LANXESS Aktiengesellschaft (OTCPK:LNXSF) Q3 2022 Earnings Conference Call November 9, 2022 8:00 AM ET
Company Participants
André Simon – Head of Investor Relations
Matthias Zachert – CEO
Michael Pontzen – CFO
Conference Call Participants
Charlie Webb – Morgan Stanley
Matthew Yates – Bank of America Merrill Lynch
Martin Roediger – Kepler Cheuvreux
Chetan Udeshi – JPMorgan
Andres Castanos-Mollor – Berenberg
Andreas Heine – Stifel
Konstantin Wiechert – Baader-Helvea
Jaideep Pandya – On Field Research
Georgina Fraser – Goldman Sachs
Sebastian Satz – Barclays
Operator
Ladies and gentlemen, thank you for standing by. Welcome, and thank you for joining the LANXESS Conference Call.
I would now like to turn the conference over to André Simon, Head of Investor Relations. Please go ahead.
André Simon
Yes. Thank you very much, Lucas. A warm welcome to everybody from Cologne, from my end and many thanks for joining our Q3 conference call. As always, I have our CEO, Matthias Zachert; and our CFO, Michael Pontzen.
Please take notice of our Safe Harbor statements. And with that, I’m happy to hand over to Matthias for a brief presentation and afterwards, the Q&A. Matthias, please go ahead.
Matthias Zachert
A warm welcome from my side for third quarter 2022. And dear ladies and gentlemen, I will start the presentation directly on Page number 4, where we are going to shed light on key strategic and financial highlights. As far as third quarter is concerned, this is the first quarter in which we see the contribution coming from IFF’s microbial control business. We will discuss it in further detail tomorrow in our Capital Markets Day then. But all-in-all, you see from the third quarter financial performance of Consumer Protection that IFF next to Emerald Kalama contributed very nicely to the overall performance of this segment. The integration goes well, and therefore, the business is up and running and more to come.
As far as the next transaction is concerned, is concerned, that is not yet closed. But we are preparing for that. With this, I’m alluding to the Polymer Engineering Materials joint venture that we would like to set up with Advent. This is fully on track.
After we have announced the CEO, the designated CEO for this business in the following weeks, we have then decided on the organizational structure, the business model of the joint venture and eventually have decided also on the next line of management. And this is a good combination between DSM pros and LANXESS pros. So by now, I would say, we have the management team fully identified, and they are, of course, meeting already as we speak so that they get their act together to take the fundamental decisions that will most likely then drive the business from, hopefully, Q1 onwards. When precisely we will see.
But at this point in time, it more and more tends to be the first quarter than the second. And therefore, this is also based on the good feedback we are getting from the anti-trust authorities. By now, we have clearance in the United States. We were very happy to have received clearance from China as well, which normally takes a little bit longer. The Brazilian authorities have approved as well, and now they are just one, two jurisdictions where we are now finalizing all the questions.
And once this is being done, the filings will happen. And then if this goes then according to the normal schedule that is foreseen by these jurisdictions, we should then hopefully have a closing in first quarter next year.
Now on the financial side, you can see that the third quarter, even though it was clearly more bumpy than the first two quarters. We achieved 38% price pass-through. We thus we were again in the position to pass on all inflated input costs. And the third quarter, ladies and gentlemen, was most likely the most toxic one, alluding to raw material, but especially energy price inflation, which will still be a lagging negative driver for the fourth quarter and then hopefully starting to ease a little bit as we advance into 2023.
As far as EBITDA pre is concerned we are €240 million. We are above previous year. I would say in this regard, we differentiate a little bit to other chemical companies, fortunately. And therefore, I think with a more bumpier third quarter, the financial profitability at least could again be above previous year trading. I think the exceptional financial gain has been noted and has been explained by my team. So I will not dwell deeper into this.
Operating cash flow in third quarter, definitely is not a highlight, but a low light. There are reasons that Michael will address later on in the Q&A. I would like to stress with this, we most likely have seen clearly the peak.
We had in the third quarter, as we alluded to in the first half of the year, the change of our ERP system here in Germany. That caused turbulences unfortunately and led to a modest outflow in inventories because simply the system was not up and running. I think as you see in many other companies, unfortunately, as well, when ERP systems are changed. We have now got it under control. And therefore, as far as fourth quarter is concerned, we prepared that we are running the fourth quarter now for cash, cash, cash.
