Revenues for 2018 came in at EUR 7,197m (2017: EUR 6,530m), bolstered by the ability to pass-through raw material costs, combined with the first-time contribution of the U.S. phosphorus additives business acquired from Belgium-based Solvay, and lower prices for various isocyanates (MDI/TDI). All segments reported double-digit sales growth except for Performance Chemicals, which shrunk by about 6% from 2017.,

Furthermore, operating profits (EBITDA) increased by approx. 32% to EUR 935m (from EUR 709m), and EBITDA margin increased to around 13% from 11% in 2017. This was driven by the ability to increase product prices and pass-through a higher proportion of raw material costs. As LANXESS received funds of EUR 1,427m from divestment of the remaining stake in ARLANXEO, Net financial debt, according to company definition (incl. time deposits and securities available for sale), shrunk to EUR 1,381m as of December 31, 2018 (previous year: EUR 2,252m). This also includes a EUR 200m increase of pension assets, which consequently lowered pension provisions to approx. EUR 1,083m at the end of 2018. As LANXESS has retroactively adjusted historically reported financials to reflect the treatment of ARLANXEO as discontinued operations, Scope’s rating case for 2018 has not included the deconsolidation effect. Including LANXESS’s reported financials, the credit metrics for 2018 were:

• Scope-adjusted funds from operations (FFO) to Scope-adjusted debt (SaD) of 58% (30% in 2017), compared to Scope’s expectation of 89%;
• SaD to Scope-adjusted EBITDA of 1.4x (2.7x in 2017), Scope expected 0.8x;
• Free operating cash flow (FOCF) to SaD of 16% (10% in 2017), versus Scope’s expectation of 52%.

Economic headwinds to remain in 2019, but LANXESS is even more resilient

LANXESS will continue to face weakening automobile and construction end-markets in 2019, a consequence of persistent global economic risks. However, conditions for the company’s agrochemicals division (Business unit Saltigo) are likely to slightly improve. Thanks to the exit of Synthetic Rubber business (ARLANXEO), we think LANXESS will be more resilient. Profitability is expected to be of lower cyclicality as LANXESS is likewise less depend on fluctuating raw material prices and cyclical demand for commodity-like Synthetic Rubber products. In its rating case for 2019 Scope therefore anticipates an EBITDA in the range of 2018 level and an increase of up to 5%.

Implications for Scope’s rating

Scope believes LANXESS’ credit metrics will remain solid in 2019. This assumption is in particular backed by the company’s continuing focus on deleveraging combined with expectations for stable to slightly higher EBITDA. Despite the share buyback program of up to EUR 200m, announced on 10 January 2019, we see no indication that LANXESS will deviate from its conservative financial policy, continuing to balance shareholder and debtholder interests. Scope therefore expects credit metrics guidelines for 2019: FFO/SaD of >50%; SaD/EBITDA of <2.0x, and FOCF/SaD of >10%).

This publication does not constitute a credit rating action. For the official credit rating action release click here. On 15 August 2018, Scope assigned LANXESS AG an issuer rating of BBB+. The short-term rating is S-2. The Outlook is Stable.