Ladies and gentlemen, thank you for standing by. Welcome, and thank you for joining the Lanxess conference call. I would now like to turn the conference over to André Wiemann, Head of Investor Relations. Please go ahead.
Yeah. Thank you very much, Michaela. Good morning to everybody from sunny Cologne, and a warm welcome to our Q1 2019 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 statement. With that, I am happy to hand over to Matthias for a brief presentation, and afterwards, as always, the Q&A. Matthias, go ahead, please.
Good morning, ladies and gentlemen, from a sunny Cologne. I start the presentation with slide number four, 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 a margin uplift to 15%. The historic margins average have been left behind, despite operating in challenging economic environments. Share buyback has been vastly advanced, and we have, by today, nearly completed the first of the share buyback that we have announced and which we want 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 have 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 do not consider as sustainable and good sites in the future. Of course, we have terminated also tolling contracts that were taken on board by Chemtura at literally no margin. 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, despite all that, profitability is up. Let us move to slide number five. Here we show the key KPIs for the company as far as EBITDA is concerned. Clearly, showing resilience as far as margin is concerned, an uptick of 20 basis points. 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 EUR 130 million. Of course, we have increased net debt due to the share buyback program. A short glance on slide number 6 shows how we compare with our peers. I think here, after Q4 has already shown a good resilience, 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.
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 Advanced Intermediates, which posted a very strong quarter in a still weak ag market. Both business unit improved EBITDA. At AII, clearly investments in the debottlenecking in the past couple of years are starting to pay off. 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 with 19.5% at very attractive levels. Next segment is Specialty Additives. Again, here, improvement both of EBITDA and margin, despite the volume reduction. There were three drivers for the volume decline.
One was the termination of tolling agreements with relatively low margin, which stands for the majority of the volume decline. Obviously, effects from site closures, which we did in the past, and a 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, Leather remains a challenge. The chrome activities in South Africa remains challenging.
We were again facing a strike in our mine. On top of it, we still saw the weak auto market as well in the first quarter, why profitability in Leather was as well, or again, negatively impacted.
MPP and IPG and LPT are 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 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 Europe, which led to a volume decline of 6% in that segment. 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.
I move to page number nine, and here we would like to inform that the supervisory board yesterday has decided to appoint Anno Borkowsky. Most of you know him already. He presented several times in our capital market day events in the last few 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, he will basically enrich the management boards with clear focus on downstream activities, therefore it's, I think, further enhancement of our capabilities in the management boards. Anno is in the industry since many, many years, has more than 30 years of experience as a chemist from background and simply a great character. We will have a lot of fun having him on the board as well.
The two business lines, Lubricant Additives and Polymer Additives, will now be upgraded into business units. Both are flagship business units with roundabout EUR 1.5 billion in sales and high EBITDA contribution as far as Polymer Additives is concerned. Lubricant Additives with roundabout EUR 650 million in sales, will be headed by a great guy, Martin Saewe. PLR, headed by Karsten Job, two great characters, good fun and great professionals. This would be the new composition in Additives. Of course, adding to this is Rhein Chemie, headed by Philipp Junge. Also the next generation is moving into the next line reporting to the management board. All in 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 EUR 1 billion to EUR 1,000,000,050 as far as EBITDA pre is concerned. This is now the quantitative 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. We see clearly, like you've seen with other peers, that volumes are soft and in some industries declining. We clearly assume that automotive sector is continuing to be weak, especially in Asia. Agro, despite the fact that Saltigo recovers, this is rather self-help and focused steering. The industry per se, we don't see recovering yet. China, of course, there have been initiatives taken by the government in order to ignite domestic demands.
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. Second quarter will be the toughest base. If I look at second quarter today, I look at a rather tough comparable base. At best, I clearly state that, at best, we will be 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 two weeks, that we would be roundabout Q3 last year, whilst Q4 should be slightly above previous year level. On the guidance, clearly we see as midpoint of our guidance today. If the economic environment remains as is, we would 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. The crystal ball is not in our hands and therefore we clearly today see us in midpoint of the given guidance. With this, ladies and gentlemen, I open up the call for your questions. Please go ahead.
Ladies and gentlemen, at this time, we will begin the question and answer session. Anyone who wishes to ask a question may press zero followed by one on their touchtone telephone. If you wish to remove yourself from the question queue, you may press zero followed by two. If you're using speaker equipment today, please lift the handset before making your selection. Anyone who has a question may press zero followed by one at this time. One moment for the first question, please. The first question is from the line of Thomas Wrigglesworth with Citi. Please go ahead.
