May 11, 2017
Executives
Matthias Zachert – Chairman and Chief Executive Officer Michael Pontzen – Chief Financial Officer
Analysts
Martin Roediger – Kepler Cheuvreux James Knight – Exane Paul Walsh – Morgan Stanley Peter Spengler – DZ Bank Andrew Benson – Citi Patrick Rafaisz – UBS Andreas Heine – Main First Markus Mayer – Baader-Helvea James Richards – HSBC
Operator
Thank you. A very warm welcome to everybody Q1 2017 conference call.
And, as always, I’m very happy very happy to have our CEO, Matthias Zachert, with us as well as our CFO, Michael Pontzen. And before – and I’ll immediately handover, just two remarks.
We unfortunately have to leave very sharp today at 2:00 p.m. And the second favor I ask you is to have a look at our safe harbor statement.
And I now hand over to Matthias.
Matthias Zachert
Ladies and gentlemen, warm welcome from my side as well on behalf of the entire management board of LANXESS. I would like to start the presentation at Page 05 where we give an overview on the closure of the transaction with Chemtura, so September 27th last year we announced since that time top-down we evaluated synergies and we’ve since closing started the detailed bottom-up validation.
We feel inspired by what we are seeing and teams are set up, organization, nominations have been conveyed globally. And in autumn term we will give you detailed line-by-line explanations and operational explanations on what we do with the strengthened business going forward.
So here integration I would say all plans that we have conceptually designed over the last several months are now being implemented and we think that in the next 6, 12 months we will be fully on track with implementing what we have designed in the first phase. Turning now our attention to Q1, definitely a strong punch, strong start to the year.
Volumes were reasonably high, especially stemming from strong momentum in Asia. And as far as the raw material volatility is concerned, which was extremely pronounced, I think from the numbers you can see that everybody was up to speed passing them as best as possible on to the respective industry segments.
And therefore we were able to basically not in all segments but basically across the board to push the steep raw material price increase through to the market. As far as segmental strength is concerned you can see that all business segments performed strongly in terms of volume upgrade, so it’s not only one but basically across the floor.
And as far as EBITDA is concerned reflected with nice incremental 25% increase. And I think with this we clearly differentiate ourselves versus other chemical players in the industry.
And of course as far as ARLANXEO is concerned, here Q1 due to the disparity in raw material prices we could successfully manage our global production network which definitely makes us clearly differentiated not only through the technology market leadership but also for the global production footprint. We can simply here play differently compared to our peers.
Financial highlights, 25%, as I indicated, speaks for itself. EBITDA margin despite inflationary raw material environments we could keep stable if not to say slightly increased EPS pre up round about 40%.
And although raw material and net working capital went up sharply we could keep the net financial debt at comparable level compared to full year 2017.So here we manage our balance sheet tightly and of course can now nicely absorb the financial debt so that we will incur in the balance sheet structure through the Chemtura acquisition. With this ladies and gentlemen I will pass on the word to our financial expert.
Michael, take on the word.
Michael Pontzen
Thank you, Matthias. Hi everybody from my side as well.
Yes, indeed Q1 was a very strong quarter which you can find on page where you find basically the financial overview. Just to recall overall environment in which we were acting.
In Q1 2016 we had a slow start to the year especially coming from Asia. And we were still in an environment of falling raw material prices.Q1 just the opposite as Matthias mentioned.
Very strong momentum in Asia. Strongly rising raw material and basically a very strong month of March which is now as well reflected in the numbers.
You see sales, EBITDA, EPS are all going upwards. We passed on raw material prices to the customers and therefore posted the EUR 328 million in EBITDA pre.
Net financial debt was basically kept stable. We had an increase in the net working capital to EUR 1.9 billion, driven primarily by the fact that the receivables increased by some EUR 250 million given the very strong month of March where we had price and volume impact obviously in our revenue number and therefore as well in the receivable number.
Looking into the segments on Page 7 you see that all four segments contributed to the EBITDA growth. Advanced Intermediate, nice volume growth by 9%.
