Lanxess May Finally See Some Light At The End Of The Tunnel

seekingalpha07-09

Lanxess has seen brutal volume and price pressure due to destocking across its markets and important competition subsidized by Chinese access to cheaper oil.With multiple end-markets showing at least ...

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Hangen
07-13
Hangen
Very detailed about this company situation. The management is not doing good enough to stimulate growth.. and to add on... They are also poor in research and development area.

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BalkansCat/iStock Editorial via Getty Images Turnarounds and transformations take time, but I can understand why investors may question whether LANXESS (LXSG.DE) (OTCPK:LNXSF) (OTCPK:LNXSY) (“Lanxess”) will ever show real results for a decade-long transformation process that was supposed to leave the company as a less-cyclical, higher value-add, more consumer-focused specialty chemicals company. Although management has been making what generally seem like sound decisions, the company has been hammered by macro challenges that have seriously undermined the earnings of the company. Down almost two-thirds since my last update, far worse than the performances of peers or comparables like Covestro, Evonik, and Wacker, it may seem insane to have a positive outlook on the company. I think management absolutely has a lot to prove, but I also think that a lot of the macro headwinds that hit the company so hard have started to abate, and that while 2024 and 2025 likely won’t be full rebound years, the stage is being set for better results. At this point, little is in the stock price, so further evidence of stabilization could drive upside from here. Destocking Seems To Be Ending Lanxess saw brutal destocking across its end-markets in 2023, with the construction market practically collapsing for the company (down roughly 50%). Other markets like electronics, mobility, and agriculture weren’t all that much better, driving quarterly volume declines of 12%, 14%, 9%, and 14% for the fourth, third, second, and first quarters of 2023 (respectively). Even markets like food and consumer products, which typically don’t see dramatic volume shifts, saw significant destocking as manufacturers got more confident with their supply situation and moved away from post-pandemic hoarding. It looks as though that painful reset process is largely over. Volume did decline another 5% in the first quarter, reported back in early May, with ongoing weakness in construction and destocking in agricultural chemicals, but other markets have started to see at least limited restocking, and overall company volume improved about 13% sequentially. I’m guardedly positive on the volume outlook for the remainder of 2024 and into 2025. While the destocking in ag chemicals is concerning, FMC (FMC) and Corteva (CTVA) have sounded more positive about a second half recovery. Even if Lanxess doesn’t fully participate there, “less bad” may be good enough given where sentiment is today. As far as other markets go, I think construction is likely washing out; I’m not bullish on construction for 2024/2025, but I do think it will start to get better in 2025, driving some restocking for Lanxess. I also expect improving demand from electronics and consumer goods markets, with the caveat that consumer spending is starting to slow, and so I think it will be a drawn out recovery process for Lanxess into 2026. Unusual Pricing Headwinds Should Be Easing Lanxess’ recent volume challenges would have been enough bad news on their own, particularly as they pushed utilization below critical operating leverage breakpoints, but the company also saw meaningful price pressure in 2023 and into 2024, with realized prices down 13% in Q4’23 and down 9% in Q1’24. Price declines in this sector aren’t that uncommon, particularly when input costs are falling, but I believe low-priced import competition has really hit Lanxess particularly hard. The Chinese have been increasing their exports of base chemicals into European markets, and Lanxess’ results suggest they’ve been hit harder than many of their peers. What has made this situation even more challenging is that Chinese producers have been leveraging access to lower-cost oil imported from Russia; at one point China was paying about $30 less per barrel than the global benchmark price. With oil and oil derivatives being key inputs to the Chinese chemical sector, these companies were able to use price to take share, even in a market where destocking