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Edited Transcript of LXS.DE earnings conference call or presentation 14-Mar-19 12:00pm GMT

Full Year 2018 Lanxess AG Earnings Call

Leverkusen Mar 20, 2019 (Thomson StreetEvents) -- Edited Transcript of Lanxess AG earnings conference call or presentation Thursday, March 14, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* André Simon

* Matthias Zachert

LANXESS Aktiengesellschaft - Chairman of the Board of Management & CEO

* Michael Pontzen

LANXESS Aktiengesellschaft - CFO & Member of the Board of Management

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Conference Call Participants

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* Andreas Heine

MainFirst Bank AG, Research Division - MD

* Chetan Udeshi

JP Morgan Chase & Co, Research Division - Research Analyst

* Markus Mayer

Baader-Helvea Equity Research - Lead Analyst of Chemicals

* Martin John Evans

HSBC, Research Division - Analyst of Global Chemicals

* Martin Roediger

Kepler Cheuvreux, Research Division - Equity Research Analyst

* Patrick Rafaisz

UBS Investment Bank, Research Division - Director and Chemical Research Analyst

* Peter Spengler

DZ Bank AG, Research Division - Analyst

* Thomas P Wrigglesworth

Citigroup Inc, Research Division - Director and Chemicals and Basic Materials Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by. I'm Stewart, your Chorus Call operator. Welcome, and thank you for joining LANXESS' Full Year 2018 Results Call. I would now like to turn the conference over to André Simon, Head of Investor Relations. Please go ahead.

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André Simon, [2]

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Yes. Thank you very much, Stuart. Warm welcome to everybody from Cologne and many thanks for joining our Q4 and full year 2018 call. As always, I have our CEO, Matthias Zachert; and our CFO, Michael Pontzen with me. Please take note of our safe harbor statement. And with that, I'm happy to turn it over to Matthias. Please go ahead.

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

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Welcome, everybody. I turn to Page #4 of the presentation for fourth quarter 2018. 2018 was a year with a lot of operational delivery, but also strategic milestones that were taken. Noteworthy, the divestiture of rubber -- and I think, in the hindsight, we can say, good timing. We also integrated the phosphorus chemicals businesses of Solvay that we acquired in February, 2018. We signed a cooperation agreement with Standard Lithium and El Dorado, which is definitely, if it comes through, an investment for the future. And we, in 2018, started and implemented brownfield debottlenecking investments in the neighborhood of EUR 150 million. Besides this, we, as promised, implemented an upgrade in our production network, closed Zárate in South America, closed Ankerweg and unplugged Reynosa, of course, leading to cash-outs, especially, burdening 2018, but we will continue upgrading our production network as planned also in 2019. And with this, of course, delivering also the synergies that we have promised. And that will help us with self-help to achieve our targets for 2021 onwards.

Chemtura integration is fully on track. We delivered on the promised synergies even faster than originally anticipated. And if you, later on, get the explanation on the numbers in Specialty Additives, you can see that, here, really we walk the talk and execute as communicated.

Let's turn the attention to Page #5. 2018 was a mixed development in terms of the half-year momentum. First half was rock solid, second half was challenging. We saw profit warnings in Q3 from automotive industries several times. And fourth quarter saw then profit warning -- profit warnings in the other industries, and quite a lot of chemical companies were among them.

So despite a year showing sunlight and storm, showing constraints on the macroeconomic environment, definitely headwinds as far as currencies are concerned, I think financially, LANXESS proved its resilience, not only in third quarter, but especially in the fourth quarter. We came out at the upper end of the guidance we had communicated in the summer. And we, therefore, delivered according to our promises.

As far as resilience is, therefore, concerned, we achieved this despite a shortfall in volume momentum in our ag business, notably Saltigo, despite a really bad financial result in leather chemicals, here, notably stemming from the chrome value chain. And also the construction industry made us suffer. And notably, the emerging markets, where also currency -- the weakening of currency, led to a financial erosion in our pigments business. But of course, as far as overall financial stability is concerned, you can see that in the fourth quarter in the P&L, you can see that also in the fourth quarter in the balance sheet.

Let's move to Page #6, and it's -- before moving to Q4, let's take a step back and look at our segments. I think here, the segments Intermediates, Additives and Engineering Materials speak for themselves. Despite a tough environment in ag industry, we compensated everything completely through our strong, really powerful business unit, Advanced Industrial Intermediates. So we grew absolute -- in absolute terms nicely, expanded our EBITDA by 7%, completely absorbing the shortfall in profitability of Saltigo. And ladies and gentlemen, take note of the fact that Organometallics is not fixed yet, we just start doing it.

Specialty Additives, we just walk the talk. We implement synergies. We advanced very, very nicely in the integration. And here, we absorbed, through Additives and here through the flame retardant additives and the lube adds, nicely the weakness in Q4, which we saw in the Rhein Chemie business, which, of course, has exposure to the automotive industry.

