LANXESS Aktiengesellschaft (LNXSF) CEO Matthias Zachert on Q1 2019 Results – Earnings Call Transcript

LANXESS Aktiengesellschaft (OTCPK:LNXSF) Q1 2019 Results Conference Call May 14, 2019 2:30 AM ET

Company Participants

Andre Simon – Investor Relations

Matthias Zachert – Chief Executive Officer

Michael Pontzen – Chief Financial Officer

Conference Call Participants

Thomas Wrigglesworth – Citi

Georgina Iwamoto – Goldman Sachs

Patrick Rafaisz – UBS

Martin Roediger – Kepler Cheuvreux

Andreas Heine – MainFirst

Laurence Alexander – Jefferies

Chetan Udeshi – JPMorgan

Knud Hinkel – Pareto Securities

Operator

Ladies and gentlemen, thank you for standing by. Welcome and thank you for joining this LANXESS Conference Call. I would now like to turn the conference over to Andre Simon, Head of Investor Relations. Please go ahead.

Andre Simon

Yeah, thank you very much Operator. Good morning to everybody from sunny Cologne and a warm welcome to our Q1 ’19 conference call from my end as well. As always I have, our CEO, Matthias Zachert; and our CFO, Michael Pontzen with me. Please take notice of our safe-harbor statements.

And with that, I am happy to hand over to Matthias for brief presentation and afterward as always the Q&A. Matthias go ahead please.

Matthias Zachert

Good morning ladies and gentlemen from sunny Cologne. I start the presentation with Slide Number 4, showing highlights and challenges of first quarter 2019. All-in-all, we delivered according to expectation and according to guidance, we hit Q1 EBITDA compared to previous year and even with a slight increase of two percentage points.

First time in history we reported the margin uplift to 15%. So the historic margins average has been left behind despite operating in challenging economic environments. Share buyback has been vastly advanced and we have by today nearly completed the first or the share buyback that we’ve announced and which we wanted to complete by end of the year. As far as segments are concerned, three out of four segments improved profitability versus previous year. Challenges, like you’ve seen with other peers, most of the companies have reported a decline in volumes due to the exposure that we have on automotive industry, we are no different. On top of that, we clean up certain sites, which we don’t consider as sustainable and good sites in the future and of course we’ve terminated also toning contracts that were taken on board by Chemtura, at literally no margin. So, this is, of course, impacting volume decline in the segment, but also, overall, I will address that in a moment.

Of course, we also mitigated the increase in freight and energy prices and despite all that, profitability is up. Let’s move to Slide Number 5, here we show the key KPIs for the company as far as EBITDA is concerned, clearly, showing resilience as far as margin is concerned and uptake of 20 basis points and EPS over proportionally has outgrown sales and EBITDA. As far as net financial debt is concerned, we have an increase driven a, by IFRS 16 of around about $130 million. And of course, we have increased net debt due to the share buyback programs.

Short glance on Slide Number 6 shows how we compare with our peers. And I think here after Q4 has already shown a good resilience. The Q1 which was definitely one of the toughest quarters, has clearly shown that we with a different setup in the portfolio have shown resilience and strength.

With this I hand over to Michael, to address segment reporting. Michael, take it to the next level.

Michael Pontzen

Thank you, Matthias. Good morning as well from my side. Looking into the segments you realize that three out of our four segments contributed positively to the development of the overall group. Starting with advance intermediate which posted a very strong quarter in a still weak ag market, both business unit improved EBITDA. At AII clearly investment and the debottlenecking in the past of couple of years are starting to pay off and in Saltigo we were reporting earlier this year or end of next year that we got new contracts which are now getting in place and improving profitability of Saltigo. Margin now was 19.5% at very attractive level.

Next segment is Specialty Additives, again here improvement of both EBITDA and margin despite the volume reduction there were three drivers of volume decline. One was the termination of polling agreement with relatively low margin which stands for the majority of the volume decline. Then obviously effects from site closures which we did in the past and the decline in the auto market which hit especially business unit Rhein Chemie. Synergies, pricing levels and currency supported the EBITDA and we’re posting now a margin of above 17% in that segment.

Next, chemicals the good news is chemicals is stabilizing, all business unit excluding leather with volume growth, IPG is as well stabilizing we proceeded our closure of the Jinshan site back in China in the first quarter as announced but leather remains a challenge. The Chrome activities at South Africa remains challenging we were again facing a strike in our mind and on top of it we still saw the weak auto market as well in the first quarter while profitability in leather was as well or again negatively impacted. Still NPP and IPG and LPTR performing nicely while overall EBITDA of the segment is further improving.