and insulating supply chains against China were factors. Like the destocking headwinds, this too should be abating. It’s difficult to find accurate real-time data on what China is paying for Russian oil, but reports suggest that the discount is now down to a few dollars a barrel. That’s still an advantage that Lanxess has to deal with, but it’s a considerably more tolerable challenge today. Will The Transformation Program Finally Show Returns? Lanxess has done a lot over the years to ostensibly improve the long-term competitiveness and earnings potential of the business. The company has exited some more-cyclical businesses, including the formation of the Envalior joint venture with Advent to offload its cyclical High Performance Materials business, and management is actively looking to sell its Urethanes business. It has also acquired assets in areas like biocides and other antimicrobials, as well as preservatives, aromas, and advanced materials. Lanxess has also been directing about 80% of its growth capex toward the United States since 2017. Management has done this to take advantage of significant feedstock cost advantages in the United States (namely, low-cost natural gas and natural gas derivatives), as well as increased reshoring and increased interest in sustainable chemical manufacturing. What benefits there are to be had from this shift won’t likely be really apparent until 2026, given what I expect will be still-challenged end-markets and further Chinese chemical industry capacity expansion. Over time, though, I think a greater focus on consumer goods and growth markets like batteries (various chemicals for battery manufacture) and renewable energy (lubricants for turbines, et al.) can pay off, as can access to cheaper feedstocks. The Outlook I’m not expecting a quick V-shaped turnaround. I’m looking for about EUR 6.45B in revenue in FY’24, not the lowest number out there, but still about 3% below the sell-side average, and I’m likewise below the sell-side for FY’25 (revenue up 6% to EUR 6.84B versus the Street at just over EUR 7B). Longer term, I’m expecting revenue growth to slow to around 3% on an annualized basis, and that still assumes at least some enduring uplift from leverage to faster-growing, less cyclical markets. As utilization rates bounce off the bottom and management moves forward with cost/margin improvement initiatives, I do expect some improvements in EBITDA margin this year. I’m looking for a full-year margin close to 9% versus 7.6% in FY’23, and I expect improvement toward the mid-teens over the next three to five years; prior to the business melting down, adjusted EBITDA margins in the 14% to 15% range weren’t uncommon. I do expect free cash flow margins to improve over the next five years, reaching the mid-to-high single-digits, but I don’t expect that level to be sustainable, and I think something more on the order of 4% is probably a realistic long-term expectation (if not bullish). That is still enough, though, to drive normalized FCF growth in the mid-to-high single-digits. Between discounted cash flow and margin/return-driven EV/EBITDA (there has historically been a fairly close relationship between margins, ROIC, and market multiples in this sector), I think a fair value of EUR 30, or around $32.50/ADR, is reasonable. The Bottom Line Just about everything that could go wrong for Lanxess has done so over the last couple of years, and it’s perfectly understandable if investors want no more part of this never-ending turnaround and transformation story. Looking at where the business is today, though, I think there are credible arguments for improving financial numbers in the coming quarters as pressures from destocking and low-priced import competition tied to cheap Russian oil abate. If this business has indeed seen the worst and there aren’t further negative revisions, these shares could rerate higher even with a less than ideal macro outlook.  Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[{"id":326748648034504,"gmtCreate":1720805986282,"gmtModify":1720805990181,"author":{"id":"4087724962016220","authorId":"4087724962016220","name":"Hangen","avatar":"https://static.laohu8.com/default-avatar.jpg","vip":1,"hat":"https://static.tigerbbs.com/f84859c65fc2d7681e28f6b8e9b0535a","crmLevel":4,"crmLevelSwitch":0,"idStr":"4087724962016220","authorIdStr":"4087724962016220"},"htmlText":"Very detailed about this company situation. The management is not doing good enough to stimulate growth.. and to add on... They are also poor in&nbsp;research and development area.","listText":"Very detailed about this company situation. The management is not doing good enough to stimulate growth.. and to add on... They are also poor in&nbsp;research and development area.","text":"Very detailed about this company situation. The management is not doing good enough to stimulate growth.. and to add on... They are also poor in research and development area.","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":0,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/326748648034504","repostId":2450013859,"repostType":2,"repost":{"id":"2450013859","kind":"highlight","pubTimestamp":1720514540,"share":"https://ttm.financial/m/news/2450013859?lang=&edition=fundamental","pubTime":"2024-07-09 16:42","market":"hk","language":"en","title":"Lanxess May Finally See Some Light At The End Of The Tunnel","url":"https://stock-news.laohu8.com/highlight/detail?id=2450013859","media":"seekingalpha","summary":"Lanxess has seen brutal volume and price pressure due to destocking across its markets and important competition subsidized by Chinese access to cheaper oil.With multiple end-markets showing at least ","content":"<html><body><ul><li>Lanxess has seen brutal volume and price pressure due to destocking across its markets and important competition subsidized by Chinese access to cheaper oil.</li><li>With multiple end-markets showing at least tentative signs of restocking and Russian oil no longer trading at a steep discount, there seem to be some green shoots within Lanxess' business.</li><li>If these unusual headwinds are done, the company's decade-long effort to transform into a less cyclical, higher value-added specialty chemical company should start to show some results in FY'26.</li><li>Long-term revenue growth of 3%, EBITDA margins in the mid-teens, and FCF margins of around 4% can support a higher share price, but Lanxess has a lot to prove after years of disappointments.</li></ul><p><figure><picture> <img fetchpriority=\"high\" height=\"1024px\" sizes=\"(max-width: 768px) calc(100vw - 36px), (max-width: 1024px) calc(100vw - 132px), (max-width: 1200px) calc(66.6vw - 72px), 600px\" src=\"https://static.seekingalpha.com/cdn/s3/uploads/getty_images/1883398784/image_1883398784.jpg?io=getty-c-w750\" srcset=\"https://static.seekingalpha.com/cdn/s3/uploads/getty_images/1883398784/image_1883398784.jpg?io=getty-c-w1536 1536w, https://static.seekingalpha.com/cdn/s3/uploads/getty_images/1883398784/image_1883398784.jpg?io=getty-c-w1280 1280w, https://static.seekingalpha.com/cdn/s3/uploads/getty_images/1883398784/image_1883398784.jpg?io=getty-c-w1080 1080w, https://static.seekingalpha.com/cdn/s3/uploads/getty_images/1883398784/image_1883398784.jpg?io=getty-c-w750 750w, https://static.seekingalpha.com/cdn/s3/uploads/getty_images/1883398784/image_1883398784.jpg?io=getty-c-w640 640w, https://static.seekingalpha.com/cdn/s3/uploads/getty_images/1883398784/image_1883398784.jpg?io=getty-c-w480 480w, https://static.seekingalpha.com/cdn/s3/uploads/getty_images/1883398784/image_1883398784.jpg?io=getty-c-w320 320w, https://static.seekingalpha.com/cdn/s3/uploads/getty_images/1883398784/image_1883398784.jpg?io=getty-c-w240 240w\" width=\"1536px\"/> </picture><figcaption> <p>BalkansCat/iStock Editorial via Getty Images</p></figcaption></figure></p> <p>Turnarounds and transformations take time, but I can understand why investors may question whether <strong>LANXESS</strong> (LXSG.DE) (OTCPK:LNXSF) (OTCPK:LNXSY) (“Lanxess”) will ever show real results for a decade-long transformation process that was<span> supposed to leave the company as a less-cyclical, higher value-add, more consumer-focused specialty chemicals company. Although management has been making what generally seem like sound decisions, the company has been hammered by macro challenges that have seriously undermined the earnings of the company.</span></p> <p>Down almost two-thirds since my last update, far worse than the performances of peers or comparables like <strong>Covestro</strong>, <strong>Evonik</strong>, and <strong>Wacker</strong>, it may seem insane to have a positive outlook on the company. I think management absolutely has a lot to prove, but I also think that a lot of the macro headwinds that hit the company so hard<span> have started to abate, and that while 2024 and 2025 likely won’t be full rebound years, the stage is being set for better results. At this point, little is in the stock price, so further evidence of stabilization could drive upside from here.