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Edited Transcript of LXS.DE earnings conference call or presentation 6-May-20 8:00am GMT

Q1 2020 LANXESS AG Earnings Press Conference

Leverkusen Jun 8, 2020 (Thomson StreetEvents) -- Edited Transcript of Lanxess AG earnings conference call or presentation Wednesday, May 6, 2020 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Claus Zemke

LANXESS Deutschland GmbH - Head of Corporate Communications

* Matthias Zachert

LANXESS Aktiengesellschaft - CEO & Chairman of the Board of Management

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Conference Call Participants

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* Annette Becker;Börsen-Zeitung

* Bert-Friedrich Fröndhoff;Handelsblatt

* Jonas Jansen;Frankfurter Allgemeine Zeitung

* Patricia Weiss;Reuters

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to the telephone conference at LANXESS. It will be recorded. (Operator Instructions) And now Claus Zemke will begin the conference. He's Head of Corporate Communications.

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Claus Zemke, LANXESS Deutschland GmbH - Head of Corporate Communications [2]

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Good morning, dear colleagues. Good morning, and welcome to our Q1 conference call. At least, we could be joined together acoustically. I hope that you're all doing well. We are practicing social distancing here in the room. We have Matthias Zachert, the CEO; and Michael Pontzen, CFO. They'll be informing us with regard to Q1 and giving us an overview.

Mr. Zachert, you have the floor.

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Matthias Zachert, LANXESS Aktiengesellschaft - CEO & Chairman of the Board of Management [3]

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Hello. Welcome. Good morning from me as well. I will now start the presentation from Page 3.

So we're well prepared through the crisis. Of course, protection of our employees has utmost priority. And I think that we took a good approach. We acted at an early stage, and I can talk about this later on.

Now our production plants are running. We've boosted our -- secured our liquidity, and we expect that liquidity is decisive in the phase of any crisis. And gratifyingly, 2 out of 4 segments recorded positive earnings, thus beating the prior year figures.

On to Page 4. Here, you can see the key indicators. In sales, things remain relatively stable. EBITDA, due to the coronavirus and a drop in demand, but also due to the shutdown, particularly in China, it -- this is primarily in February, where 8 plants were shut down for 2 to 3 weeks. As such, EBITDA fell by 10%. However, the level of our margin was maintained at quite a high level. Net income declined quite sharply because we had one-off charges.

On to Page 5 now. On Page 5, you can see the new segment structure. Now I said that we would -- in the previous conference, I said that we would have a new segment called Consumer Protection. Here, you can see it in the presentation in red. And you can see that we have these business units, Saltigo, Material Protection Products and Liquid Purification Technologies. Now you will see that this new pillar look is a new segment, has delivered excellent results during the first quarter.

I'd now like to move on to Page 6. And I'd like to go into the individual segments, starting with Advanced Intermediates. And due to the coronavirus, we had a weaker demand in what is generally quite a stable segment. And due to the shut down in China, we were heavily impacted. For this reason, EBITDA declined by 16%. Our margin, however, remained at a 16%, which is a good level.

And now I'd like to move on to Page #7, here you can see Specialty Additives. And here, the performance was excellent. And we actually beat the sales of the prior year period and also recorded an increase in EBITDA, a 17% EBITDA margin. And in the second and third quarter, we believe that momentum will drop because demand in this segment, if you take the automotive sector into account, for example, we believe that it will have a significant decline in the second and third quarters.

I'd now like to move on to the Consumer Protection, which is our new segment, on Page 8. Sales increased. EBITDA increased. Margin of 54% (sic) [24%]. So here, you can see that we have a very strong segment. And over the full year 2020, we expect it to perform very well. In addition to agrochemicals and water-based chemicals, we also have our disinfectants. And of course, due to the crisis, we are experiencing a significant demand. And we're also donating this, not taking any money for this whatsoever because we want to play our role in helping in the current situation.