We will clean the barn very clearly also on the inventories. We’ve discussed it with the business in order to get a tidy balance sheet at the end of the year again.
With this, I turn my attention to Page number 5 and here to group numbers. All-in-all, key themes, I’ve addressed prices have been passed on, 38% sales increase, in a quarter, I’ve rarely seen in my professional career. But hey, this is the inflationary environment. We are dealing with this by now. In many cases, we are now even up for monthly pricing adjustment, something that the industry a few years ago has never imagined. And now I mean, it’s somewhat best practice EBITDA, as indicated.
Margin through inflationary cost and pass-through on the top line, of course, there’s an arithmetic margin contraction, but also this is something we would like to see going northwards again in 2023 as raw materials come back into more normal territory levels. Volume, another 6% volume decline, similar to the second quarter. My personal assumption is this will increase in Q4 for sure, and we are getting prepared ourselves for tougher trading environments in 2023, most likely Q1 and Q2 and then hopefully starting to rebound. But let’s, first of all, get prepared for a tough market environment or tougher market environment.
I think our portfolio all-in-all, will be reasonably robust. But nevertheless, we look at that, of course, with care and being prepared.
On the sustainability side, I’m very happy that we can flag to you that we are getting top best ratings from the respective authorities. MSCI, that is well known with all of you has communicated recently, and confirmed the AA rating and clearly stated in their comments and remarks that we are advancing extremely well on carbon emissions reduction or intensity is significantly lower than industry average.
It has also been nicely noted that next to emissions, our waste ratios and indicators are improving. It has been stressed that our water improvement projects in the areas where water is scarce is advancing nicely and we have provided full transparency. And last but not least, the corporate governance that we have here in our company in the respect structures is recognized as being in a highest category with highest scores. And so bottom line, MSCI ranks us in the diversified chemical space worldwide under the top three companies. So ESG is dear to our heart. And therefore, we will continue advancing on this with all focused commitment and conviction.
On the next slide, I would like to provide you a little bit more color on our configuration of the Management Board. I’m very happy to communicate to you that Frederique van Baarle will become a member of the Management Board of the LANXESS Group in 2023. So once the closure of the joint venture with Advent will be achieved, on the next day, which she will enter into the Management Board. Until then she will lead the HPM business for which is in charge. It’s one of our biggest business units.
So once the closure has occurred, she will enter into the Management Board, will take over immediately the responsibility as Labor Director. Then from first October ’23 onwards, she will also, in addition, relocate to Pittsburgh of course, to support the Steelers, but notably, of course, our American business customers and teams. And here from Pittsburgh, she will be responsible for Americas region and be a direct representative in the Management Board for the region because Americas over the last several years, turned to become next to Europe, our strongest market, strongest pillar, with broadest coverage in the markets, customer proximity, production site as a base you name it. And as such, we would like to have a face for the Americas region directly involved responsible in the Management Board.
So the transfer of responsibilities is therefore well prepared, and I think this will be a strong addition of capabilities in our Management Board going forward. The background of Frederique, I mean, we really developed her over the last four, five years. When joined, I very quickly offered her the EMEA position for High Performance Materials. Afterwards after the successful management of the biggest region in HPM, she was offered the Senior VP position for global procurements and did that extremely well. And after successful work in procurement departments we then nominated her for the Senior VP position in High Performance Materials, which she did for the last 2.5 years. And therefore, she is well prepared. She has been really developed in our company and will do extremely well once she will enter into the Board of Management.
Ladies and gentlemen, with this, I move on to Page number 8. Full year guidance, current economic environment. I mean, we are still dealing with volatile uncertain energy, raw material prices and every day, there is something different on the tele, and on the news wire that we have to cope with, which we are doing because I think we have learned to address volatile markets and have shown that in the past few quarters, if not to say, in the last two to three years.
General inflation pressure will weigh on demand. We will address that through our pricing going forward. And of course, we also expect that some of the end industries that all have seen increase in inventories will address working capital and rather clean up balance sheets at year-end. So this will addressed by us as well.