Last in the row is engineering materials, the only segment with a decline in the EBITDA in the first quarter which was driven by the exposure of HPM to the auto industry. We saw as said weak markets in auto in China and in Europe which led to a volume decline of 6% in that segment, but as the business units were able to keep prices up, margins are still at 17% which is a rather good level at that difficult market environment.

With that I hand over again back to Matthias.

Matthias Zachert

So I move to Page Number 9 and here we would like to inform that the supervisory board yesterday has decided to appoint Anno Bokowski most of you know him already he presented several times in our market day events in the last two years has been appointed as new Board Member in charge for the Additives Business Units. Anno has led the integration and the business unit ADD successfully, profits are up and more to come and he would basically enrich the Management Board with clear focus on downstream activities and therefore it’s I think further enhancement of our capabilities in the management board. Anno is in the industry since many, many years has more than 30 years of experience, he is a chemist from background and simply a great character we would have a lot of fun having him on the board as well.

The two business lines that look at putting their edifice, will now being upgraded into business units both our flagship business units with around about $1.5 billion in phase and high EBITDA contribution as far as putting the edifice is concerned and also look with round about $650 million in sales will be headed by a great guy Martin Ziever PLR headed by Cos Nuke. Two great characters good fun and great professionals. So this would be the new composition in edifice. And of course adding to this is Rheine Chemie headed by Philip Junger also the next generation is moving into the next line reporting to the management board.

So all and all I think a strong team and you will get to know all of them in due course. With this I move to Page Number 10, giving indication on our guidance. Here like we normally do with the first quarter of the year we give a range, the new range for 2019 will be $1 billion to $1.50 as far as EBITDA please concern, so this is now the qualitative guidance we provide to 2019.

We look at the economy and basically assume that 2019 is going to have a softer economic environment. We don’t see that things are deteriorating but we see clearly like you’re seeing with other peers that volumes are soft and some industries declining. We clearly assume that automotive sector continuing to be weak especially in Asia. Agro despite effect that Saltigo recovers but this rather self help and focused steering the industry per se we don’t see recovering yet.

China of course there has been initiatives taken by the government in order to ignite domestic demands. But so far we don’t see that China is back on growth track. If I look today into 2019 I think we’ve managed the challenging first quarter. The second quarter would be the toughest base if I look at second quarter today, I look at rather tough comparable base at best I clearly state that, the best we would at previous year level. My today’s assumption would be that we would be below Q2 previous year.

Q3 assumption is after we’ve made intensive business reviews in the last week that we would be around about Q3 last year was Q4 should be slightly above previous year level. Therefore on the guidance clearly we see a midpoint of our guidance today, if the economic environment remains as is we will be in the first half of our guidance if economic environment improves in the second half of this year we would be in the second half of the guidance. But the crystal ball is not in our hands and therefore we clearly today see us in midpoints of the given guidance.

With this ladies and gentlemen I open up the call for your questions. Please go ahead.

Question-and-Answer Session

Operator

Ladies and gentlemen at this time, we will begin the question and answer session. [Operator Instructions] The first question is from the line of Thomas Wrigglesworth with Citi. Please go ahead.

Thomas Wrigglesworth

Good morning gentlemen, thank you very much for your presentation. And just a couple of quick ones from me. Firstly, on the improvement year-over-year in Advance Intermediates, is that step up all really Saltigo? And, is that kind of type of improvement, something that we should now expect the rest of the year or is there a seasonality to Saltigo that we should think about?

Secondly, again give me, the mechanical, how much do you think the strike impacts was in performance chemicals? I just wondering what the underlying level of profitability is given some of the improvements, you know, since MPP and LPT?

And then lastly on engineering materials, I mean, you’ve obviously given a very clear picture there for the rest of the year, but just specifically in the nylons business, within that guidance do you see Q1 as the floor margins and profitability? And it should at least hold Q1 going forward. Thank you.

Matthias Zachert

Welcome, let me address one by one. As far as Advanced Intermediate was concerned, not everything is coming from Saltigo. So we always set for that the big business unit AII fundamentally mitigated and even overcompensated Saltigo in the past so AII did tremendously well over the last few years. And this continued in 2019. So, AII, the big ship did very well. And please take note of the fact we’ve highlighted in the last 12 months on the road, but also in conference calls that we made major debottlenecking investments, which gradually come through.

