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

Background:

• • LANXESS AG, specialty chemicals, HQ Cologne, Germany, LTM EBITDA €538 mm and Total Net Leverage 4.4x company-defined net debt to reported EBITDA and 5.0x on stricter net debt to reported EBITDA, Moody's Baa3 negative outlook; S&P public rating discontinued in 2022
• • LANXESS is a diversified specialty chemicals company focused on three segments: Consumer Protection, Specialty Additives and Advanced Intermediates, supplying performance chemicals and intermediates to end markets including consumer goods, agrochemicals, construction, electronics, automotive and water treatment across Europe, the Americas and Asia.
• – EBITDA generated in the latest financial year 2024 was €538 mm reported and €614 mm pre exceptionals; year over year EBITDA increased from €328 mm reported and €512 mm pre exceptionals in 2023; EBITDA margin in 2024 was 8.5 percent reported and 9.6 percent pre exceptionals on €6.366 bn of sales.
• – CEO is Matthias Zachert; CFO is Oliver Stratmann. These roles are longstanding and were reconfirmed through the 2024–2025 reporting cycle. There were no disruptive leadership changes disclosed in 2024–Q1 2025.
• • Segmental breakdown: management reports three operating segments.
• – Consumer Protection supplies material protection products, flavors and fragrances and liquid purification; these consumer-oriented businesses typically carry the highest margins within the portfolio and were a key driver of Q1 2025 EBITDA pre exceptionals with a 14.2 percent margin.
• – Specialty Additives covers polymer and lubricant additives, flame retardants and related formulations; margins are mid single to high single digit in the current trough, affected by weaker construction and electronics demand and US tariff uncertainty in early 2025; Q1 2025 EBITDA margin was 9.5 percent.
• – Advanced Intermediates provides chemical intermediates and Rhein Chemie solutions into diversified industrial chains; margins are cyclical and volume-sensitive; Q1 2025 EBITDA margin was 8.4 percent.
• – Given limited disclosure of full-year 2024 EBITDA by segment in the public extracts, Consumer Protection remains the most resilient earnings contributor, with Specialty Additives and Advanced Intermediates still below mid-cycle levels.
• • Geographic breakdown: production and sales are globally diversified with a large European footprint and meaningful exposure to North America and Asia. Germany is an important production base but not the dominant sales destination. Exact 2024 revenue percentages by region are not fully disclosed in the extracts; however, the company stresses a balanced end-market and geographic mix rather than concentration in any single country.
• • Revenue model and contractual structure:
• – Revenue is a function of price and volume across numerous SKUs with partial pass-through mechanics. Raw material cost deflation in 2024–Q1 2025 flowed through to lower selling prices, while volumes improved modestly in most BUs.
• – Contracts are a mix of spot and term agreements with select customers; price escalation and indexation clauses exist in many but not all contracts, creating timing lags in passing through inflation or deflation.
• – Revenue protection from inflation is incomplete. LANXESS uses hedging and pricing clauses, but in down-cycles the company typically faces margin pressure due to timing and competitive dynamics.
• • Cost structure:
• – 2024 cost of goods sold was €5.068 bn, or 79.6 percent of sales, reflecting heavy exposure to raw materials and energy. Operating expenses were €1.326 bn, approximately 20.8 percent of sales, leaving negative EBIT given trough conditions.
• – Variable costs are dominated by raw materials and energy. Fixed costs are meaningful given a global manufacturing base. Personnel costs are not broken out here, but headcount was 12,338 at year end 2024, indicating limited short-term flexibility in a downturn absent restructuring.
• • Shareholders and valuation:
• – LANXESS is publicly listed in Frankfurt. As of August 2025, market capitalization is approximately €2.5 bn and enterprise value approximately €5.0 bn. On 2024 reported EBITDA the stock trades around 9x EV to EBITDA; on 2024 EBITDA pre exceptionals it trades around 8x. Free float is high with a broad institutional holder base; detailed ownership percentages are not provided here.
• • Strategy:
• – Complete portfolio shift to specialty chemicals with less cyclicality, higher margins and greater consumer exposure. The company exited or agreed to exit polymer-heavy businesses, invests in Scopeblue low-carbon products, and targets structural efficiency via the FORWARD! plan.
• – Cost actions: €150 mm sustainable savings targeted by end 2025 via footprint optimization, SG&A reduction and process improvements; 870 job cuts already initiated in 2023–2024.
• – Deleveraging remains a stated priority using operating cash flow and divestment proceeds.
• • Corporate actions:
• – Sale of Urethane Systems to UBE Corporation closed April 1, 2025 for an enterprise value of €460 mm; assets were classified as held for sale in late 2024 and deconsolidated upon closing. Proceeds are earmarked for debt reduction.
• – Dividend maintained at €0.10 per share for 2024, proposed to the May 22, 2025 AGM, consistent with a minimal payout posture in deleveraging mode.
• • Current trading:
• – Q1 2025 sales were €1.601 bn, broadly flat year on year. EBITDA pre exceptionals increased 31.7 percent to €133 mm driven by higher volumes, mix and cost savings, partly offset by lower pricing due to input cost deflation and soft agro and construction demand.
• – Net loss narrowed to €57 mm from €98 mm in Q1 2024. Net financial liabilities rose to €2.512 bn at March 31, 2025 due to seasonal working capital build; €460 mm divestment cash was received on April 1, 2025 after quarter-end.
• – FY 2025 guidance for EBITDA pre exceptionals is €600–650 mm, implying only a mild improvement from 2024 and acknowledging continued macro and tariff uncertainty.