This brings me to some specific measures that we introduced. You can see this on Page 9. There were 7 countries where we are producing Rely+On Virkon, which is effective against the coronavirus. And it is mainly used for surface disinfection. Because often, you will see that disinfectant is sprayed on to surfaces. And often, the disinfectant used is our disinfection that you can see here. This is being supplied to more than 10 countries. And 1 million liters of disinfectant solution have been donated. We've sent these to hospitals, to other public institutions as well. And we've also supplied the product to Germany in the North Rhine-Westphalia Health Ministry. We have also provided this ministry with the record disinfectant. So we are trying to play our role here to help in this situation.

We were also asked about masks and whether we have enough because some of the authorities or places in the region don't have enough. But fortunately, we took action quite an early stage. And as such, we made sure that we had sufficient masks available. And we donated the masks that we did give away.

Now on to the fourth segment, Engineering Materials, which is the most heavily impacted, primarily due to the greater exposure to the automotive markets. As such, sales declined by 9%, EBITDA contracted by 25%. The margin was maintained at a solid level. We expect that in the second and the third quarters of this year, given the persistent weakness in the automotive sector, we will continue to downtrend in Engineering Materials.

I'd now like to give you a brief update on the coronavirus on Page 11. But on a positive note, we have had very few confirmed cases at LANXESS throughout the world. We had 31 confirmed cases, 27 of which have already recovered, which we're very happy about.

Now in the current situation, all plants are now up and running again, even in India, where we have a national shutdown, and it's a very strict shutdown as well. We resumed production in Italy as well. In China, all of our plants are running again, not at full capacity, but they are running. But I believe we've reached around 60% to 70% capacity utilization as far as our factories are concerned and also in Argentina.

Now I have had the impression our employees have managed to keep the logistics and raw material supply up and running. There are certain delays, but we don't have a broken supply chain. Rather, the thing is, if you do have a breakdown in the supply, then it can lead to problem with production, but I would say, largely, everything is going okay on this front.

Now where possible, we are gradually resuming our office operations. In Cologne, for example, on the 4th of May, which was Monday of this week, we gradually started resuming office operations. Of course, we have a much smaller team working there at the moment, and we are gradually reintroducing people to the office again. So it's very positive to see that interactions or personal interaction, face-to-face interaction is now gradually taking place again.

And on to our German sites, we did have Kurzarbeit. We have the following, the job retention schemes, but we only had 3 plants where we did have this: In Leverkusen, Brilon and Bitterfeld. So it's been at a very low level. None of these are particularly big sites. So I would say, overall, we are doing very well on this front.

I'd now like to turn your attention to Page 12. So we learned from the financial crisis in 2008, 2009. What we learned is that liquidity is key and cash is king. In the 3 to 6 months, I believe this situation will become more challenging. So what we are trying to focus on now is making sure that we have sufficient liquidity. And we assume that, due to the coronavirus crisis, we will be experiencing a very challenging economic situation in this financial year. That said, it's also -- but sorry, it's also possible that we could have a difficult situation next year. The crisis could take longer. And you -- let's just put it this way, you can't have enough liquidity, which is why we have suspended our share buyback program and we've drawn down our revolving credit facility.

We also have the sale of our Currenta stake. So this was perfect timing with the sale of the Currenta stake because we sold it this year. And this year, we will receive the proceeds from the sale. So we will have one-off net income in the second quarter for this. And in the second quarter, well, as things stand, we're a bit more modest with our investments. We've made adjustments of around EUR 50 million on the CapEx front. We had a look at cost-containment measures. And we expect we'll have savings of between EUR 50 million to EUR 100 million. That's the amount of cost reduction that we will be able to achieve. As we communicated, at Board level and the top management level, we have agreed on a reduction in compensation. A 50% reduction of bonuses at Board level will be cut. Also, at our level, we have 20% for top management.

Now let's now have a look at safety and protection measures for our employees that we have introduced in [our review]. You can see this on Page 13 of the presentation. We are scanning -- we were doing fever checks at all of the entrances to our sites. This is a pretty common method in most of the successful countries, from all the countries that have had success in tackling the coronavirus crisis.