EBITDA was impacted to some extent by the known lag effect on the raw material prices. Usually, you know that it takes a couple of months, two to three months until fully the raw material impact is forwarded to the customers.
On top of it we were facing an environment of slightly increasing energy costs and some slight increase in freight cost. Nevertheless, overall EBITDA was further improved to now EUR 91 million in the quarter.
Performance Chemicals, same nice development. Volume increased by 5%.
Chemtura’s transaction contributed, as expected, to the increase in sales and EBITDA. Here as well we were facing a couple of minor impacts on the cost side.
One is as well mentioned, energy cost, the other freight. And the third one I will like to mention is the FX in the emerging market.
You recall in Q1 2016 we said we had some support from the FX side. Now, we have a little bit front wind from the currency.
But, all in all, again nice increase in EBITDA to now above EUR100 million to EUR 300 million. High Performance Materials very strong quarter, strong increase in volume, 9%.
So not only the volume as it says but the product mix improved, why the EBITDA is now at EUR 48 million which is kind of double the number we were posting 2 years ago. So it’s paying off, our strategy roadmap to the balance capacity model.
The fourth segment of ours is ARLANXEO. Matthias was mentioning we passed on to the customers the significantly impacted raw material.
There is in the volume obviously a couple of effects, one is a basis effect, the other effect is a pre- buying effect given the fact that in Asia you know it is to a large extent a spot market. Nevertheless, the colleagues at ARLANXEO, like for all the other business units did, a great job in the first quarter.
And all of them increased their EBITDA. That’s it through the segments.
Matthias.
Matthias Zachert
Well, with this I would like to turn your attention to Page 8 of the presentation, and here we address macro view and give an outlook for LANXESS’ full year. Let’s start with macro.
Europe and North America, we see somewhat at similar levels like 2016, so low growth rates but stable and of course big markets. Asia-Pacific should like 2016 show good growth rates.
Of course here the indication we would like to give, 2016 Asia started very modest in Q1 and from that started to accelerate. So in the chemical industry our assumption is that you will see that the forthcoming quarter would -- will have tougher comparable basis and therefore growth rates will be softer.
Nice element is that Latin America is slowly but in a visible way comes back to report upward trend. This is notably driven by Brazil.
Let’s now come to LANXESS. 2017 should be the strongest year ever.
Despite several challenges that still need to be tackled. In detail.
We do have two major shutdowns, and Q2 currently running Symrise our butyl plants where our biggest supplier also has a parallel organized planned maintenance running.And in Q4 September, October we have around about 6 weeks our big caprolactam plants also in a 3-years returning maintenance, planned maintenance that we do. We had a strong start to the year.
However of course with some pre-buying in Asia I think this is visible in the double-digit volume number increase you have seen. But despite raw material volatility, business dynamics remain healthy in Q2 and from the business reviews we’ve done with our business guys, we have a good underlying operational momentum.
Growth rate as indicated before should soften in H2. Here seasonality and of course high comparable base needs to be taken into consideration.
For the full year, however, we give guidance on EBITDA pre which should be between € 1.225 billion EBITDA to € 1.3 billion EBITDA. For the time being this will then or should be then our records here.
Despite the fact that we still have substantial idle costs for the new three rubber facilities in Asia, we do still have overcapacities which will be burdening us of course last year, this year and next year to come. But then we should expect improvement.
And we have to deal with a pretty difficult agro market at this point in time. All of that was different in 2012.
So we think that you see in 2017 very clearly that the transformation that we have started a few years ago yields results. My final statements, and potentially the most important one for me at least, is with today’s call we finish Chapter 1 of the transformation, which we called "Let’s LANXESS again."
With today we will start Chapter 2 of the transformation. And we have the energy and the aspiration to make great things happen.
You have seen what we have done in the last 3 years, 2 to 3 years. And we will explain to you in the autumn, when most likely we will see all of you again, what nice things we would like to do in Chapter 2.
We are all extremely enthused, energized and focused. And therefore with this we finish the presentation and would like now to start answering your questions for the conference call.