And the automotive industry, let's face it, eroded in Q4. And I am therefore also cautiously looking at the automotive industry in Q1 '19.

As far as Performance Chemicals is concerned, I mean that was really a drag in the entire year of 2018, but the other segments compensated for this. Chrome value chain, we started restructuring in 2017 and executed this in 2018. That led to volume declines, but further price erosions happened. And then of course, construction chemicals was also adding to the drag. And therefore, I think the current result is really not a good one, we acknowledge this. Take appropriate actions in the balance -- in the annual accounts and annual reports, you will see that we have also announced the closure of a pigment plant in China, Jinshan, which we go off-stream in end of March, April completely. Therefore, we walk the talk, take corrective steps. And I think we are somewhat at the very troughy levels in Performance Chemicals. So we look at the segments through -- not in Q1, but throughout 2019 to stabilize, and then to turn a chapter towards the more profitable future again.

Engineering Materials speaks for itself. And here, despite fourth quarter showing sluggish demands in China predominantly but also, of course, notably, in the automotive industry.

Urethanes, room for improvement, the [saturation] on TDI and MDI generally improves especially on pricing. Only in the volume side on the monomer MDI, we are still facing some constraints in the United States.

I turn my attention to Page #7. So here, based on the financial results of 2018 but also our comfort and clear view, conviction that LANXESS will further improve in the years to come, we raise our dividend to EUR 0.90 a share because we believe in the future of our company and of course, in what we are doing on a daily basis.

On Page 8, some key messages here we have taken down. And the one point I would like to add, fourth quarter was a tough one. Fourth quarter, we also dropped -- absorbed higher energy, higher freight costs, higher personnel costs and, what I was really seeing for the first time since many, many years, an ongoing decline in volumes in China. Normally you see this in on a monthly basis, but not for an entire quarter. We've seen that now for a few months in a row. And of course, this is something that we've also baked into our quarterly guidance for Q1. I will address that in a few moments.

With this, I will turn the page to the financials. And hey, Michael, come on, take it to the next level.

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Michael Pontzen, LANXESS Aktiengesellschaft - CFO & Member of the Board of Management [4]

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Thank you, Matthias. Yes on Page 9, you find an overview of our financials. Indeed, given the overall environment, as Matthias said, rising energy, freight costs, Rhein level discussion, Brexit, auto, China, you name it, we managed to keep our EBITDA stable on a year-on-year basis. You see as well that the EPS pre-improved further for the continuing business. For the group, we obviously have some special effects for last year, and this year, we can figure it out later on in the discussion if you want to.

On Page 10, you will find our quarterly results of our businesses, starting with Advanced Intermediates. In Advanced Intermediates, we had a very strong quarter, strong price increases where we managed to pass on our raw material prices. Strong volume increases in both business units. We addressed earlier in the year that we see an inflection point in Saltigo, and we expect 2019 to improve versus 2018. The first proof, you will find in the numbers of Q4. So the overall EBITDA improved further as well did the margin in that segment.

Next, nice improvement comes from Specialty Additives. We were able to further increase prices, like we did in the last couple of quarters. So we're, obviously, right on track when it comes to the successful integration of the operational business. We saw first signs of weakening auto demand, especially in our Rhein Chemie businesses. And we were, as well, and keep that in mind, comparing to a year where we closed sites and sold smaller sites in ADD, while the volume decline doesn't ring an alarm bell at this point in time, but, as said earlier, in Rhein Chemie, we were facing declining volumes coming from auto.

EBITDA grew again, nicely. Same is true for the margin next to the operational improvement. For sure, the realization of our synergy is further kicking in. For the overall year, we came in better than we previously expected, so we were able to generate EUR 10 million faster than we previously anticipated. As well, for the overall year, Specialty Additives now comes in with a margin of 17.3%, which is the best-performing segment in the group, which shows, as well, the very well improvement of that new business segment.

On the opposite, Performance Chemicals, again, very weak performance of Leather and IPG, which is continuing. We saw, next to the common topics of chrome prices and effects from closure as well a decline coming from China, which basically leads -- and led to the effect that EBITDA was reduced to EUR 24 million, but as Matthias said, in 2019, we should see the inflection point at one point in time.

The fourth segment, Engineering Materials, and the 3 -- or third segment which is improving, which is as well true for the overall year, is Engineering Materials, where we saw strong price increases especially in HPM. Volume increased nicely as well, but here we had, let's say, a certain trade deal which was inflating, to some extent, top line and COGS. But nevertheless, in HPM, we still saw some nice volume growth. That was not the case for Urethanes, as Matthias was mentioning, even though we saw some relief in the prices on certain raw material. Still the availability in the U.S. was limited. Nevertheless, overall EBITDA in that segment as well improved, and margin is now at 11%.