So AII did very well in Q1 and AII will continue to do very well throughout 2019. What changed of course, was that Saltigo no longer fail in terms of profitability, but basically stabilized and posted also improvements. And if you look into the momentum here, despite also AII facing some hiccups here and there as far as soft trading some industries are concerned, overcompensated this completely. So, both business units contributed well and you will see that AII the second advanced intermediate will have a good year 2019.

As far as seasonality in Saltigo is concerned, please take note of the fact that first half is always stronger with Saltigo, Q3, Q4 softer this has to do with the end industry, but all-in-all Saltigo will post an increase in profitability versus 2018. The same holds true for advanced industrial intermediates.

As far as the strike is concerned, the strike did not so much impact Q1. As a matter of fact, we lift from the inventory in South Africa and we could not pile up enough for the turnover of Q2. So I would rather see that low-single-digit million drop was cosy through the strike which however predominantly will hit Q2 and had less impact on Q1, we absorb idle cost, had to absorb idle cost in Q1, but as far as lack of turnover and margin is concerned that will hit Q2. As far as HPM is concerned please take a note of this fact that different peers we posted I think quite strong margins still, I would not say that the margin that we posted in our engineering material segments is lower, we are in the high teens. And I cannot predict all the – or I don’t want to even predict now the single margins for every quarter we normally don’t do that, but it will be clearly at higher levels than you’ve ever seen before in weakening economic environment and historic times we fell to single-digit and would see that engineering materials will remain at double-digit business. But of course eventually it has 45% exposure to the automotive industry and this industry remains sluggish according to our guidance. I hope this answers your questions. Thank you so much.

Thomas Wrigglesworth

Excellent. Thank you.

Matthias Zachert

Next question please.

Operator

And our next question is coming from the line of Georgina Iwamoto with Goldman Sachs.

Georgina Iwamoto

Hi. Good morning Matthias. Good morning Michael. And thanks for the presentation. I wanted to understand if you’ve been very clear that you’ve factored in sluggish end demand from the automotive industry. But I wanted to understand if your FY 2019 guidance and factors in the potential for the implementation of automotive tariff later in the year. And then I also wanted to get your thoughts and on whether year-to-date volumes and for the industry. Do you think that there is any chance that in Q1 there has actually seen – that we’ve actually have some pre buying ahead of and the deadline for the US, China trade discussions on Friday last week. And then you have kind of supported demand. And then just generally versus how you expect to be year to develop and it sounds like potentially you’ve been kind of news over the weekend US-China and could have been a bit, I guess disappointing and versus your expectations but yet you’re still able to give this very narrow range for stability. So, I’m just curious why you’re not finding a little bit more up beat. Thanks very much.

Matthias Zachert

Well, Georgina thank you for all your questions. Very bluntly I think it would be – it would be, we cannot factor in something that was just decided on Friday in our guidance and where I think nobody knows what kind of implications this has on the worldwide economy and from regions specifically. So this relates to your first question as far as auto tariffs are concerns. In the outset of 2019, we were always humble on the economic outlook and therefore we’ve never factored in a microeconomic improvements, so we are humble in our economic environment. But what auto tariffs and counter auto -or counter tariff measures will lead to we are not here to make the call on this. What I clearly would like to stress we remain humble, we focus on our business, we see that advance intermediate is definitely extremely resilient and will be in a position to do well in 2019. We think that the Specialty Additives is positioned well for 2019 through self help. We clean up the barn. We closed plants that are not needed. We terminate unprofitable contracts so also in Specialty Additives despite the exposure to Auto we think Additives will do well.

Performance Chemicals I think everything that we are doing here is showing a good progress. Engineering materials we are humble because we do have automotive exposure but I think we’ve addressed this reasonably well. What tariffs are leading to we would see and therefore we don’t factor in domestic improvement in China which might come from the stimuli but we also don’t factor in collapse of the world’s economy.

As far as buying is concerned we are not seeing in March for instance, major re-jump in volumes. We haven’t seen a upwards development in order pattern from our customers. And therefore I cannot stress that March was abnormal. We also haven’t seen that April was abnormal, it was normal trading. But again we haven’t seen a major revamp in volumes anywhere in the world. And as far as US China implications are concerned I can give answer that with giving clarity in the first question.