Good morning, gentlemen. Thank you very much for your presentation. Just a couple of quick ones from me. Firstly, on the improvement year-over-year in Advanced Intermediates, is that step up all really Saltigo? Is that type of improvement something that we should now expect through the rest of the year? Or is there a seasonality to Saltigo that we should think about? Secondly, again, forgive me, mechanical. How much do you think the strike impact was in Performance Chemicals? I'm just wondering what the underlying level of profitability is, given some of the improvements you note in MPP and LPT. Lastly, on Engineering Materials, you've obviously given a very clear picture there for the rest of the year. Just specifically in the nylons business, within that guidance, do you see Q1 as the floor margins and profitability?
It should at least hold Q1 going forwards. Thank you.
Well, Tom, let me address one by one. As far as Advanced Intermediates is concerned, not everything is coming from Saltigo. We always said that the big business unit, AII, fundamentally mitigated and even overcompensated Saltigo in the past. AII did tremendously well over the last few years, and this continued in 2019. AII, the big ship, did very well. Please take note of the fact we've highlighted in the last 12 months on the roads, but also on conference calls that we made major debottlenecking investments, which gradually come through. 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 fell in terms of profitability, but basically stabilized and posted also improvements.
If you look into the momentum here, despite also AII facing some hiccups here and there as far as soft trading in some industries are concerned, overcompensated this completely. Both business units contributed well, and you will see that AII, the segments Advanced Intermediates, 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. All in all, Saltigo will post an increase in profitability versus 2018. The same holds true for Advanced Intermediates. As far as the strike is concerned, the strike did not so much impact Q1. As a matter of fact, we lived from the inventories in South Africa, and we could not pile up enough for the turnover of Q2.
I would rather see that low single-digit EUR million drop was caused through the strike, which, however, predominantly will hit Q2 and had less impact on Q1. We had to absorb idle costs 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 note of the fact that different to peers, we posted, I think, quite strong margins still. I would not say that the margin that we've posted in our Engineering Materials segment is low. We are in the high teens. I cannot predict now, 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 environments.
In historic times, we fell to single digits. You will see that Engineering Materials will remain a double-digit business. 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.
Thank you so much.
Excellent. Thank you.
Next question, please.
The next question is from the line of Georgina Iwamoto with Goldman Sachs.
Hi, good morning, Matthias. Good morning, Michael. Thanks for the presentation. I wanted to understand if you've been very clear that you factored in sluggish demand from the automotive industry. I wanted to understand if your FY 2019 guidance factors in the potential for the implementation of automotive tariffs later in the year. I also wanted to get your thoughts on whether year-to-date volumes for the industry, do you think that there's any chance that in Q1, we've actually had some pre-buying ahead of the deadline for the U.S.-China trade discussions on Friday last week. That may have supported demand. Just generally, versus how you expected the year to develop, it sounds like potentially the news over the weekend, U.S., China could have been a bit disappointing versus your expectations, but yet you're still able to give this very narrow range for stability.
I'm just curious why you're not sounding a little bit more upbeat. Thanks very much.
Well, Georgina, thank you for all your questions. Very bluntly, I think we cannot factor in something that was just decided on Friday in our guidance and where I think nobody knows what kind of implication this has on the worldwide economy and on regions specifically. This relates to your first question as far as auto tariffs are concerned. In the outset of 2019, we were always humble on the economic outlook, and therefore we've never factored in a macroeconomic improvement. We are humble in our economic environments. 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 Advanced Intermediates is definitely extremely resilient and will be in a position to do well in 2019.
We think that Specialty Additives is positioned well for 2019 through self-help. We clean up the barn. We close plants that are not needed. We terminate unprofitable contracts. Also in Specialty Additives, despite having 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 have addressed this reasonably well. What tariffs are leading to, we will 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 a collapse of the world's economy. As far as pre-buying is concerned, we are not seeing in March, for instance, major re-jump in volumes.
We haven't seen an awkward 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. Again, we haven't seen a major re-jump in volumes anywhere in the world. As far as U.S., China implications are concerned, I think I've answered 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. I think in Q1 we've proven that business is what we do well, and we manage that appropriately, especially in comparison with peers in the industry.
Yep, that's great. Thank you very much.
Next question, please.
Next question is from the line of Patrick Rafaisz with UBS. Please go ahead.