Matthias, please give the outlook for the year.

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Matthias Zachert, LANXESS Aktiengesellschaft - Chairman of the Board of Management & CEO [5]

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So I turn to Page #12, and here we all read macroeconomic reports. 2019, from all the macroeconomic assumptions, most likely is going to be a year where the development of the economy will be more uncertain and bumpy. And of course, as far as the automotive industry is concerned and also China is concerned, everybody speaks about softening. So as far as we look into macroeconomic trends, we, of course, take all of that into consideration. And I would very much like to stress, however, nobody has the crystal ball. Will Brexit happen or not? We look at this on a daily basis, and I think, by now, start having a bit of fun about it. And many other areas in the world predict uncertainties, so who are we to make a call on where all of that goes.

When we look, however, into our underlying momentum, how we have managed a tough fourth quarter and how we currently manage the tough start of the year in terms of macroeconomic dynamics, then we look at our business set up -- at our portfolio. And therefore, based on what we see, we are, of course, ambitious for the year, but we're also cautious for the year. And we would like to therefore, be around the current levels that we've posted operationally, 2018. That, I think, is the message for the full year guidance. If it's slightly above, if it's slightly below, if it is on track, we have the ambition to be on the -- on track as far as 2018 is concerned. So 2018, financially, is our clear target for 2019.

For Q1, we see clearer. Here we have 2 months in the bank. The current March trading, we are aware of. And based on the current tough environment, and please recall, last year, the chemical industry had the best start to the year for many, many years in a row, so we had a very, very strong first half. Notably, Q1 was a good one. And we want to achieve, based on what we know as of today, the good financial performance that we achieved last year. And of course, we would then like to further work on our cost structures, on our portfolio and everything in order to continue delivery good set of results.

With this, I turn my attention to Page #13. And with full year '18, you see that we have, over 4 years now in a row, upgraded our financial matrix year-on-year coming from somewhat 9, 10 percentage points EBITDA moving to 11, 12, 13; and now on a reported basis, 2018 finishing for the first time on a full year basis above 14 percentage points. We are striving to implement further debottlenecking projects with nice ROCE numbers in the years to come, so they would -- the incremental volumes at good profitability will come on stream. We are going to execute further synergies stemming from the Chemtura acquisition and the Solvay acquisition. Saltigo is most likely going to be a nice contributor already from this year onwards. Of course, we clearly have the ambition to fix Organometallics. And of course, further portfolio alignment will come. That is what we would like to implement as far as self-measures are concerned.

And through these measures, we feel in the position to obtain our financial targets as far as margins are concerned, cash conversion is concerned. And as far as stability is concerned, i.e., EBITDA margin volatility is concerned, I think we've given -- proven to our strategic direction in Q4. We want to underline this further with 2019 financial performance and, of course, accelerate in this regard in the years to come.

Ladies and gentlemen, this is the comments on full year and fourth quarter. I open up the conference call for 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 the line of Thomas Wrigglesworth from Citi.

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Thomas P Wrigglesworth, Citigroup Inc, Research Division - Director and Chemicals and Basic Materials Analyst [2]

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Three questions, if I may. Specialty Additives, it looks like one of your competitors, Albemarle, gave a more conservative outlook. I'm very interested to know what you see the outlook is for the bromine additives market going forwards and what you've baked into your guidance. Second question, you've noted, obviously, this trade sale in Engineering Materials, and it looks like Advanced Intermediates had some one-off benefits, but I'm guessing there was some Rhein costs, potentially, that you've incurred. If you could help identify the kind of onetime items around that? And thirdly, just what you're seeing on the ground in China as we exit Q1 would be very helpful.