We remain humble and I think everybody is well advised to remain humble at this point in time. Focus on the business that’s what we are doing and I think in Q1 we’ve proven that business is what we do well and we manage that appropriately and especially in comparison with peers in the industry.

Georgina Iwamoto

Yeah that’s great thank you very much.

Matthias Zachert

Next question please.

Operator

Next question is from the line of Patrick Rafaisz with UBS. Please go ahead.

Patrick Rafaisz

Thanks good morning everyone. And thanks for taking my three questions, the first one and just on the following agreement impacts, assuming that there was about half of the volume declines and how should we model that for the next three quarters. Would you say similar level of impact until the base runs out? And then secondly the quick one on IFRS 16 as you have guided $35 million impact for the full year, and does it make sense to break that down pro rata for the quarter?

And then lastly at the Q4 conference call you talked about the monthly performance of China, with volumes declining for several months in a row which was unusual compared to previous volatility so this continues into Q2? Thank you.

Matthias Zachert

Patrick I will take first and third question, Michael will take number two. So as far as volume is concerned will it continue for the remaining quarters of the year? The contracts we terminated basically by end of last year, therefore they started vanishing or they reduced volumes in part of 2019 first quarter and of course this will continue in second, third and fourth quarter. And this would be of course as it were as these were contracts which were literally low margins, so with literally no margin and low-single-digits. It had always been a dilutive in fact it has always been dilutive to the safe base and earning space and therefore that will continue in course of 2019. But of course, please take note of the facts, we’ve also closed plans last year and that of course will also continue. But all-in-all this will be positive to growth see this will be positive to a margin and it will clean the base further as we have promised for the segments.

As far as China’s concerned, we saw that in Jan and Feb volume continues to decline March, we saw after Chinese New Year that margin that volumes started to creep up again, but on a very moderate basis. So we see that China so far in March and April has stabilized and slightly improved. But of course, we have to see if this is going to continue, automotive was still very, very sluggish. But of course, Chinese economy is more than automotive industry and outside of the automotive industry we see the China is relatively stable.

Mike will address IFRS.

Michael Pontzen

Hi, Patrick. Yeah, with regards to IFRS 16 indeed, the around $35 million you can divide pro rata over the different quarters. And basically over the segments, including obviously reconciliation, not only the operational segments, but as well, the Recon segment. Matthias?

Matthias Zachert

Okay, good. Perfect.

Patrick Rafaisz

Great. Thank you. Very helpful. Thank you.

Operator

The next question is from the line of Martin Roediger with Kepler Cheuvreux. Please go ahead.

Martin Roediger

Yes. Thanks for, good morning and thanks for taking my three questions. And I started with the cash flow statements. The, in your quarterly report, there was a cash outflow for financial assets of €169 million in Q1. And can you explain what is what? Second question, there was news yesterday that the CDU politician Klaus Schuler will move to LANXESS as of 1st, of July, becoming a representative of the management board in political affairs. Can you explain why lobbying is so important for LANXESS?

And the final question is on the Slide 14 in your hand out in your presentation, you said yet higher exceptional due to M&A projects. Just a clarification, is that because you had to pay for some investment bankers for the work either looking for acquisition targets or looking for potential partners who could buy some assets from you? Thanks.

Matthias Zachert

Well Michael will address cash flow, I will address the other two questions that you’ve mentioned and I start with M&A. We’re continuously in portfolio alignment analysis. The one thing I would like to make clear however, we don’t need investment bankers to provide targets to us this is something that we do internally. But as far as of course due diligence work is concerned lawyers work is concerned et cetera. We have lawyers, we have tax experts and we do also expert sessions with professionals knowing certain businesses products in order to understand better our targets and to cross check the second, third, fourth opinions on targets that we are analyzing. So this is ongoing activities and we have done that in the past, we would do that in the future, when we do a transaction, we normally are very, very well perfect and as I indicated portfolio management is a scene that we have undergone over the last few years and we consider also going forward. So this addresses question number three.

As far as your second question is concerned LANXESS always had a representative for political affairs and we retired the senior manager who had this job before who was potentially not as prominent as Klaus Schuler but that shows you that top notch people are joining our company because they think this is a great company to work for. And with this joins 15,400 employees that are energized and enthused as I’m sure Klaus Schuler is going to be. And then Michael will address cash flow. Michael?