So very clearly, we precise the guidance between €900 million and €950 million. If it comes to management decisions, we definitely will run Q4 for cash. So the primary indicator and direction for us will be improving cash flow. And if this will be done in line with the corridor, but on the burden of EBITDA then we would rather optimize cash than going for the last €1 billion in EBITDA. So this, I think, gives you also a good strong frame.
And with this, ladies and gentlemen, let’s open up the door for all of your questions that you are having.
Question-and-Answer Session
Operator
[Operator Instructions] The first question is coming from Charlie Webb at Morgan Stanley.
Charlie Webb
Good afternoon. Thank you very much for the time and taking questions. Maybe two from me to kick things off. First, on the discontinued business, just wondering if you could help us understand how HPM kind of performed through Q3 and in terms of profitability. I understand it’s not the continuing business anymore, but just any sense on that and the trends you’re seeing there would be helpful.
And then just secondly, on Matthias, the last point you raised around working capital, and obviously prioritizing that into the fourth quarter. Maybe just help us understand how easy will that be given your customer inventory, customers are likely also going to be destocking? How easy is that to do? Do you plan to turn off any plants into the fourth quarter to kind of bring down inventories a bit quicker? Just trying to understand how easy will that be to do? Will some of that potentially linger into Q1?
And when you think about that destocking event, is this any concern that we might see some deflation and therefore, there’s some write-down effects mechanically possible through second half last quarter and maybe first part of next year? Just trying to understand the urgency. I mean, it makes sense, but just trying to gauge some of the moving parts around that. Thank you.
Matthias Zachert
Charlie, you are most welcome. Let’s tackle them one by one. First question on HPM discontinued business. I mean this is a strong business. As I’ve always explained, but it’s a business that is more volatile than others, also due to the precursors on caprolactam, polyamides, which eventually then ends up in the compound business, which is definitely more stable.
So that the upstream part is more volatile, I think is known to all of you and it has been reported by our companies in the years. Here, of course, in the upstream part, due to the higher volatility, you also have higher volatility on raws that can go up within one quarter substantially up, but also substantially down. We’ve seen that in Q3. The benzene value chain suddenly, drastically went downwards after it inflated in the first and notably in the second quarter.
So here, the business was, I mean, was hard hit on inventory revaluations, and that led to a very, very modest EBITDA contribution. The remaining portfolio of our company has not seen that. And that’s what we have always commented on. HPM is a great business, but when economic sentiment suddenly turns and we have seen after the mass murderer turned off gas that prices suddenly went through the roof abruptly. And that, of course, left its mark also on the HPM business. And here you see the reflections in Q3 if you look into business this continues.
Now on destocking, your point is very valid. We see that customers destock. We will do that as well. And we don’t shy away from taking plants off stream. So we clearly have now scheduled, and this is operational work. We have prepared now for plant maintenance shutdowns in November and December. So we will go off stream earlier than we normally did. That’s the reason why we also had to be a little bit more precise on the guidance, EBITDA guidance.
So we clearly factored in now more idle costs for plant closures that might start from mid-November to end of December. And with this, we definitely will eat up our inventories. And that’s therefore, something that we have analyzed, looked at and decided and this has been reflected in our communication this morning.
Now as far as the first quarter spillover is concerned, write-downs, I think I made my comments on the new LANXESS at our existing perimeter that raw material volatility is not really that much of an issue. Inventory write-ups, write-downs have been always be pronounced in polymers, in rubber or polyamide and less in the chemical space. I cannot exclude a little write-off here or there, but this is in the future, no longer a big topic for us and should not be a big blip on the radar. If at all, a very small blip. And I hope that clarifies also your third question, Charlie. All good?
Charlie Webb
Brilliant, thank you very much.
Matthias Zachert
You’re welcome. Next question?
Operator
Next question is coming from Matthew Yates at the Bank of America.
Matthew Yates
Hey, good afternoon. Charlie preempted one of my questions, but I just want to say thank you for including Slide 20 that gives a bit more detail on the working capital evolution, I think that’s helpful.