Operator
[Operator Instructions] First question comes from the line of Martin Roediger of Kepler Cheuvreux. Please go ahead.
Martin Roediger
Good afternoon and thank you for taking my three questions. First is on Chemtura, which you start to consolidate as of end of April.
The bromine price in China seems to have risen by roughly 15% in Q1, obviously on low production in China and rising demand in electronics globally. But it seems that this Chinese bromine price is just a local price and has no impact on selling prices elsewhere because your competitor Albemarle did not see any selling price effect on their business.
My question, do you see selling prices for bromine to rise elsewhere outside China, and to which extent would that trigger EBITDA at Chemtura’s flame retardants business. The second question is on ARLANXEO’s tax rate.
I tried to reconcile the € 85 million EBIT to the net profit figure before minorities at ARLANXEO around about € 50 million. And when I factor in the financial result for ARLANXEO, which contains roughly just pension service costs, and also factor in that a substantial part of the EBITDA improvement in the reconciliation line has to be attributed to ARLANXEO because of the swap gains, is it fair to assume that ARLANXEO’s tax rate in Q1 came down significantly year-over-year to a level of 40%?
And in that respect going forward you mentioned that also in your presentation in the backup that you will book ARLANXEO as discontinued operations in Q2 2018 onwards which means that depreciation charges and also amortization charges will fall away for the 12 months thereafter. My question here, will the absence of D&A charges at ARLANXEO have any impact on the reported tax rate of ARLANXEO for the period Q2 2018 until Q1 2019.
And the third question is a rather short one. It’s on ROCE.
You mentioned that ROCE for LANXESS was at 10.3% in Q1. But what is the ROCE of the new LANXESS in Q1, that means excluding ARLANXEO?
And also what has been the ROCE of the new LANXESS as of the full year 2016? Unfortunately, you don’t disclose the capital employed figure by segments otherwise we could do the math by our own.
Matthias Zachert
Well, all very valid questions and I am delighted that Michael will answer your last two questions on tax rates, depreciation, deconsolidation. Also ROCE will be addressed by Michael.
I will address the first one on Chemtura. Here basically what you need to take into consideration, the flame retardants business that Chemtura has and now that LANXESS has which will be called the Brom solutions business line in the Specialty Additives division.
The merchant market exposure on pure brom raw material is not that big. Over the last several years the focus was always to accelerate on the derivates and only some portion was directly sold to the merchant market in brom, that’s the reason why the business has overall become far more stable.
So as far as China brom prices are concerned indeed there is a seasonal volatility normally in Q1 and Q4, brom prices in China move up. In Q2, Q3 they somewhat soften.
There is a reason behind that which we can explain in one of our future meetings when we will explain our view on brom a little in more detail. All in all, we like high brom prices in Asia, because eventually this leads to higher derivative prices in the following chain like flame retardants.
So we don’t mind this at all. And therefore net to net this is a positive as far as competitiveness is concerned.
Our view on this is that this will even in the next several years to come further improve the competitiveness of our portfolio because the brom reserves in China will more and more start to fade away. And this is definitely a benefit for the western players who are operating in this segment.
And therefore that is something that strategically is clearly playing into our cards, and we like this direction if it’s unfolding more and more. Michael, the floor is yours.
Michael Pontzen
Martin, thank you for your questions. Indeed your, let’s say, overall calculation on ARLANXEO tax rate seems to be plausible.
We always say for New LANXESS the tax rate is around 30% to 35%. Last year obviously the tax rate was heavily diluted by ARLANXEO given the fact that there was no net income basically in Q1 in ‘16.
Now, your math seems to be all right that it should be and could be in the ballpark of some 40% for ARLANXEO. With regards to the discontinued operation question, finally at the end of the day we will report basically all in one line.
So therefore, you will have the LANXESS New data and the ARLANXEO line all in one or, let’s say, all data in the P&L of ARLANXEO in one line. But it should have similar impact then in the ARLANXEO IFRLS statement when -- if ARLANXEO would report their results as a group.