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

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Thank you, Thomas. I will take them one by one and ask Michael to make further additions to question number two. As far as Specialty Additives is concerned, I basically would like to say that I cannot comment on our competitors. They make comments on their own. We basically, see that flame-retardant markets and industry, which, among others, is construction, it is softening right now. But we have, for Additives, still synergies to be implemented, stemming from the Chemtura acquisition. And therefore, we think, all in all, with the measures that we've implemented last year and the measures we will take this year, we see here an end industry which is diverse. So we are not only selling our Additives in areas of construction, electronic equipments and others are here the industry focus. And that is not as dynamic anymore as it used to be, but it is positive in terms of growth. Point two, if you look into China pricing and the competitive environment in China, this is turning into our direction, which is positive and synergies are going to come through. Some sluggishness, of course, I would like to highlight in the division coming from Rhein Chemie. Here we have a little more automotive exposure, but as you could see in Q4, we have mitigated that, but this would be a theme that will -- that is embedded into our guidance for 2019. Point two, Rhein costs -- and Michael will step in afterwards, I think P&L wise, we haven't seen a major impact on our P&L. Our team did an excellent work, excellent job. Really, I'm very proud of them. I've recognized their daily energy level and conviction to mitigate everything that was there. We were successful in doing so. And therefore, you didn't see any major P&L hit by this. What you have seen is a stock-up in working capital. We did that deliberately in order to have enough stuff -- raw materials in our tanks, storages and booths in order to be prepared for a further deepening of the Rhein River. Fortunately, it didn't happen, but of course, we had some higher raw materials then in the bank, in the balance sheet end of the year. And as far as Q1 is concerned, well China was, from December, November levels, going deeper in terms of January, the February trading. So we saw the single-digit volume erosion of Q4 continuing in Q1. After Chinese New Year, there was just a modest pickup, so it didn't go down southwards any more. It stabilized and slightly improved. Now of course, we have to see how the trade disputes continue, but we have to also see how the measures that the Chinese government has decided upon are going to kick in. These were major measures taken, and I think, here, a clear sign that China is doing everything to accelerate on domestic demand. They have done that successfully in the past, and I see their determination for addressing this, also now, in 2019, but as you have heard from our statements, there's no reason to be optimistic. We are optimistic only on our company. We cannot be optimistic on the world economy because this is not in our hands, but we are focusing very professionally on turning every screw and making sure that we mitigate like last year in Q4, in Q1, ongoing the challenges that we face in macroeconomic terms. Michael?

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Michael Pontzen, LANXESS Aktiengesellschaft - CFO & Member of the Board of Management [4]

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Thomas, yes first question with regards to Engineering Materials or, respectively, volume increase in HPM. So that was basically a deal which we were making where we were not able to net the impact on top line and the impact on COGS. So both lines were inflated. And a good chunk out of that EUR 9 million increase in volume was driven by that trade. Saying that, you will recognize that the impact on gross margin and on EBITDA is rather limited in absolute terms, and it's rather dilutive when it comes to the margin, but it's simply due to the fact that we were not able to net it, and we wanted to give full transparency, not that you think that we have such organic volume increase. With regards to the comment which we have in Intermediates and Saltigo, in particular, to IFRS 15, that is something where we had and we started to do so throughout the whole year that we had some impact to reclassify certain businesses, which we used to have in the other operating income. So we had to reclassify, in Q4, a relatively higher number to the top line as well to the COGS. On EBIT or EBITDA level, it's a net-net effect, so no impact. And we are not talking about a large number, it's rather a very high single-digit or very low double-digit million number, which was inflating top line and COGS.

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Operator [5]

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The next question is from the line of Martin Roediger from Kepler Cheuvreux.

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Martin Roediger, Kepler Cheuvreux, Research Division - Equity Research Analyst [6]

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Yes, only some minor questions. On the tax rate in Q4, can you explain why it was only 7%? Secondly, on the cash conversion rate, 2018 seems to be a step back as it dropped from 57% in the year before to now below 51%. With EBITDA and CapEx guidance being flat in 2019, there is no improvement ahead in this cash conversion rate this year. How realistic is your cash conversion rate target of above 60% by 2021? Or in other words, would you consider to slash CapEx towards your maintenance CapEx level in 2 years' time to achieve your target? And then finally only a clarification question. You guide for EUR 450 million operational depreciation and amortization charges? That, I guess, that does not include the effects from IFRS 16 because, I guess, on top of that will come from roughly EUR 30 million or EUR 35 million depreciation charges because of IFRS 16.

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Matthias Zachert, LANXESS Aktiengesellschaft - Chairman of the Board of Management & CEO [7]

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I will answer cash. Cash is important. And Michael will take tax and IFRS 16. So cash conversion '18, '19, we've been pretty straightforward in 2016 at the outset of the Chemtura integration, when we announced, end of September, Chemtura, that we have a catch-up in CapEx, point one. Second, we will do restructuring, two. And three, we will go for focused investments, i.e., brownfield investments in the neighborhood of EUR 400 million. Reflect that '18, '19, you will see the upgrade in CapEx for Chemtura sites, but you would see also a lot of the restructuring charges for the cost savings. That's happening now, so we -- I think there is the expression, you cannot have a cake and eat it. We are currently eating the cake in order to accelerate afterwards. So higher CapEx is therefore a given in '18 and '19. And higher cash outflow for the restructuring that we did last year, we booked it last year as one-timers and cash it out now '19 and '18. So that is what we are doing. Now on top of that, I have to clearly state, we see that the macroeconomic environment is not going upward, it's downwards. We will not wait and see that markets will get more challenging. We will take appropriate actions in order to make sure that we counter-fight any headwind that we will have. Might we take some cash in our hands to reduce cost base, to close further plants with -- like I've indicated before, construction industry did badly 2018. We take out an entire Chinese site, close it, took EUR 10 million impairment charges, and first quarter, we will take it offline. So we take actions, we don't talk, we act. And of course for this, we need resource allocation, but these are good investments in order to improve our cash flow and cash conversion in the years to come. And there is no reason why we should step away from the target that we have given. Michael, please explain the difficult tax topic in these depreciation IFRS accounting standards.