Maybe my question, Matthias, the Consumer Protection division has reported negative volumes in each of the three quarters this year. And the third quarter, in particular, is on a much easier comp from a year ago. Can we put all of that down to the unfortunate operational and logistical issues you’ve had? Or is there a degree of end market weakness that we need to think about, especially how the coming quarters may develop? Thank you.
Matthias Zachert
Matthew, well, I hope that you — thank you for your comments on Page 20. So this is all Michael’s contribution here very clearly. And of course, we always like to provide transparency. So you see that a lot of cash resides in the working capital, which will unlock itself at some point in time. But now to your specific question on CP, I hope you rejoice about the strong growth on sales, but also on bottom line, which is noteworthy for the Consumer Protection segment.
Now on the volume side in CP, I would only like to allude to the major turnaround, plant turnaround that we had and the biggest sites in F&F that was here in Europe. That’s a turnaround that happens every three years around about four years. And this took volumes of getting the plant up and running, took us longer than originally anticipated. So we had to basically unfortunately operates around about 2, 4 weeks at lower utilization that was taking off some volumes that we definitely could have sold in the markets. And therefore, the volume performance was not that great, but the plant is back up and running.
And I think in Q3 — Q4, F&F will do reasonably well again on the volume side. But that was definitely something that was on my radar and was not fortunate, but this happens.
Matthew Yates
Thanks very much.
Matthias Zachert
With this I think your questions are answered. All good?
Matthew Yates
Absolutely. Thank you, Matthias.
Matthias Zachert
Next question please.
Operator
Next question is coming from Martin Roediger at Kepler Cheuvreux. Your line’s now open.
Martin Roediger
Yes. Thanks for taking my question. The first question is actually on specialty additives. Maybe you can help me to understand why volumes in lubricants were up. And also related to specialty additives, I would like to figure out the moving parts for Q4. The comparison base for Q4 is very low because last year, you had the logistics issues and constraints. And do you still benefit in Q4 this year from favorable FX effects? And you may see some synergies from a part of Emerald Kalamba, which is also consolidated here.
So even if I assume a further volume decline in Q4, similar to Q3, is there any reason why earnings in specialty additives might go down in Q4? Thank you.
Matthias Zachert
Well, Mr. Roediger, we are not guiding on a segmental level. So I will not start doing this today. I think additives did pretty well throughout the entire year. The fourth quarter is always weaker. So don’t assume that Q3 numbers will be the same in Q4. That is completely unrealistic. That would be a huge increase in profitability versus previous years. So what I clearly would like to say the business is doing well.
Q4, what we are seeing is that definitely the Rhein Chemie business will be modest. They had a very tough time so far that was overcompensated by extraordinary profits in polymer additives and very good performance in lube adds. These two businesses will do good, but of course, as far as polymer additives concerns, construction is currently no longer as bold and strong as it used to be in the first half.
So here, construction industry, which is a big end industry for polymer additives. It’s very soft in China and Asia. It’s modest in Europe and somewhat no longer that bullish in the United States, but United States is still okay, especially as far as public investments are concerned. Commercial is also little softening. So here, you should simply be on the sights [ph] not blue eyed, take our feedback into consideration on lube adds,
Aviation has come back so far. But on lube adds, also here, we will run Q4 for cash. In both businesses, we will reduce inventories. And for that very reason, please take that into consideration.
Now the comparable base, I stressed and therefore, if we look at Specialty Additives, all-in-all, it will finish the year with clearly showing a strong performance through the entire year. It has been one of the growth machines in 2022 and definitely benefiting from the very, very strong U.S. footprint at both business units, lube adds and polymer additives are having. All good?
Martin Roediger
Thank a lot.
Operator
Your next questions come from Chetan Udeshi at JPMorgan.
Chetan Udeshi
Hi, thanks. So a few questions. First, simple one. Hopefully, you can help us with the EBITDA contribution from IFF Microbial business in Q3? I think, Matthias, you had previously talked about, I think, €60-ish million run rate for that business. Should we assume €60 million by €450 million in Q3 in terms of contribution, give or take?
The second question was you guys don’t hedge the energy costs and we’ve seen a significant decline in energy prices in Europe in Q4 versus Q3, especially on a day ahead levels. So I was just curious how is that impacting, say LANXESS’ profitability in Q4, if at all?