Thanks. Good morning, everyone, and thanks for taking my three questions. The first one, just on the tolling agreement impact. Assuming that that was about half of the volume declines, how should we model that for the next three quarters? Secondly, a quick one on IFRS 16. As you already guided EUR 35 million impact for the full year, does it make sense to break that down pro rata for the quarters? 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. Has this continued into Q2? Thank you.
Patrick, I will take first and third question. Michael will take number two. 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, and therefore they started vanishing or they reduced volumes in course of 2019 first quarter and of course this will continue in second, third and fourth quarter. It will be, of course, as these were contracts which with literally no margins. Volumes sales with literally no margins, I mean low single digits. It has always been dilutive to the sales base and earnings base, and therefore that will continue in course of 2019. Of course, please take note of the fact we've also closed plants last year, and that, of course, will also continue.
All in all, this will be positive to ROCE, this will be positive to the margin, and it will clean the base further as we have promised for the segments. As far as China is concerned, we saw that in Jan and Feb, volumes continued to decline. March, we saw after Chinese New Year that volumes started to creep up again, but on a very moderate basis. We see that China so far in March and April has stabilized and slightly improved. Of course, we have to see if this is going to continue. Automotive was still very, very sluggish. Of course, Chinese economy is more than automotive industry. Outside of the automotive industry, we see that China is relatively stable. Michael will address IFRS.
Hey, Patrick. With regards to IFRS 16, indeed, the around EUR 35 million you can divide pro rata over the different quarters and basically over the segments, including obviously reconciliation. Not only the operational segment, but as well the recon segment. Matthias?
Done.
Okay. Good. Patrick.
We're done.
Thank you. Very helpful. Thank you.
The next question is from the line of Martin Roediger with Kepler Cheuvreux. Please go ahead.
Yes, thanks for Good morning, and thanks for taking my three questions. I'll start with the cash flow statement. In your quarterly report, there is a cash outflow for financial assets of EUR 169 million in Q1. Can you explain what you have bought? Second question, there was news out yesterday that the CDU politician, Klaus Schüler, will move to Lanxess as of 1st of July, becoming a representative of Lanxess Management Board in political affairs. Can you explain why lobbying is so important for Lanxess? The final question is, on the slide 14 in your handout, in your presentation, you said you had higher exceptionals due to M&A projects. Just a clarification, is that because you had to pay for some investment bankers for their work, either looking for acquisition targets or looking for potential partners who could buy some assets from you? Thanks.
Well, Michael will address cash flow. I will address the other two questions that you've mentioned, and I'll start with M&A. We are continuously in portfolio alignment and 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. As far as 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 and have second, third, fourth opinions on targets that we are analyzing. This is ongoing activities, and we have done that in the past. We will do that in the future. When we do transactions, we normally are very, very well prepared.
As I indicated, portfolio management is a theme that we have undergone over the last few years and will consider also going forward. This addresses question number three. As far as your second question is concerned, Lanxess always had a representative for political affairs, and we retired a senior manager who had this job before, who was potentially not as prominent as Klaus Schüler, but that shows you that top-notch people are joining our company because they think that this is a great company to work for. With this, he joins 15,400 employees that are as energized and infused as I'm sure Klaus Schüler is going to be. Then Michael will address cash flow. Michael.
Thanks, Matthias. Martin, with regards to the financial outflow, as you know, we received the proceeds from the sale of ARLANXEO. 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, that is the reason behind.
Thank you.
The next question is from the line of Alexandra Wilson-Elizondo with Morgan Stanley. Please go ahead.
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? My second question: You've obviously been very clear around the weakness in autos in China, but could you provide an update on end markets, what underlying demand is doing on the other end markets, and also geographically? Thanks.
Yes. Let me address both of these questions. 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. Volume increase on the flame retardant sides or downstream products has been okay, but not strong. Compared to previous year, it was slightly softer. The question that you've addressed as far as pricing is concerned on bromine raw materials, which is an indicator, but you shouldn't read too much into this. Of course, if bromine prices are up, in general, this is positive. We have alluded to the fact that bromine reserves in China are more and more deployed. They are still there, but at lower levels. This has led, in the last two years, to an increase in regional prices in Asia continuously.
Different to the past, we have now seen in Q2 that prices, which tend to go down in Q2 and Q3 on a seasonal basis, remained firm, which is a positive. That simply has to do with a lack of supply. Of course, when supply is tight and demand is there, you normally have a stabilization on pricing or even an increase in pricing. This is the reason why the bromine prices currently are rather at the 4,050 level, which is of course, to historic terms, a good price. As far as end markets are concerned, I think I've given indications on the industries in our outlook, everything is there and communicated. As far as regions are concerned, we haven't given any indication, let me be very crisp. 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. 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. Of course, this has not a major implication at group level now that rubber is gone. That's how we look at the regions. I hope this helps.