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Michael Pontzen, LANXESS Aktiengesellschaft - CFO & Member of the Board of Management [8]

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I'm more than happy to, Matthias. So Martin, with regard to tax rate, yes, it's probably the magic of the small numbers, let's put it like this. Yes, because if you're having an earnings before tax of EUR 14 million, it's not really right to determine and discuss the applicable tax rate. Therefore, I always say you have to have a longer view. I guided to you, we will be at the lower end of the range of 30% to 35% for the full year. Full year, we are at 30.3%, I think right on spot where I guided Q2, but on a quarterly basis, especially if the numbers are so relatively low, it's hard to really meet the sweet spot of that guidance, but we should on a yearly basis. And with regards to the D&A rate, yes, it does include the roughly EUR 35 million from the IFRS 16 impact.

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Operator [9]

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Next question is from the line of Chetan Udeshi from JPMorgan.

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Chetan Udeshi, JP Morgan Chase & Co, Research Division - Research Analyst [10]

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A couple of questions. Firstly, just talking around the M&A environment right now as you see, Matthias, especially now with the cash from the sale of remaining stake in ARLANXEO. Can you maybe give us some color on how you think about inorganic opportunities and which other key areas that you would think of expanding into? That's number one question. Number two question is you've guided to flat EBITDA in Q1. And it seems right now, it's -- that Q1 might probably be the worst quarter in terms of auto production, from a yearly perspective. So is there something that you think might weaken through rest of the year, which is why you've sort of assumed that EBITDA remains flat for the full year or stay around the same level as '18?

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Matthias Zachert, LANXESS Aktiengesellschaft - Chairman of the Board of Management & CEO [11]

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Chetan, thank you for your questions. On M&A, I mean, we've clearly stated we are prepared to do M&A, but we are, of course, in the current environment, not in a hurry. If we do transactions, we do transactions because they have a clear strategic fit, and they have a clear financial rationale. In the current market environment, we do our analysis, we prepare our targets. And of course, with due care, we do all measures in order to see what opportunities arise. When they arise, and if we then come to an agreement, depends on 2 parties and not only 1. And therefore, we think that here, 2019, 2020 might be a year where we take something onboard again. But of course, M&A, we evaluate next to other areas of resource allocation. These are organic investments, which we pursue as communicated. You see that also share buybacks are something that we consider actively, and we are just executing a share buyback program as we speak. And in the Annual General Meeting, of course, we can take appropriate resolutions to, again, make sure that we can continue doing this in the future. And therefore, we look at all opportunities with a clear ambition to create value in a sustainable way. And of course, we also use our financial proceeds to continuously reconsider our dividends. We know that, for some shareholders, we receive this feedback, constant and increasing dividends has been noted to be of higher value to some shareholders, whilst others indicated that they would like to have more organic investments and M&A, and others, again, would like to have share buyback. So I think we are considering all of that and are trying to deliver value creation in all aspects. As far as Q1 seasonality is concerned, well Chetan, who am I to make a call on macroeconomy? Who am I to make a call on trade disputes between 2 giant nations? Who am I to predict U.K. Parliament on Brexit? I look at 2019 in the following way: first half for the chemicals faces tough comparables, first half had strong volume momentum. And then second half '18 had erosion on volumes. We saw tough numbers already in Q3 and tough reported numbers in the chemical industry already with Q3 results. In Q4, many companies faced real hard times. So if I look into 2019, my assumption is that Q3 and Q4, we will all face a better comparable base, but Q1, Q2 is going to be tough. If macroeconomic environment, however, implodes in second half, it might be a high base. And therefore, I clearly would like to state, we feel more comfortable clearly on what we have in the bank, and we see what we have in the bank in Q1. For 2019, we will do everything in order to deliver on our full year guidance but of course full year, we -- you do have to take a lot of assumptions and the assumptions we've given before. I hope that gives some color to what we've guided for.

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Operator [12]

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Next question comes from the line of Martin Evans from HSBC.

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Martin John Evans, HSBC, Research Division - Analyst of Global Chemicals [13]

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Just 1 question really on, I guess, the weak link this time, Performance Chemicals. And Matthias, your comment, I think you said it was sort of troughy. You've done a lot of work there already in terms of site closure and so on, but is your comment sort of implying we might be at the bottom, based upon your view that you've kind of done most of what you can do, the heavy lifting yourself, and therefore, it's the market pricing and so on and demand, bottoming? Or I guess, do you have more plans up your sleeve for radical, which it would have to be because profits halved and margins halved in the fourth quarter, sort of radical restructuring for this year? And then I guess finally, connected with all of that is, I mean you may have said it before, but is this sort of -- this division is creating a lot of trouble for you and lot of time and capital employed, is it really one of the longer-term sort of divisions within the group? Or would you be happy to, at some point, think of exiting in some form?