And last question was just to drill down a little bit on inventory, which seems to have gone up by €300 million in Q3 versus Q2. Can you may be split that between how much of that was just the cost driven because of high energy price? And how much of that was maybe volume-driven where probably because of the SAP and ERP transition, you ended up with probably higher inventory than you would have liked from a volume perspective? Thank you.
Matthias Zachert
Thank you, Chetan. And with delight, I pass on the ball to Michael.
Michael Pontzen
Thank you. Welcome from my side as well. With regards, maybe I start with your third question first, to the development of the inventories. You’re absolutely right, Chetan. If you take a look at the balance sheet, there is an increase of give and take, €350 million. The majority though comes from the first time recording of the IFF inventory level, and that holds true for probably around a little bit less than half of the effect.
The second element is then currency. The much stronger U.S. dollar did have an impact on the working capital and in the inventory of give and take €40 million in the third quarter and the remainder, some €160 million is then the operational change. And the operational change is driven like in the quarters before by pricing. And the overall rule of the thumb, which you, as well, find on Page 20 in the slide deck, is 70% related to the price effect and 30% to the volume effect. And the major driver of the price effect in the third quarter was then the energy cost.
So if you take a look, the energy cost basically here in Germany, more or less doubled in the third quarter compared to the second quarter. And that was then the major driver for the increase of the inventories. Still, you have to keep in mind, we record on our inventories on an average rate in our accounts.
So it’s not that we take the rate as it is the most recent one, but the average rate. But clearly, if there will be in the fourth quarter, and that is what we see as of today, and the volatility of the prices of gas in Germany is rather high. But as of today, we are on a clearly lower level and that should as well be then reflected in the fourth quarter.
With regards then to the contribution of microbial control, as we rightly — or as you rightly said in earlier occasion, we said given the most recent development we saw prior to the closing of the transaction, you should expect that there will be a contribution of some €60 million on an annual basis, which would then account for the number you were just mentioning, €15 million on a quarterly basis. But the business developed better than we anticipated and expected.
So therefore, you should have a little higher number in your model than the €15 million. But please allow that we’re not now guiding on single effects, but the business, the microbial control business run, or did run rather good in the third quarter, and it was above our expectation. And that’s it from my side.
Matthias Zachert
Next question please.
Operator
The next question is coming from Andres Castanos-Mollor at Berenberg.
Andres Castanos-Mollor
Hello.
Matthias Zachert
Hi.
Andres Castanos-Mollor
My question is on CapEx. I hear you running for cash in Q4. And I know that perhaps you’re running behind schedule in deploying the CapEx. I wonder if you expect a lower number in Q4 for CapEx. That is my first question. My second question is about the good strong EBITDA margin in Consumer Protection. Is this coming from IFF, is this coming from Saltigo or other parts of the business we have not talked about yet?
Matthias Zachert
Well, Andres, thank you for your two questions. As far as CapEx is concerned, definitely, we are running the company for cash in Q4. This is notably addressing working capital. And I’ve indicated that in some cases, we advance plant maintenance and go for then a lower utilization production in Q4. It might well be that this is something where we will also then look at CapEx. But then rather keeping the guidance we have for the full year, which you have in the appendix of our presentation because when you have plants that are not running, you can do whatever you always wanted to do. So the CapEx envelope hasn’t changed. The running for cash is explicitly focusing on working capital.
Now on the Consumer Protection segment, of course, we added business, IFF going into the parameter, which as Michael indicated, contributed according or slightly above expectation. We are here now addressing pricing initiatives wherever possible, but that will be elements that will continue now in Q4 and next year. This division, Consumer Protection is a division that should more and more turn into higher margins once synergies are implemented. And I will not now allude to one or the other business units. It’s a segment, as we will describe tomorrow, that will turn into a more and stronger segment going forward and will most likely be already next year, if not to say, then the year following the strongest EBITDA contribution segment in our entire portfolio.
And I think this lays out the ground for our Capital Markets Day tomorrow. With this, I should have addressed all your question, Andres. All good?
Andres Castanos-Mollor
Thank you.
Matthias Zachert
You’re most welcome.
Operator
The next question is coming from Andreas Heine at Stifel.