What we've done also is switch shifts from 8 to 12 hours, and this means that we have greater flexibility. If there is -- if a shift -- if there are any infections affected on a shift, then it means that if people work for longer, they have less contact with other people than if we have more shifts. Now the shift handover is contactless. Everybody in working in production has to use a mask, anybody who has contact with other employees. And the same applies to our white collar colleagues as well. We have supplied masks to ensure that everybody has a supply of masks that they can then use.

Now I'd like to say thank you to our IT department because in a very short period of time, they created the flexibility to ensure that the -- work from -- that our work-from-home capacity was improved and the level of connectivity that we have is sufficient. We also provided laptops to the employees who needed them, and this was introduced during a very short period of time.

But when it comes to a crisis of this magnitude, it's important that you're looking at how you report your figures because you have to adapt accordingly. What we do is we issue a daily liquidity report, and we base this around all of the different potential scenarios that could occur. Now this has proven to be very effective. We are also keeping an eye on our value chain. And before coronavirus, we all -- we met up almost every day, had a Board and management meeting. We're having Board meetings almost daily as well to try and do everything to steer our company in the right direction. I think this has proven its worth.

I'd now like to give you our outlook. Of course, the pandemic will be the characterizing feature of how the economy performs. There will be an adverse impact of COVID-19. As we said in March, the second quarter was heavily impacted, but we now also believe that the third quarter will be significantly impacted.

Because we got exposed to the 3 industries that had most impact, so this is aviation, automotive and oil and gas and because unemployment is increasing in a number of different countries. Look at the unemployment rate, which has exceeded 20% in the U.S., for example, which will also lead to a drop in demand because people on unemployment or people who have been furloughed will purchase less. And this, of course, will leave its effect, will have an effect on the economy.

We spoke at length about whether we should even issue guidance or not. Most companies in the cyclical industries have not issued any guidance. Some are still issuing guidance. We took the following decision. We have a number of -- a lot of different data points. We can see our order books, and we do have contracts, which have been signed for a year or on an annual basis. But I'd like to say, it's very difficult to issue guidance, but we will try -- and we'd like to try and offer you more transparency because it's a very volatile time, but we'd like to create as much transparency as possible.

Now based on my -- these assumptions, I'd like to tell you our figures for the second -- what we expect for the second quarter. We believe that profitability will be between EUR 200 million and EUR 250 million of EBITDA. And our forecast for the full year will be adjusted by EUR 100 million. And our guidance is between EUR 800 million and EUR 900 million in EBITDA.

So on that note, I would now like to open the floor for questions and answers. So I look forward to answering your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from Annette Becker from Börsen-Zeitung.

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Annette Becker;Börsen-Zeitung, [2]

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I would like to ask 4 questions, if I may. Reduced working, how many people are affected by short working time? And you said that this is still relatively limited. Does that mean that you believe that there will be more in the future? And why?

And then you said Q2 and Q3, the things will get worse. First of all, there are other industries and companies that say things will be better as of Q3. Why are you so skeptical? And if you take a look at your forecast for Q2, then you're talking about the -- having the EBITDA at about the same level as Q1. How can that be the case if the shutdown didn't really occur until the second quarter?

And my third question is with regard to the AGM and your dividend policy. Are you considering to change your proposal for the dividend and perhaps to do away with the dividend?

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Matthias Zachert, LANXESS Aktiengesellschaft - CEO & Chairman of the Board of Management [3]

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Ms. Becker, thank you very much. Let me take the questions one at a time. For short working hours, if we compare this to other companies, I think that we're very fortunate. We're doing very well there. We have a total of about 300 employees in short working time. And this is in small locations: Brilon, Bitterfeld. It's just one product line. It's a small site.

In Leverkusen, this is Leather operations. And this is how -- you can see that it's primarily operations that are responsible for the automotive industry. These are the ones that are most affected. And I would also say that I cannot rule out the possibility that they will be more, that these numbers will increase. But right now I don't think we have to have this on an extended basis. I think we should also consider that other industries are in crisis.

