LANXESS AG Credit Analysis: Specialty Chemicals at Cyclical Trough with Deleveraging Path

Background:

• • LANXESS AG, specialty chemicals, HQ Cologne, Germany. LTM EBITDA and TNL: FY2024 reported EBITDA €538mm and Clean EBITDA €614mm; Total Net Leverage 5.0x on reported EBITDA and 4.4x on Clean EBITDA using net debt as defined below. Moody's Baa3 with negative outlook; no public S&P rating.
• • LANXESS develops, manufactures and sells specialty chemicals across three segments globally: Advanced Intermediates, Specialty Additives and Consumer Protection.
• – FY2024 EBITDA pre exceptionals €614mm, up 19.9% year over year; EBITDA margin 9.6%. Reported EBITDA €538mm; reported EBITDA margin 8.5%.
• – CEO: Matthias Zachert. CFO: Oliver Stratmann. No senior management changes announced in 2025 to date.
• • Segmental breakdown:
• – Consumer Protection: sales €2.081bn in FY2024; EBITDA pre €286mm; margin 13.7%. Includes Material Protection Products (e.g., biocides, preservatives and protection additives used in coatings, construction materials, plastics and wood), Flavors and Fragrances (e.g., aroma chemicals and fragrance blends for home and personal care, detergents, fine fragrances and food) and Liquid Purification Technologies (e.g., ion exchange resins, adsorbents and filtration media for municipal and industrial water treatment as well as food and beverage purification); demand was supported by hygiene, water quality and everyday consumer staples, alongside ongoing portfolio innovation in low-VOC, natural-origin and high-capacity solutions. Saltigo weakness in agrochemicals weighed on earnings, reflecting softer crop protection demand and customer destocking, which pressured volumes, mix and plant utilization despite resilient performance in consumer and water treatment applications.
• – Specialty Additives: sales €2.209bn; EBITDA pre €227mm; margin 10.3%. Additives for lubricants, plastics and flame retardants; benefited from better utilization and cost cuts.
• – Advanced Intermediates: sales €1.804bn; EBITDA pre €210mm; margin 11.6%. Intermediates for multiple end markets; strong recovery from prior-year low.
• – The three segments contributed broadly evenly to EBITDA pre; Consumer Protection remains the single largest EBITDA generator.
• • Geographic breakdown:
• – The latest disclosed regional mix shows sales concentrated in Asia Pacific, EMEA ex Germany, the Americas, and Germany. FY2023 sales by region were Asia Pacific 35%, EMEA ex Germany 29%, Americas 19%, Germany 16%. Germany and broader EMEA remain core manufacturing and customer bases. No reliable FY2024 regional mix percentages disclosed beyond the headline global presence graphic.
• • Revenue model and contractual structure:
• – Revenue is driven by a combination of price and volume with frequent formula-based raw material and energy pass-through clauses in multi-quarter agreements, plus spot pricing in more commoditized sub-lines.
• – FY2024 demonstrates pricing pass-through in a deflationary raw materials environment: volumes rose across most units, yet sales fell 5.2% due to lower prices, indicating contracts can and do pass lower input costs to customers. This helps preserve volumes but compresses revenue during input cost normalization.
• – No disclosed churn metric. Revenue is not subscription-like; protection from inflation is moderate via pass-through clauses but subject to lag effects and customer purchasing behavior.
• • Cost structure:
• – FY2024 cost of goods sold €5.068bn equating to 79.6% of sales, consistent with a high raw material and energy cost base that is largely variable.
• – Fixed costs include personnel, site overheads and maintenance tied to a broad asset footprint; the company is executing the FORWARD! program to structurally reduce fixed costs by €150mm by 2025.
• – Personnel cost disclosure as a percentage of total costs is not provided in a way that allows precise calculation; nonetheless, job reductions of 870 positions are part of the cost program, indicating management's recognition that fixed cost absorption has been weak at low utilization.
• • Shareholders and valuation:
• – Public company listed in Frankfurt. As of July 31, 2025, market capitalization was €2.14bn. With FY2024 year-end net debt of €2.713bn, implied enterprise value is €4.853bn.
• – Trailing EV to EBITDA metrics: on Clean EBITDA €614mm, EV/EBITDA is 7.9x; on reported EBITDA €538mm, EV/EBITDA is 9.0x.
• – 2025 guidance was cut in August 2025 to EBITDA pre exceptionals €528mm to €580mm, implying a forward EV/EBITDA of 8.4x to 9.2x on the same EV basis.
• • Strategy:
• – Complete the portfolio shift to pure-play specialty chemicals, divesting polymer exposure. The Urethane Systems sale to UBE closed on April 1, 2025, with gross proceeds of roughly €500mm earmarked for debt reduction.
• – Execute FORWARD! to structurally lower the break-even through site consolidation, headcount reduction and process optimization.
• – Grow higher-margin niches such as Consumer Protection and water purification, and expand sustainable product families like Scopeblue to capture demand for lower-footprint chemistries.
• • Competitive landscape:
• – Competes against diversified chemical majors and specialty peers such as BASF, Evonik, Clariant, Wacker Chemie and Symrise across end-markets. LANXESS does not disclose market shares; its advantage lies in breadth across specialty niches, but pricing power is still cyclical and capacity utilization sensitive.
• • Corporate actions:
• – Urethane Systems divestiture completed April 1, 2025; proceeds used to redeem a €500mm bond maturing May 2025 and delever.
• – Dividend for FY2024 reduced to €0.10 per share, preserving cash in a downturn. This is a marked cut from €1.05 per share in prior years and underlines management's shift to balance sheet repair.
• • Current trading:
• – Q1 2025 EBITDA pre exceptionals €133mm, up 31.7% year over year; however, Q2 2025 sales fell 12.6% year over year to €1.466bn and EBITDA margin pre exceptionals slipped to 10.2%. 2025 EBITDA pre exceptionals guidance was lowered to €528mm to €580mm due to weak demand, chlorine supply constraints at a supplier and a softer macro.