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Matthias Zachert, LANXESS Aktiengesellschaft - Chairman of the Board of Management & CEO [14]

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Martin, very valid, but I think the -- as far as here Performance Chemicals is concerned, it boils down notably to Leather, and within Leather, to the chrome value chain. And here, heavy lifting has been done, but we will not shy away from doing further heavy lifting. We will not accept eroding results. And therefore, the time spent on chrome, of course, management-wise, exists. We've worked on this already in the last 12 months. We'll continue working on this in course of 2019. And definitely, we are addressing this. We will not accept falling results. And my look at Performance Chemicals and Leather going forward in '19, I think, from everything that I know, Q1 will still be tough, but afterwards, I think Leather will stabilize. Pigments, my view is that this should stabilize already in Q1. Pigments is, business-wise, a strong business, but markets- and currency-wise, in emerging markets, we saw headwinds. Here, our view is that Pigments will stabilize and might even go upwards. So I see -- look at 2018, where we posted an EBITDA margin of 14%, somewhat as a trough margin. If you compare it to the years before, it was the high-end of Performance Chemicals. So today's trough, in recent years, was Performance Chemicals' highest margin. And this is, to some extent, how I look at the company transformation. We have upgraded structurally LANXESS. And therefore, with Performance Chemicals, I think the actions we will take will lead to increase in profitability and margins going ahead, but we don't shy away from heavy lifting.

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Operator [15]

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Next question comes from the line of Andreas Heine from MainFirst.

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Andreas Heine, MainFirst Bank AG, Research Division - MD [16]

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Yes, my [sum] is the cash flow. Maybe you can give some indications how much the outflow for restructuring, synergies, integration and so on in '18 was? And how this might be in '19? And my understanding is that net working capital in '18, especially towards year-end, had some special effects on the negative side by preparing for Brexit, preparing for the Rhein issue and so forth. Maybe you can highlight how you see the net working capital change going into 2019? And then on Performance Chemicals, the wording, if it comes to volume and price for material protection and [liquid] water technology, sounds quite good. So I would assume, and maybe you can comment on this, that these 2 parts of Performance Chemicals are still performing well, meaning producing higher earnings. And last but not least, on automotive, you highlighted the impact it had to Rhein Chemie. How is the impact in Rubber Chemicals, which you still have in the Advanced Industrial Intermediates? And you have said it looks like that it is pretty stable, what you have in lube additives. So there you have not seen anything negative from the weak OEM Production. These are my questions.

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Matthias Zachert, LANXESS Aktiengesellschaft - Chairman of the Board of Management & CEO [17]

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Well many, many questions. Michael will address the cash-outs for restructuring. I would take the other 3 and start with them. On working capital, Q4, we basically stocked up due to River Rhine, but also we prepared simply for -- in October, we decided in the management board to prepare for a hard Brexit and executed accordingly. And therefore, the products that are produced in Europe being sold to the U.K., we stocked them up and shipped them now to U.K., so that we are prepared for 2 to 3 months of trade and customs chaos that might happen after a Brexit. So all in all, I think both measures, Rhein and Brexit preparations will be around about EUR 100 million, EUR 150 million of incremental working capital. That, of course, will be digested, then, in the course of 2019. Where working capital will be in 2019, we take a modest approach to basically say only if we increase volume-wise, we should increase volume in inventories. I cannot, however, give an absolute term because this depends eventually also on raw materials, and raw materials are, by nature, volatile. So that should address working capital question. Now let's come to the biocides and LPT. I'm positive on both. On MPP, however, whilst the business developed nicely in 2018, and this is a pretty stable business, a growing business, we will have, in second half '19, launch costs for Nagardo. This is the natural product for the food and beverage industry. So this is something we are going to launch, but we are speaking about single-digit millions investment costs, but the business, per se, should develop nicely, contributing to cash flow and profitability. As far as our water purification business is concerned, we've announced a new leadership, a lady running it. And the lady has great ideas and, since she came onboard, profitability is going up. Very nice as well, and she's just in the business for 3 or 4 months. What an impact she has. So I'm positive on both business units, and we will make them grow going forward. Now, as far as our automotive exposure is concerned, we managed here, of course, fourth quarter already the biggest exposure to automotive we have in HPM, but please recall that our -- we have an entire value chain, not only the compounds. So in the compounds going to the automotive industry, we saw already a stagnation and erosion in Q4, November and December especially, and we still see that in Q1. The earlier parts of the value chain, however, have compensated for that in Q4. And of course, we therefore consider our HPM business as one that might see profitability erosion in full year 2019, but not a massive one, a moderate one. And that is what we've baked into our guidance for full year. As far as Rhein Chemie is concerned, this is a heterogeneous business as well. And here we see the same weakness in China notably, but it was mitigated through our flame retardants business, and that's our assumption also for 2019. And as far as your statement on Rubber Chemicals is concerned, I mean, let's face it, this business has strategically been completely turned around. We've taken out massive costs in the last 2 to 3 years. Even though we have exposure on some antioxidants and accelerators to the tire industry, I personally assume, with everything that we've done over the last 2 years, that this business, despite headwinds in automotive industry, is going to grow 2019 because of the change in business model and the new end industries that we have opened up for these products. So here, I think you have to look at this business a little bit more differentiated. With this, I hand over to Michael on the cash flow restructuring items.