With regard to Q3, I tried to mention that. I said that we can see that some countries are really heavily impacted, in particular, the United States. They are now -- it's now, as of April, you can see that their problems are really increasing. In the last 2, 3 weeks, you've seen the 26 million people additional unemployed in the U.S. So this is not something that had an effect in April. Their purchasing power will be felt in the months to follow. And unemployed are really worried about their existence, and they simply are not going to have as much demand. And the effect of this is something that we will not see immediately in Q2. We'll feel them in Q3. And that's what I'd like to say with regard to the European economy.

And in Germany, we have 10 million people in short-time work. Because in April, that's when production was reduced, especially in the automotive industry, but in other industries as well. In retail trade, for example, so this is something that means that the people do not have the purchasing power. And if they have -- if they're worried about something, they buy less.

So let's come back to the population. We have to explain the question of optimism. We have a fantastic health care system here in Germany. And you can see that. It's outstanding and it's proving itself these times. And we have excellent equipment with regard to our health care system, our physicians, et cetera. So I think the German culture is one of the most disciplined culture as compared to other countries. And that is why the infection rate is something that we have under control.

But if we don't get our optimism back, then purchasing power will decrease because if people are worried, they buy less. So if we consider the economic situations and if you consider not only Q2 but also reduced purchasing power in the third quarter as well.

Let's come to your third question, the EUR 200 million to EUR 250 million. This is compared to a figure of EUR 280 million in the previous year. And as I said, considering the current situations, I think we're more at the lower level of our guidance. And this is something that I will also say to the investors. At the current time, we say that we're now at the midpoint. And we have to be more cautious here. And I think that it tends to be more what you can see, if you take a look at the lower figure, the lower number in the guidance, then this is then a clear decline compared to the previous year, much more than in Q1.

And the Annual Shareholders Meeting. This, we have not announced the new date, and we will be doing so shortly. The dividend was discussed in March with the Supervisory Board. We decided to pay EUR 0.95, and that applies today. That is the current status quo.

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Operator [4]

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Next question is from Bert Fröndhoff from Handelsblatt.

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Bert-Friedrich Fröndhoff;Handelsblatt, [5]

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Two questions. I was going to ask about the dividend. That's already been asked. Could you explain where you're cutting CapEx exactly, which investments you're looking at? Whether there are projects that have been canceled? Or how are you going about reducing CapEx? And what about acquisitions that you've been looking at? So they -- is it on ice for the moment?

The second question, you spoke about -- you said that you're going to be keeping a closer eye on our supply chains. Do you think that in the medium to the long term, this will mean that supply chains will become more local or maybe more focused on Europe? So closer to home? Because this is something that has been achieved, well, literally the case for LANXESS.

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Matthias Zachert, LANXESS Aktiengesellschaft - CEO & Chairman of the Board of Management [6]

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Welcome. To begin with, I didn't really understand your second question. Could you go into this in more detail? Acoustically, I didn't quite hear it.

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Bert-Friedrich Fröndhoff;Handelsblatt, [7]

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I'm asking whether you're going to have a more local focus on your supply chain. So deglobalization is one of the terms which you used in this context.

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Matthias Zachert, LANXESS Aktiengesellschaft - CEO & Chairman of the Board of Management [8]

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No, I mean your question before that one, please.

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Bert-Friedrich Fröndhoff;Handelsblatt, [9]

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The question before this was about investments and acquisition. Because you've been eyeing up a few acquisitions. I was wondering whether this is on ice for now or what the situation is.

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Matthias Zachert, LANXESS Aktiengesellschaft - CEO & Chairman of the Board of Management [10]

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Okay. So let me start with CapEx. This is investment in growth, which we did actually want to proceed with. But if you look at industries which have been heavily impacted, anything in the automotive sector, for example. So in any -- or in the aviation industry, oil and gas, automotive, as things stand, they wouldn't -- then it means that we're much more likely to invest in these sectors. So we will be postponing these investments. It doesn't mean that in 2021 or 2022, we won't come back to this. But as things stand, it makes no sense because these are the industries which don't really have any growth momentum during the current crisis. And I think it will be a while for momentum to return.