Risks and mitigants:

• • Customer concentration:
• – No single-customer concentrations are disclosed; the portfolio is diversified across thousands of customers. Nonetheless, agrochemical customer destocking significantly impacted Saltigo, showing sensitivity to specific end-markets.
• • Large EBITDA adjustments and Clean EBITDA:
• – The company reports EBITDA and EBITDA pre exceptionals. For FY2024, reported EBITDA was €538mm; EBITDA pre exceptionals was €614mm. The delta reflects exceptional items including restructuring and portfolio effects.
• – Clean EBITDA definition used here: we adopt EBITDA pre exceptionals €614mm as Clean EBITDA, because it removes non-recurring items and better represents recurring operating cash generation. We do not add back recurring transformation costs without quantified, non-recurring disclosure, nor do we pro forma run-rate savings or acquisitions. Clean EBITDA margin is thus 9.6% on €6.366bn sales.
• – Leverage including and excluding adjustments: using Clean EBITDA €614mm, total net leverage is 4.4x; on reported EBITDA €538mm, total net leverage is 5.0x. If one uses the company's narrower "net financial liabilities" of €2.381bn at YE2024 rather than a gross debt minus cash view, TNL would be 3.9x on Clean EBITDA and 4.4x on reported.
• • Cyclicality:
• – LANXESS is exposed to industrial cycles and energy-price volatility. The 2023 downturn combined weak demand, destocking and high German energy costs. The FORWARD! program partially mitigates through a structurally lower fixed cost base, but utilization remains the main swing factor.
• • Litigation and provisions:
• – The group carries environmental provisions; historically disclosed balances were in the mid-hundreds of millions of euros. Environmental remediation and regulatory tightening, including potential PFAS restrictions, could trigger future cash outflows.
• • Free cash flow and leverage risk:
• – FY2024 operating cash flow €508mm and capex €320mm produced FCF of €188mm, covering only a fraction of gross debt service and deleveraging needs. 2025 guidance cut raises execution risk if EBITDA falls toward the low end while capex remains roughly stable.
• • Regulatory and geopolitical risk:
• – EU chemical regulations and emerging global tariff regimes can impact both pricing and supply chains. Germany's energy transition and power cost volatility remain structural risks.
• • Accounting irregularities:
• – No indications of accounting issues have been disclosed.
• • Financial distress history:
• – No restructuring history; however, the rating outlook is negative, and leverage metrics point to sub-investment-grade territory on a ratio basis absent further deleveraging.