But we as LANXESS will report them in the discontinued operation just as one line in the P&L. And with regards to your ROCE question, the assumption which we gave last year and the year before that basically LANXESS New is in the ballpark of some 15% and ARLANXEO in the ballpark of some 5%, still holds true.
Obviously the improvement of ARLANXEO EBIT will have an improvement on the return on capital. The same is true for LANXESS, but the ballpark numbers are still valid.
So therefore LANXESS New is or, let’s say, the reported number is diluted by ARLANXEO.
Martin Roediger
So let’s come back to the ARLANXEO tax rate question. Going forward, if, for example, then depreciation has not anymore accounted, that means the pretax profit of ARLANXEO would be much higher than before and thus you might, let’s say, use even more than your tax holidays in Singapore which means then you will see on the next profit contribution of ARLANXEO very high earnings contribution.
Is that the right understanding?
Matthias Zachert
Taxes are being paid not on IFRS reporting but on local fiscal books. Therefore with this I would like to close the tax question on discontinued operations reporting.
Next questions please, Thanks.
Operator
Next question is from the line of James Knight of Exane. Please go ahead.
James Knight
Afternoon, I’ve got four very quick ones. Firstly could you quantify any butadiene or isobutylene gains in the first quarter?
Secondly, could you give some indication of quantification of Saltigo timing issue? Thirdly, some indication of Chemtura’s performance in the first quarter, if you have it.
And fourthly, could you quantify the potential impact of those shutdowns in Q2 and Q4 that you talked about? Thank you.
Matthias Zachert
With delight, James. So the BD gains I think you are referring here through the fact if we had any inventory gains in the P&L in Q1.
And here the clear statement is no. We had a steep rise in Jan, Feb, but then a steep decline.
And therefore it evens out basically. So this was neural on the P&L side.
As far as Saltigo is concerned, we clearly see that for 2017 the agro market as far as our order momentum is concerned will remain sluggish. I see that the agro companies are modestly turning here and there, a little bit more positive, but we do not see any volume change, rather the opposite.
But this we manage within our underlying performance. So here we keep our humble tone.
And as far as Q1 is concerned on Chemtura, the only thing that we would like to convey is that in the numbers we factored in, we have basically factored in the numbers for 8 months of Chemtura performance with analyzed Q1 of Chemtura. And as far as the entire year of 2017 is concerned, the business is spot on according to the financial plan with which we have made the acquisition.
So here we feel confirmed in our view. As far as maintenance shutdown is concerned, we are talking here about roughly for each, roughly in the area of EUR 10 million, EUR 15 million.
This can be at the higher end of the EUR 15 million, let’s say, if we have some delays. It can be lower if we accelerate.
But this is the current view on having roundabout 6 weeks on average for both big plants, Zwijndrecht and Capro, our big plants in our case. So that’s the indication that is embedded in our financial guidance.
James Knight
Can I briefly return to Saltigo? The way I read the analyst summary was that you had some benefit year-on-year due to the timing with the lumpiness of orders?
Should we assume that wasn’t a particularly significant benefit?
Matthias Zachert
It’s at single-digit millions. So we are talking here about a few millions Q1, EBITDA wise.
But it’s not double-digit, it’s clearly in the single-digit area.
James Knight
Thank you very much.
Matthias Zachert
And that has to do with the project custom manufacturing that is being done there. And that’s the reason why we highlight it.
James Knight
Got it. Thank you.
Matthias Zachert
Next question please.
Operator
Next question comes from the line of Paul Walsh of Morgan Stanley. Please go ahead.
Paul Walsh
Yes. Afternoon guys.
Thanks very much for taking the questions. First one on [AI].
Just want to check that you’re confident of being able to manage the raw material volatility through the end of the year. I know there was some catch-up or delay, which you always have in the first quarter, but I just want to make sure you feel happy you’re going to catch that up.
Two, just coming back to raw material volatility. You might not have booked inventory gains, but is there anything in there, Matthias, for just timing issues around burning through cheaper inventory and selling at prices that have gone up, or again is that a zero-sum game in the first quarter?And just finally on Chemtura, you’ve mentioned it there with James’ question, but for the guidance that you’ve given for the year, are you assuming 8 months of last year’s EBITDA or 8 months on a growing EBITDA from this year.