Andreas Heine
Thanks for having the call. I have a couple, but I’ll keep it very short. The first one is on Germany. Can you confirm that the German sites are still making profit at net earnings level in the second half? The first one. And the second, in your guidance for basically Q4, which is flat for this year. On the positive side, have you factored in the lower gas price? And could you clarify what you have in mind for change from Q3 to Q4 on the energy bill? That’s the second.
And then it’s really on the inventories again and I also like the chart here a lot. If I look to this, then with all the portions given, my understanding is that the volume portion is where you have a chance to change that, which was an increase of €200 million by now. And as volume across the portfolio is declining, is that fair to assume that all of this €200 million can be unwind in one quarter? Or is that–?
Matthias Zachert
Well, Andreas, thank you for your questions. I will touch on the first two one, and Michael will answer the third one. So on your first one, are our German sites still making money? All the sites that are running are making money. Sites that are turning into red, I’ve clearly discussed with my colleagues, will be switched off. We will not produce and run negative sites. So most of our plants here in Germany are running here and there.
We have taken some plants off stream because we do plant maintenance or we now would like to adjust inventories. But wherever plants turn red, not on a daily basis but on a weekly or bi-weekly basis, the decision here has been made. The plants will be switched off and we are prepared for them filing short labor.
Looking at the portfolio, I mean, this should most likely according to all assessments that we have done, the majority of our plants will run through. But of course, you need to prepare all kinds of scenarios. So with energies or gas being volatile or not available, you should have these plants in your gross. And we have since early May, these plants operationally in the grows, but clear feedback, the majority of our sites here in Germany, despite the toughness that we have seen in third quarter, were producing money. Otherwise, the €240 million of EBITDA, we would have never been able to report.
Now on Q4, I mean, this is not an answer that catches everything in a standard way because sometimes contracts are site-specific, even plant specific. There are two effects that we have. In some cases, we benefit from lower energy prices, but please take into consideration that we still have stocks that have the energy value of third quarter embedded into the costs. So these inventories will flow through the P&L at Q3 energy costs, which will hurt.
Actual goods being produced, of course, are produced at spot prices in the energy market. At the end of the day, Q4 in the P&L, you will see a blend. So there’s not one standard answer to your question. So we still see the high cost level of Q3, but also will take here and there an advantage of lower price level in Q4. And now to the super duper Page 20, and Michael, take it from there.
Michael Pontzen
Hi, Andreas. Yes, with regards to your question. Volume increase throughout the year was around €200 million, as you stated it rightly, and it is written on the page. The development, which we saw over the year had as well an impact coming from the logistics end markets as well. And we see, as we speak, that the logistic end markets are easing, but we are not where we were at the beginning of the year.
What is in our hand, and what is in our control is the seasonality and the effects which we were recording in the most recent months. And that is clearly something which we will tackle in course of the fourth quarter when having our turnaround and let’s say, the forced turnarounds. And therefore, it will take some quarters, but you should see a major effect in the fourth quarter.
Matthias Zachert
Next question please.
Operator
The next question is coming from Konstantin Wiechert at Baader-Helvea.
Konstantin Wiechert
Yes, hi, ladies and gentlemen. Thank you for taking my questions. So mostly answered already, maybe a bit more on the networking capital. Again, as you mentioned, for the High Performance Materials that you have already had a couple of write-downs on your inventory in the third quarter. Have you also — just for clarification for me, have you also seen that in the continuing operations business segment and are you expecting — or can you give us maybe some insight to what we might expect in the fourth quarter on inventory write-downs? Thank you.
Matthias Zachert
Yes. I cut a long story short here. I think indirectly and even directly made the point here. This is not for the continuing business, has not been a topic in Q3 and should not be a topic in Q4. The nature of LANXESS continued is not that much of the nature of polymers. That’s the reason why we clearly decided for the chemical value chain.
Konstantin Wiechert
Okay, great. Thank you.
Matthias Zachert
You’re most welcome. Next question please.
Operator
The next questions come from Jaideep Pandya at On Field Research.
Jaideep Pandya
Hi, thank you. First question really is on the HPM business, which is — obviously, things have changed quite meaningfully since you guys announced the deal. So just want to confirm all the deal parameters still in place and there’s absolutely going to be no change in terms of going back to the drawing board. That’s the first question.