Michael Pontzen

Thanks Matthias. Martin with regard to the financial outflow, as you know we receive the proceed from the sale of our on sale and as soon as we put the money into for example investments with a duration above 90 days these are then financial assets and have to be posted accordingly as cash outflow from our liquidity and that’s the reason behind it.

Patrick Rafaisz

Thank you.

Operator

The next question is from the line of [indiscernible] with Morgan Stanley. Please go ahead.

Unidentified Analyst

Good morning. Just two quick questions from me. Firstly just on the bromine markets obviously we’ve seen that pricing has been quite strong for some time now. And it has continued into this year. Could you just provide a little bit more color around what’s driving that pricing and whether or not we should expect some normalization in the second half. And then just my second question, I mean you’ve obviously been very clear around the weakness in autos in China. But could you provide some an update on end markets what underlying demand is doing on the other end markets and also geographically. Thanks.

Unidentified Company Representative

Let me address both of these questions. So as far as bromine is concerned I would like to make the following statement, we see China construction markets and thus also electronic markets modest so volume increased on the flame retardant side or downstream products has been okay but not strong. So compared to previous year, it was slightly softer. The question that you have addressed as far as pricing is concern on bromine raw material which is an indicator but you shouldn’t read too much into this, but of course if bromine prices are up in general this is positive. We’ve alluded to the fact that reserves, bromine reserves in China are more and more deployed, they are still there but at lower levels. And this has lead in the last two years to an increase in regional prices in ager continuously. Different to the past we’ve now seen in Q2 that prices which tends to go down in Q2 and Q3 on the seasonal basis remained firm which is a positive. And that simply has to do with lack of supply and of course when supply is tight and demand is there you normally have stabilization on pricing or even an increase in pricing. So this is the reason why the bromine prices currently are rather at 4050 level which is of course to historic terms the good price.

Now as far as end markets are concerned I think I’ve given indications on the industries and our outlook so everything there and communicated as far as regions are concerned, we haven’t given any indications so let me be very crisp. We see that, we consider that Asia will be modestly up in terms of volume, we see a kind of stagnation in Europe. We see a softening in growth in North America, but here no longer volume increases of 3% to 4% like in 2018 that could be in the area of 1 to 2 percentage points.

Latin America driven by Brazil should be up more than 2018 but of course this is not a major implication at group level now that rubber is gone. And that’s how we look at the regions. I hope this helps.

Unidentified Analyst

Okay thank you.

Matthias Zachert

Next question please?

Operator

Next question from the line of Andreas Heine with MainFirst. Please go ahead.

Andreas Heine

Most of my questions have been answered, so I think there’s only three very minor ones. You outlines time already that Q2 indeed has high comps looking sequentially usually Q2 is seasonally stronger is that what you envisaged this year as well? Secondly within the Additives could you outline the lubricant additives so you haven’t stressed if that is dependent on the automotive industry I would assume that then the volume of this plant was rather resilient maybe you can outline on this and last one inorganic pigments maybe also some flesh on how the trends are here probably quite some positive FX tailwind to get the EBITDA on the group level but what is the underlying demand in the construction industry for these products? Thank you.

Matthias Zachert

Yeah on Q2 today I wouldn’t say that Q2 likely will be the strongest quarter. We have of course here difference to last year situation that we have lower billing base in April due to Easter holidays so that could be an implication for Q2. But also you should see that Q2 last year was the hottest quarter in 2018 after June basically volumes went softer. And that’s the reason why Q2 would be the toughest comp for that very reason we are cautious and at best we would be at previous year level. It could well be that we would be in Q2 at the level of profitability that we posted in Q1.

And so that’s on the first question as far as the lep is concerned. The $650 million of sales roundabouts that we have in lubricant additives, we indicated that roundabout 100, 2030 have exposure to automotive, the rest are industrial lub adds. look at. The industrial lub adds do pretty well, they are stable and growing. As far as automotive lubricants are concerned we see the volume decline that you see in automotive, we have the reduction in volume, but of course, it’s compared to the entire lub adds at just a portion, but here we have clearly impacts on from the automotive customers.