Thank you.
Matthias Zachert
Well, as far as AII is concerned, my answer’s clearly, yes. This business is rock-solid as has been shown over the last, I would say several years.
There is volatility quarter-on-quarter with time-lag between the sales price of the products and raw material price. So on a full year that always in general nets out.
As far as quarterly volatility is concerned, we basically have guided that Q1 AII suffered a bit and they will do the catch-up in Q2. I’ve looked into the business in further detail just in the last 2 weeks and nothing has changed my view on this.
So I’m quite positive on this. It’s one of our big flagship.
And you will see that this flagship will become even stronger in the coming years. As far as the volatility through raw material is concerned, I cannot rule out that there was 1 million, 2 million in one or the other direction.
But at group level, we looked into it and basically it’s a wash. And as far as Chemtura is concerned, we’ve said last year in September that we considered Chemtura in 2016 at a reasonably high EBITDA level.
Strong performance had been achieved over the several past few years with optimization of the portfolio, optimization of the cost structure, et cetera. But we clearly said that 2016 was a performance where they also had some benefit, headwinds or tailwinds, whatever is positive, that’s a beneficial wins in their sales, through the raw materials.
And we stated that we would keep the level of profitability of Chemtura 2016 or improve it with the help of the 100 million of synergy. So that’s basically the communication.
So I would not be too ambitious on the Chemtura growth numbers for 2017. I think the business we will exactly perform the business and run the business as stated in 2016 when we made the announcement.
But here the underlying LANXESS business and the contribution of Chemtura and the further synergies that we will implement now this year, next year, will drive profitability upwards.
Paul Walsh
That’s great, Matthias, maybe a cheeky follow- up on Asia. How are you guys feeling about Asia.
You talked about some prebuying in the press release. I know you weren’t specific to Asia.
But to what extent is the latest data around money supply being throttled a bit, credit bubble building? Are you seeing anything in your real demand that would give you any cause for concern?
Matthias Zachert
Well, we’ve clearly stated that the growth rates that you’ve seen in Q1 basically across the industry being double-digit is somewhat overstated. And the reasons behind that is: a, the comparable base last year was low.
But second, you have a few percentage points volumes being positive due to Asia being simply a spot market, China being a spot market, and you have to take that out. We see this in April and May that the volume momentum is softer.
But it’s still showing the growth that we’ve indicated for the full year. So of course we always follow any macroeconomic trends in China.
And from everything that we see, that we hear from our customers, that we hear from our sales force it’s following the guidance we have given on the regions before with the ongoing growth trends but of course versus a tougher comparable base, and therefore that’s our view on Asia and China.
Paul Walsh
Thanks a lot Matthias. Thank you.
Matthias Zachert
Always welcome Paul. Next question please.
Operator
Next question comes from the line of Peter Spengler of DZ Bank. Please go ahead.
Peter Spengler
Good afternoon gentlemen. Thank you for taking my question.
I’ve two questions left. First is on the competitive situation in the second half of 2017.
Do you see additional rubber material of competitors like Exxon coming to the market from ramp-up? And my second question is about butadiene situation we had in end of 2016 beginning of 2017, the spikes and the shortage.
How do you see the situation at the moment and going forward to the second half 2017?
Matthias Zachert
Well, on your first question. We see Exxon is further ramping up their site with Sabic.
So that is something that we’ve mentioned last year and of course we see that for 2017 as well. And that is part of the equation, that’s part of the rationale where we state that the rubber markets for ‘17-’18 are not peak times, they are still in trophya"environments.
But then in ‘19-’20 this business improved further and come again then to levels which are more satisfactory than we have seen over the last quarters and years. At the same point in time I have to state that we saw in the last 3 to 6 months also further reductions in market capacity not only additions.
You might have seen that North America one of the mid-sized, small-sized regional synthetic rubber players had to report insolvency, what a shame. And we also see in China that some smaller competitors were simply not able to get enough funding for the inflationary raw materials, so they also have exited the scenery.