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Michael Pontzen, LANXESS Aktiengesellschaft - CFO & Member of the Board of Management [18]

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Andreas, with regards to the cash-outs, we give, in one slide of our deck, an overview of the part of the Chemtura synergies and the related cash-outs. And there you see that, for that topic, the peak was met in 2018. And in 2019 and '20, the numbers are expected to decline by EUR 10 million in '19 and another EUR 30 million in '20. The next element, which did have a rather high effect in '18 was the closure of Zárate, where we booked some EUR 70 million in exceptionals back in 2017, and we're facing the majority of the cash-outs in '17 and '18. Sure, there will be some cash-outs for it in '19 and '20, but the majority of these restructuring cash-outs should have been as well in 2018. That is the kind of guidance that we're giving that, in a nutshell then, the cash-outs for restructuring should come down in '19 and much further down the road than in '20.

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

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On this, we have to take further measures for macroeconomic turbulences, but this is what we then would communicate.

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Operator [20]

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Next question comes from the line of Patrick Rafaisz from UBS.

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Patrick Rafaisz, UBS Investment Bank, Research Division - Director and Chemical Research Analyst [21]

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Three questions, please. The first one, a follow-up on that trade deal in Engineering Materials. Can you explain a bit in more detail what that was all about and if that's something that might reoccur that we have to take into account in future modeling, not only in '19 but beyond? Second question on the news item flickering over the screens yesterday, your investments in ion exchange resins. Can you talk a bit about that? What your plans here are? What we should expect in terms of modeling? And lastly, the Saltigo inflection point you mentioned, you talked a bit about IFRS 15? Can you also talk about the underlying business? Why is it inflecting? What are the new contracts? I think it's -- it was all about fungicides, right, originally. And what do you expect for 2019?

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

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So Michael will address the trading topic. I will take the other 2. Michael?

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Michael Pontzen, LANXESS Aktiengesellschaft - CFO & Member of the Board of Management [23]

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Yes. So Patrick, there is not much more to say. It was a deal which were -- where we were dealing with some raw material. We had to take it through the top line and to the COGS, we were not able to net it. That is nothing we expect to have in the future. So therefore, there is not much more to say than that, yes? And we gave the guidance to tell everybody that the inflation of the top line is not driven by the organic or operational business but rather by the fact that we had that deal, yes? So -- but that's nothing spectacular and nothing -- yes -- but you shouldn't expect that to happen again.

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Patrick Rafaisz, UBS Investment Bank, Research Division - Director and Chemical Research Analyst [24]

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Okay. So what -- was that related to Rhein and supply issues and logistics issues?

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Michael Pontzen, LANXESS Aktiengesellschaft - CFO & Member of the Board of Management [25]

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No, no, no. That was another thing.

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Patrick Rafaisz, UBS Investment Bank, Research Division - Director and Chemical Research Analyst [26]

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Okay.

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Matthias Zachert, LANXESS Aktiengesellschaft - Chairman of the Board of Management & CEO [27]

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So then on Saltigo, that was what you referred to in terms of the contracts that we have mentioned. I cannot be company specific. I can simply say that the products we onboarded were products where a technology base is needed. And as we communicated earlier on, we are one of the custom manufacturers with the best technology base for fungicides and agrochemicals in Europe. And as such, we have been chosen. And this leads, of course, to incremental volumes on a very troughy volume level, and we've seen that kicking in November. And we see that, of course, now because these are not only quarterly contracts, these are yearly contracts, up to 3 years contracts. This is going to push volumes upward and profitability because fixed cost absorption happens in Saltigo. And therefore, we are confident that, despite tough macroeconomic environments in agro, we will do well in Saltigo. As far as LPT is concerned, I'm not sure what kind of press release you are referring to. We went out with some membrane communication a few weeks ago. And if there was something else -- ah, there was --

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Patrick Rafaisz, UBS Investment Bank, Research Division - Director and Chemical Research Analyst [28]

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There was...