We are eyeing -- we are -- we do have an eye on acquisitions. But in the current situation, it was not going to be any significant M&A activity, bolt-ons, for example. But if we see that the -- once the economic situation has stabilized, we may readdress this. We can confirm, we -- as to supply chains, we know that a large number of customers are now wondering whether over the medium term it will actually be possible to have a global supply chain. We can see that in Europe a large number of our customers who had been -- had supply chains from India and China to bring them back to Europe. And I can confirm that this is a trend that exists.

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Operator [11]

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Patricia Weiss from Reuters.

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Patricia Weiss;Reuters, [12]

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I have 2 questions. I wanted to understand -- to check whether I understood correctly. Your earnings forecast for the second quarter was at the lower end of your range. Is that correct?

The second question is about your liquidity cushion. You said it looks fine. You said this in your presentation.

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Matthias Zachert, LANXESS Aktiengesellschaft - CEO & Chairman of the Board of Management [13]

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Ms. Weiss, thank you for joining us today. I can confirm what you just said. EUR 200 million to EUR 250 million is the guidance for Q2. And in the current situation, this is at the lower end of our expectations. Now liquidity, as I said, during the financial crisis, then CFO -- well, we had a 3- to 6-month period for liquidity. So with the crisis -- if the crisis takes longer than this period, more than 3 to 6 months, then liquidity is what counts. We see in this, to the detriment of a number of companies, but the situation that they are in.

Then take retail, for example. We can see that they're facing significant difficulties at the moment. So in our experience, also based on the financial crisis, is this, that you can never have enough liquidity in a period like this, and which is why we're emphasizing this to such a great degree. With the liquidity which we have and which we're happy to have at the moment, we believe that we can be fine through the next few years.

The one thing is we're not only operating in an excellent country with an excellent health care system but our colleagues are working in a company, which is in a cyclical industry, the chemicals industry, but we have liquidity, which will mean that we can continue to operate, we can continue to do well.

Are there any further questions?

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Operator [14]

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I do not see any more questions. (Operator Instructions) The next question is from Jonas Jansen from the FAZ.

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Jonas Jansen;Frankfurter Allgemeine Zeitung, [15]

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I have a follow-up question with regard to the last press conference you had. You said that you expected that there would be a EUR 20 billion (sic) [EUR 20 million] burden on the earnings. And I just wanted to ask if you could give us an update on that. Do those figures still stand? Have they gone up? Or has there been a change?

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Matthias Zachert, LANXESS Aktiengesellschaft - CEO & Chairman of the Board of Management [16]

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Mr. Jonas, that's a justified question, a legitimate question. About EUR 20 million as a result of the corona pandemic, you can see that in Q1, where it was a bit more than EUR 20 million. But I think that we managed Q1 quite well. And for the year as a whole, I have to say one thing very clearly.

What we've seen since the press conference in March, things have become much more dramatic. We've all experienced that. And I think that there was a complete shutdown in many countries. It was drastic in Spain. Here as well, we can't travel, for instance. This is something that we did not even anticipate in early March, that you couldn't go to the hairdressers, et cetera.

So all of these things, the severity of the shutdown of public life, and this happened in other countries as well, this is something that I really had not anticipated in early March, that it will be so grave. And of course, this is something that will impair economic developments worldwide. And as a result, the adjustments that we've made today in our outlook is something that is due to corona. No question.

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Operator [17]

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The next question is from [Henrik Geiser] from the (inaudible)

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Unidentified Participant, [18]

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I think most of my questions have already been answered. But now I have a question on cost-cutting measures. How exactly are you going to cut costs? Have you thought about letting any of your employees go?

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Matthias Zachert, LANXESS Aktiengesellschaft - CEO & Chairman of the Board of Management [19]

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These are measures which would not affect any of our employees. The measures that we have taken are essentially the variable budgets that we have, projects that are being postponed, consultants or certain expenditures in variable areas. But it also means that in some of the business units, the ones that are especially affected by corona: aviation, automotive, oil and gas. Here, our budgets, which we have for the business units have been reduced. But these are now at EUR 50 million. At EUR 100 million, that's what we would ramp up to, when we see that industry continues to decline. We have to be ready for this. And then, of course, we would take the necessary steps. But the cost-containing potential that we now have, that we have now implemented are EUR 50 million. But we would be willing to ramp up this figure. And of course, we also have to take a look at these industries. And what we have decided now -- in other words, should this become and remain even more massive, then of course, we can ramp this up. We'll have to take a look at our capacities and take the necessary action.