And that is something that of course we have foreshadowed, that a clean- up in the markets is something that will happen and the big guys will consolidate become bigger and the smaller ones will simply have more tough times to be in this industry. As far as BD is concerned, we saw this big spike now in Q1.
Enormous. I mean, BD basically went up in some of the region more than 100%.
Now we’ve seen the volatility to the other sites. Well, it’s a cyclical business driven by a variety of drivers.
We now see that in Q2 raw material pricing in BD will somewhat stabilize and continue in that direction, I’m not however having a crystal ball who can predict where oil and raw materials will be in Q3, Q4.But we currently don’t expect that will see this high volatility that we’ve seen in Q4 and Q1. But the one element that we clearly have benefited from, when this high volatility is there we can play our global muscle.
And we’ve played this global muscle versus competitors, and they’ve seen what a giant ARLANXEO is with two strong shareholders that basically can operate in this environment extremely successfully.
Peter Spengler
Thank you very much
Matthias Zachert
Most welcome, next question please,
Operator
Next question comes from the line of Andrew Benson of Citi. Please go a head
Andrew Benson
Thanks very much, The outlook for this year, can you just define the contribution from the synergies from Chemtura and also the other cost reduction measures, and whether there’s any mechanism given you’ve perhaps acquired Chemtura a few months earlier than planned of being at a pull forward further. So just give a magnitude of that.
You gave quite a cautious assessment of the outlook or at least assess all the downside risks, but you’ve given quite an upbeat forecast. So it looks like you’re on top of things with the risk on the up side.
And in terms of your volumes, can you try and give a lump sum volume growth try to define that in terms of whether you’ve gained – you think you gained market share or the proportion of that 11% which is stocking, just so we could be a bit more confident about the outlook. And can you try and quantify the price cost delta on the business in the first quarter in aggregate.
I mean, you’re saying advanced materials – Advanced Intermediate is a bit hit, but you’re passing on the cost increases in the ARLANXEO business.
Matthias Zachert
Well thank you very much. And let me address them one by one.
As far as synergies are concerned – and please Michael step in for further clarity – reflect for 2017 around about €20 million of benefits. And here we will implement that.
The first steps have been taken. We basically of course adjust the corporate structures, the Chemtura boards with the exception of Stephen Forsyth who has been mentioned and nominated by our boards to become member of the LANXESS Management board.
But besides him the other five officers of Chemtura have left. And of course U.S.
salaries are somewhat higher than in Germany and this leads to visible savings instantly. So having implemented that, we think that the €20 million of savings are fully on track to be delivered, where we eventually land yearend, we always provide information once the years finished but the current guidance is €20 million for ‘17 should be in the bank.
As far as volume growth is concerned, of course the volume increase that you’ve seen in Q1, it’s unlikely to happen again in Q2, Q3, Q4 due to the reasons that we have mentioned. But overall we consider, and we are still early in the year, overall we consider that the chemical industry will do nicely in the current environment.
And as far as LANXESS is concerned we’ve outperformed the industry in Q1 and definitely we have a strong setup, we have a strong team. We want to deliver, of course, good volume and good results also in the quarters going on.
But of course we have to mitigate some standstills. Planned maintenance shutdowns in Q2, you will see the inventory step-up that would be on a reported basis, of course leave a mark in the profitability reported not at EBITDA pre, but these are all technical highlights that Michael has alluded to.
And then as far as the third question is concerned I think Michael is taking that on.
Michael Pontzen
Yes, I think you were referring in the question of the price cost delta in the first quarter. And as said earlier we pass on the raw material cost.
There is a slight decline, and it’s in our presentation on Slide 10, on the input cost, and that is driven by the energy prices which we were referring to earlier, Andrew. Andrew Benson.
Andrew Benson
Oh, I can see that. Okay.
Just one last one if I may. And I don’t want to take up too much time.
But, Matthias, you talk about Chapter 2 which seemed [indiscernible] whetted my appetite -- but can you just share a little bit more with us on the contents of Chapter 2 in so far as you can or want to at this point?