Now, as far as IPG is concerned, the markets are still tough. If you look at the company who basically has majority wise deton dioxide [indiscernible] in the U.S., but they also have inorganic pigments, they posted the decline profitability of roughly 60%. So, I cannot state that this is the same with us, we took over it last year. Markets are still tough, but we stabilized and slightly consider an improvement in this business unit on a full year basis. And therefore, many measures that we have taken in 2018 should lead to stabilization or improvement. While overall the business unit is well positioned in the current consolidation that happens in the pigments, Inorganic Pigments market. So overall, we think that this would be a healthy consolidation leading to the stronger players that emerge out of this consolidation.

Andreas Heine

Thanks.

Operator

Next question is from the line of [indiscernible] with Deutsche Bank.

Unidentified Analyst

Good morning team. Thanks for having me on and just one question actually, from my side. Could you just perhaps talk through the rationale behind the reorganization of Specialty Additives? Is there perhaps anything that has changed in the way that you look at any of the business lines? Thank you very much.

Matthias Zachert

No not at all. If you look at to the management board, it’s, we have in the past, I think high stability in the management board, if you look at the age structure. In the next 12 months, there would be a normal retiring of one board member and this is a pre preparations to have stability in the management board as far as competencies are concerned. So this is well orchestrated succession planning and that’s basically all.

Michael who’s still below 50 will not be retired. Hence I will also still hang around for some time. I hope this answers the question.

Unidentified Analyst

Thank you very much.

Operator

Next question is from Laurence Alexander with Jefferies.

Laurence Alexander

Good morning on bromine, does the end of the year tolling arrangements improve the ability for that business to pass through forward 40 and elemental bromine prices, I guess historically since you’ve struggled on that front?

And secondly, can you give an update on the process for evaluating or progressing on the team extraction in North America? And then thirdly can you speak to volume trends and liquid purification?

Matthias Zachert

Yeah, I take them one by one. As far as your first question is concerned the tolling contracts that we eliminated, were not in the bromine area that was basically related to lub adds. So we communicated plant closures and we had plants where Contour in the past divested businesses and basically agreed on that already in the due diligence basically agreed that they would take on board on the request of the buyer tolling arrangements, this way at that point in time favorable for the negotiation but eventually we are of course a compromise on filling the sites whilst our conclusion was it would have been better to just terminate and close the sites. And that’s basically what we are executing, I have alluded to the fact that Contour had too many production sites for the amount of sales and we reconfigured the production network and we are doing I would say quite well on this in terms of – as far as time is concerned and as far as unlocking the value is concerned. So this is something that we simply execute.

As far as your second question is concern lithium, the project is doing well we monitor it, we have test pilot plan will be finished according to plans so this would be most likely beginning of Q3 than we will see how the extraction work works, what purification grades will come out everything that we are seeing right now is running according to plan. But we will report on this of course in due course once we see the results and it’s important to look at the extraction results and as far as the pilot plant is concerned we think this will be up and running, but then of course the extraction and the purification grades of lithium are important. They determine eventually the price you can get in the market.

As far as LPQ is concern, volumes are very good we see that the market is more and more leading the resins that we produce as we think that this would clearly take further uplifts in the years to come and therefore we have already take the decision to debottleneck our limited plant in Liberkosen because volumes here are tight and for that reason we are also quite focused and pronounced on pricing initiative here. So getting volumes and pricing up with definitely be an important thing for the resins business going forward. I hope this answers all your questions.

Laurence Alexander

Perfect. Thank you.

Matthias Zachert

Most welcome. Any questions next.

Operator

Next question is from David [indiscernible] from JPMorgan.

Chetan Udeshi

Hi, Chetan Udeshi from JPMorgan actually. Three questions on my side. Firstly is just coming back to the previous discussion on the exceptional items and Matthias has said that question M&A is ongoing team. So, I would think those costs associated with M&A which will be an ongoing team, and should maybe even classify as exceptional question first question. Second question was, you had a slide where you compared the EBITDA performance of LANXESS versus the peers and the industry. I’m curious if you guys do the same sort of benchmarking on free cash flow as well not on Q1 of course but just in general versus your peers in the industry and how do you feel in terms of LANXESS getting maybe up to the average of the industry if not better in the future and the last question is we had this unfortunate explosion in China at an industrial park a couple of months back. Have you guys seen any impact from that on your business because it seem there were a number of pigments and die companies who operated in that park? Thank you.

Matthias Zachert

Yeah Michael will address the exceptional question I will take second and third one. As far as benchmarking is concerned we do benchmark ourselves, I think everybody I assume everybody does that. We do this on an ongoing basis not only as overall company but also on business units and even on product level in order to see if we are doing well or where we can improve putting a mirror on front of your face always helps to accelerate further.