The second question is to — on this again Slide 20. I mean if we don’t talk about quarters, but just look at 2023 overall, I mean, do we think that on a sort of five quarter view at least half of this €920 million, can you sort of brought back into the cash pool? That’s my second question. And the third question really is going back to Advanced Intermediates. From memory, this always used to be sort of a very robust solid margin business around sort of the 17%, 18% level.
Do we go back there in the next few quarters as you catch up on price versus energy costs and raw materials or the difficult macro is going to make this more challenging, and therefore, we might stay in the lower end of the range for a couple of more quarters. Thanks.
Matthias Zachert
Jaideep, all good questions. Let me address them one by one. So first one on HPM. I think you see the news flow over the last 4, 8 weeks, which all show that we have highest activity on all sites to get the joint venture completed. And therefore, we do everything because we know that the likelihood for closing the joint venture increases every day with all the antitrust approvals that I have alluded to earlier on.
And here, I’ve been very clear that as far as the only topics that can hold up this joint venture is antitrust. And here we are advancing pretty well. So all indicators are on closing. And for that reason, we hire the best senior managers out of the market that I think many of you know, as far as the top positions are concerned and are transferring people worldwide into the designated legal entities. And from everything that I’m seeing is that here, we are creating a very nice joint venture for top customers that will benefit from this configuration, and it will be a good business. So that’s first question.
Second question, on the €920 million on inventories or working capital increase. I think the latter is the right word. We should see triple-digit numbers in the next 6 to 12 months turning into cash, that’s for sure. And in the next quarter, you should see already not double digits, but triple-digit numbers returning, but it will be a theme also for 2023 very, very clearly. If we are regaining the entirety of €900 million to be seen, but that we are seeing not only €100 million or €200 million should the market no longer show inflationary, but deflationary tendency is very, very likely.
Now third question, advanced Industrial Intermediates. Nothing has changed on the market structure. This is a stronghold. It’s a fortress. But of course, it is a business where I would say the majority of the assets are here in Germany. And of course, with gas prices being at €300 to €350, electricity at €600 to €800, this is toxic. This business, technology-wise and market position wise is a fortress, stronghold and rightly, as you stated, this should deserve margins of high teens, close to even 20%. This was the area where this business was before. It will go back to these levels.
But of course, it has to be in a normal economic environment. I think here, we are currently seeing tough times, still managing this in the double-digit margins. But definitely, this is not the area where this business should trade at in the future. All good.
Jaideep Pandya
Yes, looking forward to tomorrow.
Matthias Zachert
Well, we are singing, dancing for you every day now. Next question please.
Operator
Next question comes from Georgina Fraser at Goldman Sachs.
Georgina Fraser
Hi, good afternoon, Matthias and Michael. Thanks for taking my questions. I’ve got two. The first one is that, if I remember correctly, during the 2Q conference call, Matthias, you alluded to possible strategic preference for growth in the U.S. going forward compared to China. And that seems quite different from the strategy that we’ve seen from other German industrial colleagues and the delegation that traveled to China with Olaf Scholz recently. Could you please tell us a bit about where LANXESS’ rationale is differentiated compared to your German industrial colleagues?
And then my second question is on the price escalators that you have been putting through your business since the start of the year, even at the end of last year. What are the mechanics of these now that we have lower gas prices? So what’s the kind of time frame for reflecting lower gas prices in your product selling prices? Thank you.
Matthias Zachert
Thank you, Georgina. Let me take them one by one. I mean everybody has to make his own decision, what he does, what he doesn’t do. So we only take the decisions that we consider are the best ones for our company. So to be very clear, China is for the great market. It’s the biggest chemical market, and we clearly are dedicated to China, and we want to keep our position in China. But when borders are closed, engineers and people cannot travel and are confronted with lockdowns in the domestic market.
And with lockdowns entering China, the likelihood that you can get new customers on board and make ground fields — brownfield or greenfield investments is not very high. So you have to take the consequences, and I was very clear and explicit as long as the country is in lockdowns and current teens are being imposed, I see no way on accelerating growth and foreign direct investments.
