, depending on how tough the environment will turn out to be? Thank you.
Oliver Stratmann
Thank you, Samuel. On net financial debt development in Q4, we still have roundabout 1.5 months to go here. And I think you should bear in mind that the CapEx tilt we have towards more CapEx in Q4 will at least be one item where a cash out occurs that hasn’t occurred to that extent in the first three quarters.
I think I’ve alluded to the fact that potentially we might be producing a bit to increase stock here to run plants sustainably and in an orderly manner. So I would prefer not to guide to net financial debt, but rather reemphasize that our clear goal is to reduce indebtedness with the measures we can take. So bit blurry answer for Q4 net debt. But there are some moving parts. And I’m sure you will appreciate that.
The answer to your question on utilization, which is low and why we are – why we seem to be confident that volumes will come back indeed. It doesn’t only seem we are confident. We are very regularly, frequently talking to our businesses, of course, also on the question if there are any structural changes in the market, because very clearly there hasn’t been any period where we’ve seen a utilization as low for a period as long as it is now in the past.
And the very broad answer is that we don’t see structural changes in the markets. And hence, we are of course checking plant by plant whether what the foreseeable future will bring. And you have already seen us announce two plants actually that we will be closing for good, which has a mixture of reasons, not only that we think demand will be gone, but also that they are from an energy perspective and from a CO2 emissions perspective, negatively connotated [ph]. So we are addressing and evaluating whether and if plants should be closed, but with the capacity available right now, we feel strategically in a good position to benefit massively when demand comes back.
Samuel Weber
Thank you.
Operator
Thank you. [Operator Instructions] And our next question comes from the line of Andres Castanos-Mollor from Berenberg. Please go ahead. Your line is open.
Andres Castanos-Mollor
Hello, good afternoon. Thank you very much. I wanted to ask on the outlook for weakness in agriculture. How much have you seen already in Q3? And how much should we spec as incremental negative in Q4 and the next quarters? And the second one is on Urethane’s. Will there be any disentangling synergies here on separation?
Oliver Stratmann
Yes. Andres, thanks very much. The weakness we are seeing, we have seen in Q3, but it’s more a topic of Q4 and the coming quarters. But it has been signaled to us. Of course, this is always an evidence that you get from discussing with your customers, right? Customers are typically not prepared to tell you exactly how their order patterns evolve.
And you will appreciate that we talk to a lot of customers. And then if our sales and marketing force starts to get indications that orders for the future are being reduced because of destocking, this is when we then tell the market. So it will be more a topic of Q4 and then the quarters afterwards.
Then you asked on Urethane’s and whether there would be any dis-synergies. I think that is frankly something that we can tell you once we know how the deal looks exactly and who we are selling to. Normally in such a deal, there are agreements about the people that are going with the assets about transitionary contracts to provide services or not. So it’s too early to say what in terms of costs here happens when Urethane’s leaves the portfolio.
Andres Castanos-Mollor
Right. Thank you very much.
Operator
Thank you. [Operator Instructions] And our next question comes from the line of Andreas Heine from Stifel. Please go ahead. Your line is open.
Andreas Heine
Thanks for squeezing me again. Very two short ones. If next year’s business activity is getting better, what would happen with net working capital to sales? Would it stay on this level or are you able to bring that ratio down a little bit more? And you were mentioning how low your utilization rates are now in the low-50s. Are you able to quantify the operational leverage you would have if volume is coming back?
Oliver Stratmann
Andreas, nice talking to you again. Next year’s networking capital to sales ratio, the way I would like to answer this question is referring to what we have guided. We want to achieve this year and then in the longer-term, on top of the 23% in a more normal environment. You’ve seen us between 20%, 21%. I don’t see any structural reason why that shouldn’t be possible also in the future.
But please give us the time to look into 2024 and whether 2024 has more attributes of something like a normal year with that that compared to 2023. So I think we can do better than 2023 or even higher percentage points. And now I must admit I’ve forgotten your second question.
Andreas Heine
That was the operational leverage. So if the utilization gets back from 50 to something more normal, what would that mean for earnings?
Oliver Stratmann
Now I know the reason why I’ve forgotten your question. Because we typically don’t comment on the precise operational leverage here. But you can imagine, I mean normally I’ve always experienced and been told that if you go below 70% utilization, normally a chemical company is really struggling. We are in the low-50s now. You have seen our results. And I think it is fair to say that we have managed to adjust our cost structures in a way and cash out structures in a way that demonstrates flexibility.
The fact that 70% utilization from our perspective even looks appealing should tell you that there is quite a nice lever when idle costs are reduced and fixed cost absorption is improved when the utilization rises again. So I don’t want to give any precise percentage or amount there. But having come down from high utilization and having seen what the portfolio even without the more stable components that we have on Board is able to deliver. I think we can be confident to have a more stable portfolio than we’ve ever had now in the future, when utilization comes back.
Andreas Heine
Fair enough. Thanks a lot.
Oliver Stratmann
Andreas, thank you.
Operator
Thank you. [Operator Instructions] And our next question comes from the line of Jaideep Pandya from On Field Research. Your line is now open.
Jaideep Pandya
Thanks a lot for the follow-up. I just wanted to get an update around the smaller projects, although important, came on this Standard Lithium and the [indiscernible] potential JV. I remember you had earmarked some capacity in Saltigo for [indiscernible] so just want to get an update what’s going on there? Are you going to sell more to them in the outer years or is this capped? And then any update on Standard Lithium and also on CheMondis would be great. Thanks a lot.
Oliver Stratmann
Yes, Jaideep, good to talk to you as well. Again, let me start with CheMondis and not really an update here. We have said we are in the process of testing monetization features in the business model on both ends. We are still in that process and we wanted to report back with an update towards year-end. So that is still out there.
You can, however, imagine that also CheMondis in an environment of much lower demand, offers lower opportunities to test these monetization features. On Standard Lithium, Standard Lithium has just published a feasibility study and our experts are currently looking at the study. And we will inform the market once the discussion with Standard Lithium, our business cooperation has come to terms.
And I can assure you that we’ll do that as soon as we see clearly and have completely analyzed the study. [Indiscernible] we’ve mentioned already last time that up and beyond what has been agreed, there is no further development. We are in continuous exchange, but no tangible update here either.
Jaideep Pandya
Right. Thanks, and speedy recovery to Matthias.
Oliver Stratmann
Thank you very much. We’ll pass that on Jaideep. And with that, I think we have hopefully answered all of the questions. We need to run now to catch a plane. And we’re looking forward me personally to also see you guys personally in the future be it on Road Show on or on a self side trip. So take good care, and thanks for your attendance today. Bye-bye.
Operator
Ladies and gentlemen, this concludes LANXESS conference call for today. Thank you for joining and have a pleasant day.
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