Matthias Zachert
Well, we are following our game plan. And as we said to you before with Chapter 1 we just get back to our starting position, and I think we’ve achieved this now.
So Chapter 1 was basically getting to where we are today. But now we will show you what New LANXESS is going to be.
We are already working since a few months on this. And therefore it’s always time for once a year to show what you want to do strategically in the next several years to come.
We are currently preparing this so that we will show you all of this and answer your questions then. I think it’s September when we are going to meet.
And therefore I would clearly like to indicate to you that in the next years to come you will find out that the company will look different. Three years ago nobody thought that we would be where we are today, and I think in three years down the road you will say the same thing.
And let us explain you in September and going forward what we have, what our game plan is so that we will elaborate on this and hopefully have your presence physically in September as well.
Michael Pontzen
Thanks very much.
Matthias Zachert
Most welcome Andrew, next question please.
Operator
Next question comes from the line of Patrick Rafaisz of UBS. Please go ahead.
Patrick Rafaisz
Thank you and good afternoon everybody. Three questions please.
The first on your guidance. Is it fair to assume that, if I strip out the two additional months of Chemtura consolidation given the early closing of the deal that the guidance for underlying LANXESS remains for slightly higher EBITDA as you said with the full year results conference?
Second question on the costs and energy and transportation costs, how should we think about that in the next few quarters in Performance Chemicals and Advanced Intermediate. So should we expect similar effects there as well until the end of the year?
And then the last question on ARLANXEO. Please correct me if I’m wrong, but I got the feeling that your view on 2018 in the rubber market has become a bit more gloomy than maybe a year ago, that the recovery in the cycle may kick in a bit later than you may have thought a few quarters ago?
Thank you.
Matthias Zachert
On all three questions, we can be spot on. On your guidance question, the answer is yes.
Both components contribute, LANXESS and of course the incremental money from the earlier closure of the transaction. As far as energy costs is concerned, because it boils down to energy costs notably, we consider that this is ongoing for the entire year, so we assume that energy costs will also be lifted for the next three quarters.
So also here clearly, yes. And as far as ARLANXEO, we don’t see a change here.
The incremental capacity coming from Exxon Sabic, we knew already 12 to 18 months ago. What we of course have noted is that some competitors don’t make it to the finish line, and we say farewell to them in an honorable and respectful way.
And therefore our view is that from 2019 onwards we will gradually start moving upwards in the industry consolidation supply-demand. But the outlook for ARLANXEO, despite good Q1, I think they did an excellent job passing on raw material prices, I think they did an excellent job here on playing the global muscle in the global production network, so here really good job.
But overall for the next 2017, and 2018, for these two years we don’t see a change in comments in our view on the business on the industry.
Patrick Rafaisz
Okay, thank you very much.
Matthias Zachert
Most welcome, anybody else there with questions.
Operator
Next question is from the line of Andreas Heine of Main First. Please go ahead.
Andreas Heine
Thank you for taking my question. The first one in Advanced Intermediate.
Could you elaborate? The price was indeed very low with just 1% clearly not offsetting the raw material cost increase here.
You said already that ARLANXEO will be able to do that in the coming quarters, how do you see this with the energy cost? So is your price mechanism pushing price through, very much dedicated to raw material cost only or will it be also possible to pass on higher energy cost.
That would obviously not be the case if the energy cost is more [indiscernible] issue and where if competitors won’t have this? And in Performance Chemicals, it’s basically the same, sales increase was also here higher than the EBITDA increase.
Is that also just a delay of price increases or is the raw material headwind here having some margin impact? And last but not least, you said you have good trends also in Q2, so I would assume that in all of your segments and volumes you see so far in Q2 is above the Q2 2016 level.
Is that a fair conclusion from the statement you made? Thanks.
Matthias Zachert
Andreas, thanks for all of them. On Q2 question, the last one, I take it first.
[indiscernible] wait and see until we report Q2. If we comment on everything that you want to know on Q2, nobody will participate anymore.