So cash flow however is one way of cost you have to look at the company specifics, we know that cash flow in ’18 was mitigated and we’ve guided already at the outset of the acquisition of Contour that ’19 will be impacted as well due to restructuring that we undergo due to clean up that we undergo and therefore that has been always part of our communication and therefore ’18, ’19 are soft on cash flow generation.

Once we set our targets that we communicated for ’21 that from 2021 onwards we should then come into higher level of profitability, and also higher cash conversion that we shown in the past year as well. So that’s clearly what we do but of course we would like to change the company and if you want to change the company, if you want to restructure, if you want to focus on innovation and structural improvements it first of all takes money to make sure that you unlock value and cash afterwards and this is what we have communicated, this is what we are executing on.

China – yes it was a dreadful accident that happened there with fatalities horrible. And of course this has disrupted many supply chains. What however we see is that the Chinese government have taken a clear stand not only on this particular chemical park, China went out and rigorously investigated all plants in China producing chemicals so not only in this plant where the incident happened but basically tightening controls in all chemical industry parks.

And we don’t know what kind of impact this is going to have but we are very focused on making sure that we get our supply that we need. And we are fortunate to put highest standards always into our plans so that we don’t consider that this would be a negative for us, this could eventually be even a positive all-in-all but we monitor this very-very closely. Michael?

Michael Pontzen

Yeah with regard to the exceptionals we don’t leave the impression that the majority of the exceptional were spent for M&A. So the majority was spent for adjusting our production network and for digitization initiatives and that are clearly exceptional. And the very minor part goes to M&A project which are on a case by case basis as well and therefore regarded as exceptional.

Chetan Udeshi

Thank you.

Matthias Zachert

Well answered. Next question please.

Operator

Next question is from the line of Knud Hinkel with Pareto Securities.

Knud Hinkel

Good morning, everybody. Reassuring to know that you will still be around for some time. So thank you for that. One question to be honest. You said in your market outlook, that the agro recovery is not yet visible. My question would be, do you think this is only postponed until later in the year or will not occur at all? And second question related to this what is baked into your guidance with regard to that topic? Thanks.

Matthias Zachert

Well on your first question agro cycles is what it is. I cannot predict the agro cycle. We will change our tonality on agro once our end customers change their tonality. And here by and large agro commentary is still on a soft notes.

On personal perspective, I have seen the agro industry already when I started my professional career in [indiscernible], where [indiscernible] was heading a company called Agarvo. And here the one thing I can tell you, agro underlying wise goes up. But it is cyclical it has a different cycle than the chemical industry. And when it goes up, nobody knows. But when it goes up, it goes up. And here clearly today we are trough levels, and this will change. When it changed, it’s not our job to make the call on this.

As far as our guidance is concerned, we factor into our guidance, the increase in profitability for Saltigo because we have underlying contracts that basically give us comfort. We don’t factor in improvement in the agro cycle.

Knud Hinkel

Okay, thanks.

Matthias Zachert

Most welcome. Next question please.

Operator

We have a follow-up question from Georgina Iwamoto, please go ahead.

Georgina Iwamoto

Thank you for taking my follow-up question. Just noting that your share prices, nearly back to the levels where you announced the share buyback at the beginning of the year. Just wondering if you think that LANXESS shares still like good investment or if you have other priorities for the balance sheet? Thanks.

Matthias Zachert

Well Georgina for the time being we have announced one share buyback program and that’s basically what has been announced, there’s no further announcement on this. We look at resource allocation on an ongoing basis. We know that a shared buyback per se are one instrument of various. Share buybacks don’t structurally change the company for the future, but they have to be considered as one instrument in resource allocation. And this has been like this in the past and this will be for us the consideration going forward.

Georgina Iwamoto

Very clear. Thank you Matthias.

Matthias Zachert

You’re most welcome.

Matthias Zachert

If we have no further questions, I thank you for your participation. I clearly would like to remember all of you that on the 16 June, we are having the 10K run for those of you that would rather like to participate to 5K please do that, the brave heart can do the half marathon. So who ever would like to participate to energizing running by LANXESS feel free to call Oliver, André or the Investor Relations team. The entire management board will participate to this run, it would be for charity events so high contribution of runners is welcome. I wish you all the best, we will see us on the road and thank you for participating today. All the best to you, bye, bye.

Operator

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