Risks and mitigants

• • Customer concentration: the portfolio and end-markets are broad; no single disclosed customer concentration issue, but individual BU exposures to agrochemicals, construction, and electronics can create pockets of demand risk.
• • EBITDA adjustments: adjusted EBITDA pre exceptionals was €614 mm in 2024 versus €538 mm reported; adjustments are approximately 11 percent of reported EBITDA, reflecting restructuring and portfolio measures. While common in chemicals, the magnitude is material and must be monitored for persistence.
• • Cyclicality: demand cyclicality is meaningful across industrial chains; the company has previously managed extended weakness through portfolio shifts and aggressive cost-out. However, 2024 EBIT was negative and leverage elevated, highlighting vulnerability in deep troughs.
• • Litigation and provisions: environmental provisions totaled roughly €167 mm; pensions were €429 mm at year end 2024, rising to €435 mm at March 31, 2025. These are manageable but represent long-dated obligations.
• • Free cash flow and leverage risk: 2024 operating cash flow was €508 mm with capital expenditures of €320 mm, yielding positive free cash flow of €188 mm. However, reported EBITDA leverage remains high and would be higher under a stricter net debt definition excluding near-cash assets.
• • Regulatory and legislative risks: EU chemicals regulation (e.g., REACH) and global climate policies can drive higher compliance costs and product phase-outs, notably for products containing substances of very high concern. The company runs a product roadmap to phase out critical products but faces revenue and margin risk during transitions.
• • Geopolitical and tariff risks: tariff uncertainty in the US and increasing Chinese competition are near-term headwinds. The company expects a neutral direct tariff impact but sees a wait-and-see effect delaying orders and potential oversupply from China.
• • Accounting and governance: no specific irregularities disclosed; adjustments and held-for-sale accounting are notable but expected given active portfolio management. Internal control and risk frameworks are detailed in the annual report.
• • Financial distress history: none disclosed; ratings remain investment grade at Moody’s Baa3 with a negative outlook; S&P coverage was terminated in 2022.

Capital structure

• • Total gross debt at December 31, 2024 was €3.012 bn, comprising €2.428 bn of long-term debt and €584 mm of short-term debt. Cash and cash equivalents were €299 mm. Company-reported net financial liabilities were €2.381 bn, reflecting the deduction of €316 mm of near-cash assets invested in money market funds in addition to cash and equivalents.
• – On a stricter definition of net debt using only cash and cash equivalents, net debt was approximately €2.713 bn at year end 2024.
• – Total Net Leverage excluding adjustments: 4.4x using company-reported net financial liabilities (€2.381 bn) divided by reported EBITDA (€538 mm) and 5.0x using stricter net debt (€2.713 bn) divided by reported EBITDA (€538 mm).
• – Total Net Leverage including adjustments: 3.9x using company-reported net financial liabilities divided by EBITDA pre exceptionals (€614 mm) and 4.4x using stricter net debt divided by EBITDA pre exceptionals.
• • Weighted average cost of debt: not explicitly disclosed. Cash interest recorded for 2024 was €41 mm against average gross debt of roughly €3.0 bn, but this likely understates the true economic cost given capital market conditions and the mix of instruments. Base case underwriting should assume a mid single digit cash cost.
• • Maturities: specific bond maturities are not listed here. The company maintains an €800 mm sustainability-linked revolving credit facility, reportedly undrawn, and bilateral credit lines of €750 mm, also undrawn as of late 2024, which provide a buffer against near-term maturities.
• • Contingent liabilities and provisions: environmental provisions circa €167 mm; pensions €429 mm at year end 2024; no supply chain financing programs are flagged in the extracts.
• • Total liquidity: €299 mm cash plus €800 mm undrawn RCF plus €750 mm of undrawn bilateral lines, implying over €1.8 bn of available liquidity at year end 2024. Liquidity at March 31, 2025 reflects seasonal working capital use; sale proceeds of €460 mm were received April 1, 2025.