</span></p> <h2>Destocking Seems To Be Ending</h2> <p>Lanxess saw brutal destocking across its end-markets in 2023, with the construction market practically collapsing for the company (down roughly 50%). Other markets like electronics, mobility, and agriculture weren’t all that much better, driving quarterly volume declines of 12%, 14%, 9%, and 14% for the fourth, third, second, and first quarters of 2023 (respectively). Even markets like food and consumer products, which typically don’t see dramatic volume shifts, saw significant destocking as manufacturers got more confident with their supply situation and moved away from post-pandemic hoarding.</p> <p>It looks as though that painful reset process is largely over. Volume did decline another 5% in the first quarter, reported back in early May, with ongoing weakness in construction and destocking in agricultural chemicals, but other markets have started to see at least limited restocking, and overall company volume improved about 13% sequentially.</p> <p>I’m guardedly positive on the volume outlook for the remainder of 2024 and into 2025. While the destocking in ag chemicals is concerning, <strong>FMC</strong> (FMC) and <strong>Corteva</strong> (CTVA) have sounded more positive about a second half recovery. Even if Lanxess doesn’t fully participate there, “less bad” may be good enough given where sentiment is today.</p> <p>As far as other markets go, I think construction is likely washing out; I’m not bullish on construction for 2024/2025, but I do think it will start to get better in 2025, driving some restocking for Lanxess. I also expect improving demand from electronics and consumer goods markets, with the caveat that consumer spending is starting to slow, and so I think it will be a drawn out recovery process for Lanxess into 2026.</p> <h2>Unusual Pricing Headwinds Should Be Easing</h2> <p>Lanxess’ recent volume challenges would have been enough bad news on their own, particularly as they pushed utilization below critical operating leverage breakpoints, but the company also saw meaningful price pressure in 2023 and into 2024, with realized prices down 13% in Q4’23 and down 9% in Q1’24.</p> <p>Price declines in this sector aren’t that uncommon, particularly when input costs are falling, but I believe low-priced import competition has really hit Lanxess particularly hard.</p> <p>The Chinese have been increasing their exports of base chemicals into European markets, and Lanxess’ results suggest they’ve been hit harder than many of their peers. What has made this situation even more challenging is that Chinese producers have been leveraging access to lower-cost oil imported from Russia; at one point China was paying about $30 less per barrel than the global benchmark price. With oil and oil derivatives being key inputs to the Chinese chemical sector, these companies were able to use price to take share, even in a market where destocking and insulating supply chains against China were factors.</p> <p>Like the destocking headwinds, this too should be abating. It’s difficult to find accurate real-time data on what China is paying for Russian oil, but reports suggest that the discount is now down to a few dollars a barrel. That’s still an advantage that Lanxess has to deal with, but it’s a considerably more tolerable challenge today.</p> <h2>Will The Transformation Program Finally Show Returns?</h2> <p>Lanxess has done a lot over the years to ostensibly improve the long-term competitiveness and earnings potential of the business. The company has exited some more-cyclical businesses, including the formation of the Envalior joint venture with <strong>Advent</strong> to offload its cyclical High Performance Materials business, and management is actively looking to sell its Urethanes business. It has also acquired assets in areas like biocides and other antimicrobials, as well as preservatives, aromas, and advanced materials.</p> <p>Lanxess has also been directing about 80% of its growth capex toward the United States since 2017. Management has done this to take advantage of significant feedstock cost advantages in the United States (namely, low-cost natural gas and natural gas derivatives), as well as increased reshoring and increased interest in sustainable chemical manufacturing.</p> <p>What benefits there are to be had from this shift won’t likely be really apparent until 2026, given what I expect will be still-challenged end-markets and further Chinese chemical industry capacity expansion. Over time, though, I think a greater focus on consumer goods and growth markets like batteries (various chemicals for battery manufacture) and renewable energy (lubricants for turbines, et al.) can pay off, as can access to cheaper feedstocks.