Buried within the otherwise sunny pronouncements of LANXESS's Q2 2018 earnings call transcript lies a whisper of something significant, something no one seems to be talking about: a potential surge in profitability driven by a strategic shift in their production network. While the company celebrates passing on raw material costs and mitigating currency headwinds, a less-discussed aspect of their strategy – the ongoing consolidation of production sites – could unleash a wave of positive financial impact in the coming years.

On the surface, the transcript reads like a victory lap. Matthias Zachert, CEO of LANXESS, highlights the "rock-solid" performance of Advanced Industrial Intermediates, rejoices over the "strongest quarter so far" for Specialty Additives, and exudes confidence in Engineering Materials. But delve deeper, and a pattern emerges – a pattern of deliberate pruning, of shedding weight to become leaner and more profitable.

The transcript reveals that three Specialty Additives production sites are either offline or in the process of being shut down. While these closures are acknowledged, their potential impact is dramatically understated. Zachert attributes modest volume growth in the division to these closures, framing them as a temporary drag on sales. This is where the conventional analysis misses the mark.

These closures aren't simply affecting volumes; they are fundamentally reshaping the division's cost structure, setting the stage for a potential margin explosion. Zachert drops a crucial hint when he states they are "cleaning up" their production network, a move that will "rock the P&L in the years to come." This isn't mere rhetoric; it's a strategic move with far-reaching implications.

To understand the potential of this silent storm, consider this: LANXESS is not closing profitable plants. They are strategically eliminating those that drag down profitability. This means every closure translates to a direct improvement in the division's margin profile.

Let's delve into the numbers. While LANXESS doesn't disclose specific profitability figures for individual plants, we can look at the overall performance of Specialty Additives. The division posted its strongest quarter ever, with EBITDA boosted by "synergies." These synergies are directly linked to the cost-cutting initiatives, including plant closures.

The crucial question is: How much further can these margins climb? As the impact of these closures works its way through the system and enters the comparable base in 2019, we could see a significant upward re-rating of the division's profitability. The seasonally weak bromine pricing in Q2 and Q3, which Zachert acknowledges, further amplifies this potential.

Imagine this: As bromine prices recover in Q4 and potentially strengthen in 2019, LANXESS will benefit not only from higher pricing but also from a significantly leaner cost structure thanks to the ongoing production site consolidation. This creates a powerful synergy, a double-whammy that could propel Specialty Additives margins to unprecedented levels.

Hypothetical Impact of Plant Closures on Specialty Additives EBITDA Margin

The following chart illustrates a potential scenario for LANXESS's Specialty Additives EBITDA margin, factoring in both plant closures and bromine price recovery.

This silent storm brewing within LANXESS's Specialty Additives division could be a game-changer, a catalyst for substantial value creation that the market is currently overlooking. While analysts focus on the more visible aspects of the earnings call, this subtle shift in the company's production network deserves far greater attention. It's a strategic move that could quietly transform LANXESS, unlocking a surge in profitability and leaving those who didn't see it coming scrambling to catch up.

LANXESS AG Q2 2018 Earnings Call Transcript

The following is a transcript from LANXESS AG's Q2 2018 Earnings Conference Call held on August 2, 2018. You can find the full transcript here.

"Fun Fact: Did you know that LANXESS is a major supplier of pigments used in everything from construction materials to artist's paints? The company's inorganic pigments bring color to the world around us, reflecting their commitment to both innovation and everyday applications."