Our feedback is we have started Q2 in a reasonable, a good way, it will be a healthy quarter. And everything else would be reported I think in beginning of August when we come out.
As far as your two divisional question is concerned, let me address AII first. In most of our contracts we have pure raw material clauses.
I understand that in some respective ones. There’s also energy addressed.
But the majority clearly is purely on raw materials. And everything else has to be either discussed with customers or made up differently through either a gaining market share or other efficiency measures.
So that’s the answer on Advanced Industrial Intermediates. Performance Chemicals, here you’ve seen that last year we were basically pretty firm on prices.
So we took the benefits of the decline on raw materials. In 2017 we cannot be as aggressive on prices of course when our raw materials return.
So here the feedback therefore is that the current performance and EBITDA increase is a reasonable one, despite the current spike in Q1. Of course for Q2 it now mitigates.
And therefore you see that this business did pretty well despite raw material burden that the business was facing. And the final comment on AII.
We are confident that the pushback that we’ve seen on raw materials and the profitability in Q1 will be compensated in Q2. They will do a good job here.
Operator
Next question comes from line of Markus Mayer of Baader-Helvea. Please go ahead.
Markus Mayer
Good afternoon. My first question is on the recent investment step of your competitor BASF Leather Chemicals.
Has this changed your strategy of your own leather business? That’s my first question.
Second one, on the farmer part of Saltigo. Currently, there is a market consolidation going on.
Do you think you have critical mass there, for this business? And lastly what is your gut feeling over the feedback you got from your automotive customers in particular looking on the second half of this year.
Thank you so much.
Matthias Zachert
On leather, our view strategy wise does not change. We reflect to you in the last I would say 6, 9 months that the first step here will be to bring profitability up through efficiency means, through restructuring.
And once this is done, which will most likely still take us 1 or 2 years, then we will consider partnership. So therefore as far as our strategic direction is concerned, no change.
As far as your second question is concerned, has Saltigo the critical mass, clear answer is yes. We are here in Europe.
As far as the custom manufacturers are concerned, they’re clearly 1 by for. Player 2 company called CABB is somewhat 50%, 40% of the business size that we have.
And therefore you can clearly see that here in Europe where the chemical fungicides are of course pretty much dominated by the three big players. There we are clearly under custom manufacturing undisputed 1.
So we do have the critical mass. As far as the outlook is concerned, I was in January, beginning of January a little more concerned than I’m now, because China, despite lowering of tax incentives did reasonably well and continued with good momentum.
We see that North America is somewhat stable but on a high level. Europe did well.
I don’t expect that Europe will continue on these high growth rates as reported in Q1, but also will continue with a good momentum. And therefore on the automotive industry, and I’ve visited in the last 6 weeks a few customers, the indication is a healthy outlook for the entire year of 2017.
Markus Mayer
Okay, thank you.
Operator
Last question for today, comes from the line of James Richards of HSBC. Please go ahead.
James Richards
The CapEx guidance you’ve given us still ex- Chemtura. Chemtura management gave guidance that CapEx would be up year- on-year.
You flagged some integration CapEx. So can you just give an update of that number with Chemtura now please?
Matthias Zachert
Our CapEx guidance for LANXESS is 450 to 500 and that is the guidance we are still giving. We will look into the Chemtura numbers.
As we said we will give an update on all the data on Chemtura later in the year.
James Richards
Thank you.
Matthias Zachert
Well, with this, ladies and gentlemen, thanks for your time today. We look forward to seeing you all through votes or physical presence in our AGM, end of May.
We will then have our LANXESS Run 11th of June, all investors globally, all analysts are cordially invited. As it stands today we have more than 700 around about 700 participants, employees, running at this event so you would see a strong participation again; biggest team energizing chemistry on the road.
And then of course we are delighted to see you on the Road Show which starts this afternoon. And so hopefully we would see all of us in the coming month.
Thank you so much from the LANXESS team. Bye-bye and see you soon.
Operator
Ladies and gentlemen this concludes the LANXESS conference call. Thank you for joining and have a pleasant day.
Goodbye.