We keep our markets. We like the markets, but expanding the market is utterly difficult in the current circumstances. This is different in the United States. We have a very strong platform. We have strong businesses. We have strong teams, and we acquired this strategically, I would say, to some extent because we saw opportunities, to some extent, it followed strategic direction that we gave out in 2018 because these were the growth markets, China, United States and in the United States, we found good targets. So we accelerated and expanded massively in the United States.
Now we harvest the earnings or the fruits. And therefore, we can invest there. In the United States, borders are no longer closed. We are not quarantined. We can travel free. Governance and approval schemes are in most of the states speedy. And therefore, from an investment focus, this is an area where we can invest. And therefore, clearly, at this point in time, we expense clearly further strategically and operationally in the United States.
Now on pricing, order to the teams are, there are still raw materials on the rise. You see that labor costs are going up. You see that insurance costs are going up. You see that interest rates are going up. We have to earn our living. So pricing — to keep pricing at the current levels is clearly a priority for the organization. But of course, we have to see also where the economic environment is going to lead us to. I hope this should answer all your questions. All good?
Georgina Fraser
That was great, thank you.
Operator
The next question is coming from Sebastian Satz at Barclays.
Sebastian Satz
Hi, everyone. Thanks very much. I’ve two quick follow-up questions, please. And the first one is again on the HPM exit here. Just wanted to see if you could confirm if you’ve already filed with the European Commission for the deal and what other hurdles are still outstanding for the deal to be cleared. And then the second question is coming back on Advanced Intermediates. Assuming energy prices will stay higher for longer, what specifically can you do to get margins and absolute EBITDA back to its historic range? Thanks very much.
Matthias Zachert
Well, let me take questions one by one. So I think I’ve given more color on the antitrust scenery in HPM. So in most of the jurisdictions, we are well advanced, but every jurisdiction has a different procedure. In some jurisdictions, you file, and then you get questions, in others, you, first of all, have to answer questions, then you file and gets — then a standard process afterwards. So all-in-all, in most of the jurisdictions that I’ve indicated, we got approvals by now.
For instance, the big one was the United States, one that is always rather on the delayed track is China, approval was reached here. Brazil takes quite a long time, approval has been achieved.
Now the final one, two jurisdiction, one being Europe, we are about to file. In Europe, the process is a little different. You first of all, have to answer all questions from the commissions, and this we have done, and are finalizing now once questions are addressed. Then basically, you go for the approval process. And that then takes normally be around about 35 working days, and that is the reason why we rather assume that we will get clarity in Q1. We still stick to the first half year timeline, but from everything that we currently assume and the feedback that we get from our experts, internal eternal makes us believe that Q1 is the likely scenario.
Now on pricing margin, I mean, you’ve seen with all chemical companies that margins were distorted through inflationary environments. Our business in a normal economic environment has clearly higher margins than what you have seen right now. You’ve seen that over the last several years, and therefore, this is to some extent, the current context of an environment where we are dealing with 10% of inflation and that margins in a normal environment will turn upwards from my point of view, a question of when it occurs and not if it occurs. And that should have answered all your questions.
Sebastian Satz
Thank you very much.
Matthias Zachert
Yu are most welcome. Please come along tomorrow as well. We have done a lot of work. And with this, I would basically like to finish the call for today. Thank you for attending. Thank you for your interests and your time and questions. I would like to take the liberty to announce that we would like to — next to management board changes, I would like to announce that André Simon, who was heading Investor Relations for the last five years, will now take a new role in our company. He will be in the management team of the business units, Urethane Solutions, and he will take up here the strategic and marketing departments, will ignite pricing and market consolidation. So he has a lot in front of his table, and he will do great.
And at the same point in time, I welcome Eva Frerker who will succeed André in the Head of Investor Relations and will make sure that we keep the highest standards that we always were striving for. And therefore, from tomorrow onwards, Eva will take the lead. This is for your information so that you know where to direct e-mails to. And with this, I finish the call for today.
I’m looking forward to hearing and potentially seeing you tomorrow at our Capital Markets Day event here from Cologne Digital. All good. Bye-bye.
Operator
Ladies and gentlemen, this concludes LANXESS conference call. Thank you for joining, and have a pleasant day. Goodbye.
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