Great. Thank you.
Next question, please.
Next question is from the line of Andreas Heine with MainFirst. Please go ahead.
Actually, most questions have been answered, starting with only three very minor ones. You outlined already that Q2 indeed has high comms. Looking sequentially, usually Q2 is seasonally stronger. Is that what you envisage this year as well? Secondly, within the Additives, could you outline the Lubricant Additives? You haven't stressed that that is dependent on the automotive industry. I would assume that then the volume of this part was rather resilient. Maybe you can outline on this. The last one, Inorganic Pigments, maybe also some flash on how the trends are here. Probably quite some positive FX tailwind to get the EBITDA on a good level. What is the underlying demand in the construction industry for these products? Thank you.
Yeah. On Q2, today I wouldn't say that Q2 2019 would be the strongest quarter. We have, of course, here a different to last year situation that we have lower billing days in April due to the Easter holiday, so that would be an implication for Q2. You should see that Q2 last year was the hottest quarter in 2018. After June, basically, volumes went softer. That's the reason why Q2 will be the toughest comp. For that very reason, we are cautious and at best, we will be at previous year level. It could well be that we will be in Q2 at the level of profitability that we posted in Q1. That's on the first question.
As far as the lap is concerned, in the EUR 650 million of sales round about that we have in lubricants additives, we indicated that round about 120, 130 have exposure to automotive. The rest are industrial lube adds. The industrial lube 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. Here we have a reduction in volume. Of course, it's compared to the entire lube adds, just a portion. Here we have clearly impacts from the automotive customers. As far as IPG is concerned, the markets are still tough. If you look at the company who basically has majority-wise titanium dioxide, Venator in the U.S., but they also have Inorganic Pigments. They posted a decline in profitability of roughly 60%.
I cannot state that this is the same with us. We took our hit last year. Markets are still tough, but we've stabilized and slightly consider an improvement in this business unit on a full year basis. Many measures that we have taken in 2018 should lead to a stabilization or improvements, whilst overall the business unit is well-positioned in the current consolidation that happens in the Inorganic Pigments market. Overall, we think that this would be a healthy consolidation leading to stronger players that emerge out of this consolidation.
Thanks.
Most welcome. Next question, please.
Next question is from the line of Robin Treger with Deutsche Bank.
Morning, team. Thanks for having me on. 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.
No, not at all. If you look into the management boards, we have in the past had, I think, highest 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, this is a pre-preparation to have stability in the management board as far as competencies are concerned. This is a well-orchestrated succession planning. That's basically all. Michael, who is still below 50, will not be retired. I will also still hang around for some time. I hope this answers the question.
Thank you very much.
Next question is from Laurence Alexander with Jefferies.
Good morning. On bromine, does the end of the tolling arrangements improve the ability for that business to pass through volatility in elemental bromine prices? I guess historically, Chemtura struggled on that front. Secondly, can you give an update on the process for evaluating or progressing on lithium extraction in North America? Thirdly, can you speak to volume trends in liquid purification?
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 Lubricant Additives. We communicated plant closures, and we had plants where Chemtura in the past divested businesses and basically agreed, and found that already in the due diligence, basically agreed that they would take on board on the requests of the buyer tolling arrangements. That were at that point in time favorable for the negotiation, but eventually were, of course, a compromise on filling the sites, whilst our conclusion was it would have been better to just terminate and close the sites. That's basically what we are executing.
I've alluded to the fact that Chemtura had too many production sites for the amount of sales. We reconfigure the production network, and we are doing, I would say, quite well on this in terms as far as time is concerned and as far as unlocking the value is concerned. This is something that we simply execute. As far as your second question is concerned, lithium. The project is doing well. We monitor it. We have tests. Pilot plants will be finished according to plan. This would be most likely beginning of Q3. We will see how the extraction works, what purification grades will come out. Everything that we are seeing right now is running according to plan. We will report on this, of course, in due course once we see the results. It's important to look at the extraction results.
As far as the pilot plant is concerned, we think this will be up and running. Of course, the extraction and the purification grades of lithium are important. They determine eventually the price you can get in the markets. As far as LPT is concerned, volumes are very good. We see that the market is more and more needing the resins that we produce. We think that this will clearly take further uplifts in the years to come. We have already taken the decision to bottleneck our Leverkusen plant in Leverkusen, because volumes here are tight. For that reason, we are also quite focused and pronounced on pricing initiatives here. Getting volumes and pricing up will definitely be an important theme for the resins business going forward. I hope this answers all your questions.