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Matthias Zachert, LANXESS Aktiengesellschaft - Chairman of the Board of Management & CEO [29]

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There was a fair recently. And of course in fairs, you make a lot of comments on whatever you do, but fair communication is nothing that is now leading to a big statement on our side in this press conference or in this analyst call. If this would be big for the company, big for LPT, I would have [think] of that in my comments early on.

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Operator [30]

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The next question is from the line of Peter Spengler from DZ Bank.

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Peter Spengler, DZ Bank AG, Research Division - Analyst [31]

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Fortunately, only 1 question is left. The price decline of isocyanates lately should have a positive effect on your Engineering Materials business. Is it correct that the headwind in 2018 that you mentioned will become a tailwind in the first half of 2019?

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Matthias Zachert, LANXESS Aktiengesellschaft - Chairman of the Board of Management & CEO [32]

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To some extent, yes, your analysis is completely right, but now you have to look into the configuration of our entire business units. The biggest plant we have in Gastonia, and this is where the hot cast is being produced. The hot cast polyurethane business, as you know, is a niche business with worldwide market of around about $1 billion. So it's really niche markets. We have, in North America, significant market share. And therefore we depend, however, in this hot cast business notably from the monomer MDI, and that is still tight in North America. Worldwide, the polymeric MDI and the TDI, especially these 2 products, get long in Europe and Asia, price erosion happens. Solely the monomer MDI in North America is somewhat still tight. And therefore, we will have a better momentum on the raws for our business in '19. But as far as the big chunk of volume, which is produced in North America, we know that capacity expansions will come onstream in 2021. We would love to have that already earlier onstream, but we have to wait and see if an acceleration is happening.

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Operator [33]

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The last question comes from the line of Markus Mayer from Baader-Helvea.

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Markus Mayer, Baader-Helvea Equity Research - Lead Analyst of Chemicals [34]

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Three questions on my side thus far. The first be, again, on Saltigo. Could you give us some indication how you see the underlying ag business or the ag demand going into 2019? Recently you said -- or in the last calls, you said you expect an improvement there. Is this still the case? Second question on the other item in the cash flow, there's roughly EUR 60 million (inaudible) negative swing in the fourth quarter. Could you split this other line up, please? And lastly, you said that several business units you saw, in 2018, [decreases] in raw material costs and with this gross margins [period]. What kind of gross margin improvement, due to lower material costs, is baked in, in your full year guidance? Or is anything baked in?

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Matthias Zachert, LANXESS Aktiengesellschaft - Chairman of the Board of Management & CEO [35]

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So Michael will answer the Q4 cash flow swing. I will be very short on margin. We've given an absolute EBITDA guidance. We don't give -- and it was qualitative. We don't give -- we've never given gross margin guidance, and we'll not start doing this today. As far as Saltigo is concerned, I've been very crisp that we view Saltigo on the right track and will increase our volumes in 2019. Where the agro industry is going as such, in totality, we are the wrong person to talk to, we are the wrong company to talk to. You should talk to the pros, which are, of course, the agro companies themselves. Our view on agro industry is it's going to be still a modest environment, whilst we have done the appropriate measures to come out of the trough in our agro business and LANXESS. And that's the full answer. And with this, I hand over to Michael. Do your best.

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Michael Pontzen, LANXESS Aktiengesellschaft - CFO & Member of the Board of Management [36]

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Markus, like usual, we have 3 major elements in here. First of all, it's the bookings for restructuring and exceptional. We had more bookings in the Q4 2017 and less bookings in 2018, which do have an effect not only on the profitability before taxes but, as well, on the cash flow statement because when you book an exceptional or when you book certain provisions, they don't necessarily come with a cash-out the same moment. On the other hand, saying that, not only that we booked less than '17, we also had higher cash-outs for the bookings we had in the past. That's what I was referring to it earlier. And then we had a small effect from hedging as we, in 2017, still had a larger share of intercompany loans, which we were hedging, and that number came down. We had, last year in the Q4, a swing of U.S. dollar which went against us from a cash perspective. That is always a net effect because then you have more cash in the cash item, but you have a certain cash-out here in that line. So all in all, if you basically look from top to down, we basically generated an EBITDA on comparable level, we had some more cash-outs. One were driven by taxes, the other by higher restructuring spendings and, the third element, a little swing in the hedging.

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Operator [37]

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There are no further questions at this time. And I would like to hand back to André Simon for closing comments. Please go ahead.

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André Simon, [38]

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Yes. Thank you, everyone, for joining our call, and we will speak to our Q1 figures in May. Thank you very much.

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Operator [39]

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Ladies and gentlemen, this concludes the LANXESS conference call. Thank you for joining, and have a pleasant day. Goodbye.