</p> <h2>The Outlook</h2> <p>I’m not expecting a quick V-shaped turnaround. I’m looking for about EUR 6.45B in revenue in FY’24, not the lowest number out there, but still about 3% below the sell-side average, and I’m likewise below the sell-side for FY’25 (revenue up 6% to EUR 6.84B versus the Street at just over EUR 7B). Longer term, I’m expecting revenue growth to slow to around 3% on an annualized basis, and that still assumes at least some enduring uplift from leverage to faster-growing, less cyclical markets.</p> <p>As utilization rates bounce off the bottom and management moves forward with cost/margin improvement initiatives, I do expect some improvements in EBITDA margin this year. I’m looking for a full-year margin close to 9% versus 7.6% in FY’23, and I expect improvement toward the mid-teens over the next three to five years; prior to the business melting down, adjusted EBITDA margins in the 14% to 15% range weren’t uncommon.</p> <p>I do expect free cash flow margins to improve over the next five years, reaching the mid-to-high single-digits, but I don’t expect that level to be sustainable, and I think something more on the order of 4% is probably a realistic long-term expectation (if not bullish). That is still enough, though, to drive normalized FCF growth in the mid-to-high single-digits.</p> <p>Between discounted cash flow and margin/return-driven EV/EBITDA (there has historically been a fairly close relationship between margins, ROIC, and market multiples in this sector), I think a fair value of EUR 30, or around $32.50/ADR, is reasonable.</p> <h2>The Bottom Line</h2> <p>Just about everything that could go wrong for Lanxess has done so over the last couple of years, and it’s perfectly understandable if investors want no more part of this never-ending turnaround and transformation story. Looking at where the business is today, though, I think there are credible arguments for improving financial numbers in the coming quarters as pressures from destocking and low-priced import competition tied to cheap Russian oil abate. If this business has indeed seen the worst and there aren’t further negative revisions, these shares could rerate higher even with a less than ideal macro outlook.</p> <div></div> <p>Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.</p></body></html>","source":"seekingalpha","collect":0,"html":"<!DOCTYPE html>\n<html>\n<head>\n<meta http-equiv=\"Content-Type\" content=\"text/html; charset=utf-8\" />\n<meta name=\"viewport\" content=\"width=device-width,initial-scale=1.0,minimum-scale=1.0,maximum-scale=1.0,user-scalable=no\"/>\n<meta name=\"format-detection\" content=\"telephone=no,email=no,address=no\" />\n<title>Lanxess May Finally See Some Light At The End Of The Tunnel</title>\n<style type=\"text/css\">\na,abbr,acronym,address,applet,article,aside,audio,b,big,blockquote,body,canvas,caption,center,cite,code,dd,del,details,dfn,div,dl,dt,\nem,embed,fieldset,figcaption,figure,footer,form,h1,h2,h3,h4,h5,h6,header,hgroup,html,i,iframe,img,ins,kbd,label,legend,li,mark,menu,nav,\nobject,ol,output,p,pre,q,ruby,s,samp,section,small,span,strike,strong,sub,summary,sup,table,tbody,td,tfoot,th,thead,time,tr,tt,u,ul,var,video{ font:inherit;margin:0;padding:0;vertical-align:baseline;border:0 }\nbody{ font-size:16px; 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}\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nLanxess May Finally See Some Light At The End Of The Tunnel\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-07-09 16:42 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4703083-lanxess-stock-may-finally-see-light-end-of-tunnel-reiterate-buy><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>Lanxess has seen brutal volume and price pressure due to destocking across its markets and important competition subsidized by Chinese access to cheaper oil.With multiple end-markets showing at least ...