Perfect. Thank you.
Most welcome. Any questions left?
Next question is from David Finnis with JPMorgan .
Hi, Chetan Udeshi from JPMorgan. Three questions on my side. Firstly is just coming back to the previous discussion around the exceptional items, Matthias, you said to that question that M&A is ongoing theme, so I would think those costs associated with M&A should be an ongoing theme and should they be even classified as exceptional is the question. First question. Second question was, you had a slide where you compared the EBITDA performance of Lanxess versus the peers in 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. How do you feel in terms of Lanxess getting maybe, up to the average of the industry or if not better, in the future.
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? It seems there were a number of pigments and dye companies who operated in that park. Thank you.
Michael will address the exceptional question. I would take the second and third one. As far as benchmarking is concerned, we do benchmark ourselves. I assume everybody does that. We do this on an ongoing basis, not only as overall company, but also on business unit and even on product level in order to see if we are doing well or where we can improve. Putting the mirror in front of your face always helps to accelerate further. Cash flow, however, is one where of course you have to look at the company specifics. We know that cash flow in 2018 was mitigated and we've guided already at the outset of the acquisition of Chemtura that 2019 will be impacted as well due to restructuring that we undergo, due to cleanup that we undergo. Therefore, that has been always part of our communication.
Therefore 2018, 2019 are softer in cash flow generation. Whilst we set in our targets that we communicated for 2021, that from 2020, 2021 onwards, we should then come into a higher level of profitability and also higher cash conversion that we've shown in the past years as well. That's clearly what we do. 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. 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. Of course this has disrupted many supply chains.
What however we see is that the Chinese government has taken a clear stance, not only on this particular chemical park. China went out and rigorously investigated all plants in China producing chemicals. Not only in this plant where the incident happens, but basically tightening controls in all chemical industry parks. 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. We are very fortunate to have put highest standards always into our plant so that we don't consider that this will be a negative for us. This could eventually be even a positive all in all. We monitor this very closely. Michael.
Yeah, with regards to the exceptionals, we don't want to leave the impression that the majority of the exceptionals was spent for M&A. The majority was spent for adjusting our production network and for digitization initiatives, and that are clearly exceptionals. The very minor part goes to M&A project, which are on a case-by-case basis as well, and therefore regarded as exceptionals.
Thank you.
Well answered. Next question, please.
The next question is from the line of Georgina Iwamoto with Pareto Securities .
Good morning everybody. Reassuring to hear that you will still be around for some time. 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? Second question related to this, what is baked into your guidance with regard to that topic? Thanks.
Well, on your first question, agro cycle is what it is. I cannot predict the agro cycle. We will change our tonality on agro once our end customers change their tonality. Here, by and large, agro commentary is still on a soft note. On personal perspective, I have seen the agro industry already when I started my professional career in Hoechst AG, where Hoechst AG was having a company called AgrEvo. Here, the one thing I can tell you, agro underlying-wise goes up. It's cyclical. It has a different cycle than the chemical industry. When it goes up, nobody knows. When it goes up, it goes up. Here, clearly, today, we are trough levels and this will change. When it changes, it's not our job to make the call on this.
As far as our guidance is concerned, we factor into our guidance 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.
Okay, thanks.
Most welcome. Next question, please.
We have a follow-up question from Georgina Iwamoto. Please go ahead.
Thank you for taking my follow-up question. Just noting that your share price is 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 look like a good investment or if you have other priorities for the balance sheet. Thanks.
Well, Georgina, for the time being, we have announced one share buyback program, 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 share buyback per se are one instrument of various. Share buybacks don't structurally change the company for the future. They have to be considered as one instrument in resource allocation. That has been like this in the past, and this would be, for us, the consideration going forward.
Very clear. Thank you, Matthias.
You're most welcome. If there are no further questions, I thank you for your participation. I clearly would like to remember all of you that on the 16th of June, we are having the 10K run. For those of you that would rather like to participate to 5K, please do that. The brave hearts can do the half marathon. Whoever 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 event, so high contribution of runners is welcomed. I wish you all the best. We will see us on the roads. Thank you for participating today. All the best to you. Bye-bye.
Ladies and gentlemen, this concludes the Lanxess conference call. Thank you for joining, and have a pleasant day. Goodbye.