Financial Modelling

• • Assumptions:
• – Revenue flat to slightly up in 2025 with volume recovery offset by lower average prices in deflationary input environments; sequential improvement weighted to H2 if tariffs stabilize.
• – EBITDA pre exceptionals aligned with management's €600–650 mm guidance; reported EBITDA expected to trail adjusted levels given ongoing restructuring and portfolio costs.
• – Capex approximately €330 mm in 2025, consistent with management's indication to limit growth capex and focus on maintenance and selective debottlenecking.
• – Working capital to normalize after seasonal Q1 build; overall modest inflow or neutral for the full year assuming limited price inflation.
• – Minimal cash dividends maintained at €0.10 per share, implying roughly €9 mm total cash outflow, consistent with a deleveraging posture.
• – Divestment proceeds of €460 mm received in April 2025 reduce net debt.
• • Outlook and metrics:
• – Under these assumptions, free cash flow should be positive in 2025 even at the low end of guidance, driven by stable EBITDA, controlled capex and minimal dividends. Deleveraging in 2025 will depend on the pace of earnings recovery and the use of divestment proceeds rather than operating improvements alone.
• – Structural cost savings of €150 mm run-rate by end 2025 are necessary to sustain margins into 2026 given muted volume recovery in cyclical end-markets.

Conclusion

• • Free cash flow: the business generated €188 mm FCF in 2024. For 2025, a combination of stable adjusted EBITDA, tight capex, minimal dividends and the April divestment proceeds should support positive FCF and net debt reduction. Risks include persistent price pressure, slow demand recovery in construction and agro, and tariff-related order delays.
• • Valuation and capital structure: enterprise value is approximately €5.0 bn, comprising roughly €2.5 bn equity value and €2.5 bn net financial liabilities on the company’s definition at year end 2024. On reported 2024 EBITDA, EV to EBITDA is about 9x; on EBITDA pre exceptionals, about 8x. Debt represents approximately 50 percent of EV using the company net debt definition and a higher share if stricter net debt is applied.
• • Sustainability of capital structure: the capital structure is stretched for an investment grade profile on reported EBITDA metrics, particularly on a stricter net debt basis. Liquidity is strong, and the April 2025 proceeds plus the FORWARD! savings offer a path to gradual deleveraging, but sustained EBITDA improvement is required to defend an investment grade rating.
• • Indicative ratings view using the provided grid, anchored on leverage excluding adjustments:
• – Debt to EBITDA of approximately 5.0x on a stricter net debt basis and 4.4x on company net financial liabilities maps to the B1 to Ba3 range on leverage alone. LANXESS's negative EBIT in 2024 and weak EBIT-based interest coverage weigh further.
• – Considering scale, diversification and strong liquidity, an overall blended outcome would align around Ba1 to Ba2 on a through-the-cycle view unless reported EBITDA improves and leverage falls toward the low 4x area or better. This contrasts with the current public Moody's rating of Baa3 with a negative outlook, which implies a downgrade risk if deleveraging stalls.
• • Bottom line: near-term credit quality hinges on delivery of €600–650 mm EBITDA pre exceptionals, execution of €150 mm cost savings, disciplined capex and application of divestment proceeds to debt reduction. Absent clear progress to reduce reported net leverage below 4x, the investment grade rating is at risk; however, ample liquidity and an increasingly consumer-focused specialty portfolio provide mitigation against a deepening downturn.