</p>\n\n<a href=\"https://seekingalpha.com/article/4703083-lanxess-stock-may-finally-see-light-end-of-tunnel-reiterate-buy\">Web Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","type":0,"thumbnail":"https://static.seekingalpha.com/cdn/s3/uploads/getty_images/1883398784/image_1883398784.jpg","relate_stocks":{"LU1506573853.SGD":"MANULIFE GF GLOBAL EQUITY \"AA\" (SGD) INC","BK4588":"碎股","LU0385154629.USD":"贝莱德营养科学基金A2","FMC":"FMC Corp.","BK4093":"化肥与农用药剂","BK4545":"锂电池","CTVA":"Corteva, Inc.","BK4098":"多种化学制品","LNXSF":"Lanxess Ag","BK4535":"淡马锡持仓","LU0471298777.SGD":"Blackrock Nutrition A2 SGD-H","BK4585":"ETF&股票定投概念","LNXSY":"Lanxess Ag"},"source_url":"https://seekingalpha.com/article/4703083-lanxess-stock-may-finally-see-light-end-of-tunnel-reiterate-buy","is_english":true,"share_image_url":"https://static.laohu8.com/5a36db9d73b4222bc376d24ccc48c8a4","article_id":"2450013859","content_text":"Lanxess has seen brutal volume and price pressure due to destocking across its markets and important competition subsidized by Chinese access to cheaper oil.With multiple end-markets showing at least tentative signs of restocking and Russian oil no longer trading at a steep discount, there seem to be some green shoots within Lanxess' business.If these unusual headwinds are done, the company's decade-long effort to transform into a less cyclical, higher value-added specialty chemical company should start to show some results in FY'26.Long-term revenue growth of 3%, EBITDA margins in the mid-teens, and FCF margins of around 4% can support a higher share price, but Lanxess has a lot to prove after years of disappointments.   BalkansCat/iStock Editorial via Getty Images Turnarounds and transformations take time, but I can understand why investors may question whether LANXESS (LXSG.DE) (OTCPK:LNXSF) (OTCPK:LNXSY) (“Lanxess”) will ever show real results for a decade-long transformation process that was supposed to leave the company as a less-cyclical, higher value-add, more consumer-focused specialty chemicals company. Although management has been making what generally seem like sound decisions, the company has been hammered by macro challenges that have seriously undermined the earnings of the company. Down almost two-thirds since my last update, far worse than the performances of peers or comparables like Covestro, Evonik, and Wacker, it may seem insane to have a positive outlook on the company. I think management absolutely has a lot to prove, but I also think that a lot of the macro headwinds that hit the company so hard have started to abate, and that while 2024 and 2025 likely won’t be full rebound years, the stage is being set for better results. At this point, little is in the stock price, so further evidence of stabilization could drive upside from here. Destocking Seems To Be Ending Lanxess saw brutal destocking across its end-markets in 2023, with the construction market practically collapsing for the company (down roughly 50%). Other markets like electronics, mobility, and agriculture weren’t all that much better, driving quarterly volume declines of 12%, 14%, 9%, and 14% for the fourth, third, second, and first quarters of 2023 (respectively). Even markets like food and consumer products, which typically don’t see dramatic volume shifts, saw significant destocking as manufacturers got more confident with their supply situation and moved away from post-pandemic hoarding. It looks as though that painful reset process is largely over. Volume did decline another 5% in the first quarter, reported back in early May, with ongoing weakness in construction and destocking in agricultural chemicals, but other markets have started to see at least limited restocking, and overall company volume improved about 13% sequentially. I’m guardedly positive on the volume outlook for the remainder of 2024 and into 2025. While the destocking in ag chemicals is concerning, FMC (FMC) and Corteva (CTVA) have sounded more positive about a second half recovery. Even if Lanxess doesn’t fully participate there, “less bad” may be good enough given where sentiment is today. As far as other markets go, I think construction is likely washing out; I’m not bullish on construction for 2024/2025, but I do think it will start to get better in 2025, driving some restocking for Lanxess. I also expect improving demand from electronics and consumer goods markets, with the caveat that consumer spending is starting to slow, and so I think it will be a drawn out recovery process for Lanxess into 2026. Unusual Pricing Headwinds Should Be Easing Lanxess’ recent volume challenges would have been enough bad news on their own, particularly as they pushed utilization below critical operating leverage breakpoints, but the company also saw meaningful price pressure in 2023 and into 2024, with realized prices down 13% in Q4’23 and down 9% in Q1’24. Price declines in this sector aren’t that uncommon, particularly when input costs are falling, but I believe low-priced import competition has really hit Lanxess particularly hard. The Chinese have been increasing their exports of