Capital structure:

• • Total gross debt and net debt:
• – YE2024 short-term debt €584mm and long-term debt €2.428bn, totaling gross debt €3.012bn. Cash and equivalents €299mm. Using a strict gross debt minus cash lens, net debt is €2.713bn. The company also reports "net financial liabilities" of €2.381bn, which deduct certain financial assets.
• • Total Net Leverage and interest coverage:
• – TNL 5.0x on reported EBITDA €538mm; 4.4x on Clean EBITDA €614mm. EBITDA to interest coverage is high on an EBITDA basis given FY2024 cash interest expense of €41mm, but EBIT-based coverage is weak because EBIT was negative; this undermines investment-grade metrics despite good cash interest cover.
• • Weighted Average Cost of Debt:
• – FY2024 interest expense €41mm. Using YE2024 gross debt €3.012bn as a simple proxy, an implied cost of debt is approximately 1.36%. The bond stack had a low average coupon; rising rates and any new issuance could raise the forward cost.
• • Maturities and refinancing:
• – A €500mm bond matured May 2025 and was redeemed using Urethane Systems proceeds. Remaining maturities through 2026 to 2029 consist of benchmark eurobonds and bank debt; there are no disclosed financial covenants in the €800mm ESG-linked revolving credit facility signed in September 2024 with a 5 plus 2 year tenor.
• • Contingent liabilities and supply chain finance:
• – No quantified supply chain finance programs or material contingent liabilities are disclosed beyond standard environmental and legal provisions.
• • Liquidity:
• – YE2024 cash €299mm and an €800mm undrawn RCF provide at least €1.099bn of potential liquidity if fully available. Liquidity headroom is adequate relative to near-term needs after the May 2025 bond redemption.

Conclusion:

• • Free cash flow outlook:
• – With FY2025 EBITDA pre exceptionals now guided to €528mm to €580mm, and capex historically around €320mm, we expect FCF to remain positive but modest absent working capital releases. The deleveraging path depends on disciplined capex, stable working capital and no adverse exceptional cash uses.
• • Valuation and capital structure sustainability:
• – Using market cap €2.14bn as of July 31, 2025 and YE2024 net debt €2.713bn, EV is €4.853bn. Debt comprises roughly 56% of EV and equity 44%, highlighting a capital structure that is leverage-heavy for an investment-grade profile. If EBITDA trends toward the lower end of guidance, leverage will remain elevated and constrain equity value accretion.
• • Rating view and grid outcome:
• – On a ratio basis, TNL of 4.4x on Clean EBITDA and 5.0x on reported EBITDA, combined with negative EBIT and modest margins, maps closer to Ba2 to Ba1 on the Moody's-style grid, given Debt to EBITDA well above 3.0x and margins below typical investment-grade specialty peers. This contrasts with the current public Moody's rating of Baa3 negative. Our grid-indicated rating outcome for the business and financial risk, based on Clean EBITDA and a conservative net debt definition, is Ba2, S&P equivalent BB. A one-notch improvement to Ba1 or BB+ would require sustained EBITDA growth above €650mm, positive EBIT margins through the cycle and net debt reduction below €2.3bn. Conversely, a weaker macro and EBITDA closer to €528mm would solidify a Ba to high-BB profile.
• • Bottom line:
• – LANXESS has executed meaningful portfolio and cost actions, and liquidity is solid. However, current leverage, negative EBIT in 2024, and a downgraded 2025 earnings outlook point to a credit profile that is below the investment-grade threshold on a through-the-cycle basis. Balance sheet sustainability hinges on maintaining positive FCF, executing the cost program, and using further divestment or retained cash to bring TNL closer to 3.0x on Clean EBITDA.