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Operator [20]

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Next question is Bert Fröndhoff from Handelsblatt.

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Bert-Friedrich Fröndhoff;Handelsblatt, [21]

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It's me again. Two questions. Where demand is concerned, could you -- could you be a bit more specific about the situation that's in China and whether here there are signs of a recovery in demand compared to Europe, for example? Now the second thing is when -- we need to have optimism to make sure that people are purchasing things again. How can you succeed in doing this?

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Matthias Zachert, LANXESS Aktiengesellschaft - CEO & Chairman of the Board of Management [22]

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So let me start by addressing your first question. So China is ramping up again. As a country which react -- which had a very strong reaction for a number of reasons, now China is resuming -- returning to normality. I spoke with our -- when people come into the -- they've got an app checking whether people have been in any risk areas. They'll also check when they come into the plant. So in China, life is returning to cities, and production is ramping up again. But it's not happened all over the country. It's not returned to the levels that it was at prior to the crisis. But I would say it's -- we resumed about 70% to 80% in production. And I think it's certainly different to the situation that we had in February and the beginning of March in the area.

In March, we said we knew that there would be a steep decline in industries, whether it's automotive, tires, et cetera. We said that this will be the second half of April as well. Now the EU is currently in the midst of this. And we have to ensure here that we succeed in resuming normal activity again. Otherwise, we will have a problem that the government will have a high level of debt. I think we've already got 10 million people in job retention schemes at the moment. And we saw during the financial crisis, that it's a significant share of our labor force, which is why it's important. We hope that the industry can return to what it's doing. Otherwise, it's going to be a big challenge. You can see this on the weekly unemployment figures that are announced.

Although coming back to the U.S.A., they have an unemployment rate of more than 20%, which I've never experienced during my professional career. The danger is that it could continue to increase. In the U.S., GDP is powered primarily by consumers. And we can assume, if they're unemployed, then they're going to buy less. And this will thus have a significant impact on the economic growth there.

So on to answer your question about optimism, which is something that we have to speak about, which is why I say to my employees, when it comes to Germany, we certainly have a reason to be optimistic. This is a severe crisis, but we shouldn't let this lead into an economic crisis. We have the best health care system or at least one of the world's best health care systems. We have hospitals that are very well equipped with the best doctors, and this is, I'm sure, it is clearly demonstrated at the moment. So you can see people, they might be buying too much toilet paper, but they are certainly keeping distance from one another. So they've shown that they're able to do this.

When I go into shops, I'm impressed how all of these shops, they've got PLEXIGLAS and protective screens, people wearing gloves. Everybody who comes into the shop is wearing a mask. And this is something which is heavily embedded in our culture. We seem to be predestined for this kind of thing. And this is something that we need to speak about.

And to now speak about a second wave, a third wave, this just generates fear. Of course, response to coronavirus crisis has to be professionally organized, but we should be optimistic because particularly here in Germany with the health care system that we have, we know that we will manage this well. And I say to my employees that this is going to be a severe crisis. However, let me emphasize, we have everything in our power to master the crisis.

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Operator [23]

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Just one more question left on the list from Jonas Jansen from FAZ.

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Jonas Jansen;Frankfurter Allgemeine Zeitung, [24]

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I just have a follow-up question about the compensation cuts at Board level. You spoke about bonuses. Was it 50% for the supervisory and 20% for the Board of management?

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Matthias Zachert, LANXESS Aktiengesellschaft - CEO & Chairman of the Board of Management [25]

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20% for the Supervisory Board, 25% at the top level and 50% at Board level. And this has all have been put down on paper and signed off. The decision is final. With no further questions on the list, as such, I would like to say thank you very much for joining us this morning. Take care. Stay healthy, and I hope to see you again soon. Goodbye, everybody.

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Operator [26]

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Thank you very much for participating today. The conference is now ended.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]