base chemicals into European markets, and Lanxess’ results suggest they’ve been hit harder than many of their peers. What has made this situation even more challenging is that Chinese producers have been leveraging access to lower-cost oil imported from Russia; at one point China was paying about $30 less per barrel than the global benchmark price. With oil and oil derivatives being key inputs to the Chinese chemical sector, these companies were able to use price to take share, even in a market where destocking and insulating supply chains against China were factors. Like the destocking headwinds, this too should be abating. It’s difficult to find accurate real-time data on what China is paying for Russian oil, but reports suggest that the discount is now down to a few dollars a barrel. That’s still an advantage that Lanxess has to deal with, but it’s a considerably more tolerable challenge today. Will The Transformation Program Finally Show Returns? Lanxess has done a lot over the years to ostensibly improve the long-term competitiveness and earnings potential of the business. The company has exited some more-cyclical businesses, including the formation of the Envalior joint venture with Advent to offload its cyclical High Performance Materials business, and management is actively looking to sell its Urethanes business. It has also acquired assets in areas like biocides and other antimicrobials, as well as preservatives, aromas, and advanced materials. Lanxess has also been directing about 80% of its growth capex toward the United States since 2017. Management has done this to take advantage of significant feedstock cost advantages in the United States (namely, low-cost natural gas and natural gas derivatives), as well as increased reshoring and increased interest in sustainable chemical manufacturing. What benefits there are to be had from this shift won’t likely be really apparent until 2026, given what I expect will be still-challenged end-markets and further Chinese chemical industry capacity expansion. Over time, though, I think a greater focus on consumer goods and growth markets like batteries (various chemicals for battery manufacture) and renewable energy (lubricants for turbines, et al.) can pay off, as can access to cheaper feedstocks. The Outlook I’m not expecting a quick V-shaped turnaround. I’m looking for about EUR 6.45B in revenue in FY’24, not the lowest number out there, but still about 3% below the sell-side average, and I’m likewise below the sell-side for FY’25 (revenue up 6% to EUR 6.84B versus the Street at just over EUR 7B). Longer term, I’m expecting revenue growth to slow to around 3% on an annualized basis, and that still assumes at least some enduring uplift from leverage to faster-growing, less cyclical markets. As utilization rates bounce off the bottom and management moves forward with cost/margin improvement initiatives, I do expect some improvements in EBITDA margin this year. I’m looking for a full-year margin close to 9% versus 7.6% in FY’23, and I expect improvement toward the mid-teens over the next three to five years; prior to the business melting down, adjusted EBITDA margins in the 14% to 15% range weren’t uncommon. I do expect free cash flow margins to improve over the next five years, reaching the mid-to-high single-digits, but I don’t expect that level to be sustainable, and I think something more on the order of 4% is probably a realistic long-term expectation (if not bullish). That is still enough, though, to drive normalized FCF growth in the mid-to-high single-digits. Between discounted cash flow and margin/return-driven EV/EBITDA (there has historically been a fairly close relationship between margins, ROIC, and market multiples in this sector), I think a fair value of EUR 30, or around $32.50/ADR, is reasonable. The Bottom Line Just about everything that could go wrong for Lanxess has done so over the last couple of years, and it’s perfectly understandable if investors want no more part of this never-ending turnaround and transformation story. Looking at where the business is today, though, I think there are credible arguments for improving financial numbers in the coming quarters as pressures from destocking and low-priced import competition tied to cheap Russian oil abate. If this business has indeed seen the worst and there aren’t further negative revisions, these shares could rerate higher even with a less than ideal macro outlook.  Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. 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