Nov 15, 2017
Executives
Ulrike Rockel - Head of Treasury and IR Matthias Zachert - Chairman of the Management Board and CEO Michael Pontzen - CFO and Member of the Management Board
Analysts
Martin Roediger - Kepler Cheuvreux Andreas Heine - MainFirst Markus Mayer - Baader-Helvea Andrew Benson - Citi Peter Spengler - DZ Bank Patrick Lambert - Raymond James Stephanie Bothwell - Bank of America Merrill Lynch
Ulrike Rockel
A wonderful good morning to everybody and many thanks for joining our call. As always, I have our CEO, Matthias Zachert, with me; and our CFO, Michael Pontzen.
Please take note of our safe harbor statement. And with this, I will now immediately hand over to Matthias.
Please go ahead.
Matthias Zachert
Thank you, Ulrike, and warm welcome to everybody this time in early morning sessions. We understand that this would be very suitable especially for the capital market participants on the buy side and sell side and, therefore, we have changed our normal schedule accordingly.
I would like to start on Page number 4 with the executive summary which basically highlights that organically but also inorganically, the third quarter came through nicely. We have a strong comparable base, as indicated earlier, due to the pickups in volume demands last year, Q3, Q4.
But despite that, we posted solid volume growth. And the nice element about this underlying volume momentum was that basically, all business units contributed to this.
We still see the weakness in agro, and this would be even fierce in the fourth quarter. And for that very reason, we can basically say, by and large, all end markets continue in the same pattern as we have seen in the last few quarters but also, as regards to agro, we see that this is continuing to develop subdued.
Operationally, however, Performance Chemicals and especially HPM business, polyurethanes business performed better than expected in the second quarter. The operation of business integration with Chemtura is fully on track.
And operationally, the integration will be done by year-end. So here, we advanced nicely.
What we flagged already in our last Capital Markets Day event is that we have now will address, step by step, the optimization of the production platform. Especially in the lube adds business, Chemtura has had a very scattered productions set-up with many little sites, only partly utilized and, therefore, we started the consolidation process in the lube adds business and took respective charges for closing the Ankerweg plant in the Netherlands.
As far as the U.S. dollar is concerned, of course, it's burdening third quarter, and we definitely have the toughest comparable base in Q4 versus Q4 last year and that is embedded now in our guidance completely, which we, however, absorbed and basically upgrade the middle range of our guidance with the solid operational performance now in third quarter.
And as far as indebtedness is concerned, I'm very happy to say that financial deleveraging has accelerated better than we originally planned for 2017. So third quarter was a strong delivery on cash generation, and we're happy to say that also Standard & Poor's recognized our strong performance and upgraded us to stable outlook compared to the negative that we had before.
Ladies and gentlemen, on Page 5, a short summary on financials. I think everything speaks for itself.
35% EBITDA increase stemming from strong organic performance, but also the incremental EBITDA we consolidate through our acquisitions. Third quarter definitely is, therefore, a landmark because it posts the strongest third quarter we ever had, and I think this pattern is one that you will see continuing.
EBITDA margin expansion, of course, driven by New LANXESS performing well. ARLANXEO faced a tough quarter with around about 10% EBITDA margin only.
And of course, if you look at New LANXESS, we are here fully on track to go in the direction we want to go because synergies are yet to come. And of course, with this, we would further like to structurally upgrade our performance as indicated to you earlier.
Free cash flow, strong delivery leading to a net debt reduction, which I very much see that Michael rejoices about this. Now let's come to delivery on strategic steps that we have taken since we met in our meet-the-management events here in Cologne.
On Page six, we highlight what we've done recently. And this, of course, starts with the restructuring of our chrome chemicals activities, the closure of Zárate is running according to plan.
By yearend, this will be implemented and the relocation to South Africa will have been completed. The charges of that we've digested by and large in the second quarter.
So that should basically improve profitability in the lagging business units profitability of leather chemicals. The second visible of course is the consolidation of our global lubricant precursors footprint.
Here, we will close by 2018. Ankerweg charges have been taken on third quarter and the production of the precursors will be consolidated in North America.
What we also would like to highlight is that we, in the third quarter, end of September, finished the divestiture of the noncore chlorine dioxide business. It's a business in materials protection that we had to acquire when we bought the Virkon business.
It was noncore at the time of the acquisition, and we'd either the opportunity to close or to sell. And so I'm happy to say that we found here an interested party.
We will let go of around about 30 million of sales with an EBITDA one have to find through the microscope, otherwise, you would not see it. And I think we've got decent proceeds of round about close to $10 million cash.
I'm also happy to say that yesterday night, we finalized an acquisition fitting perfectly into our value chain and geographical footprint. Solvay had a, I would say, noncore single phosphor additives business in North America, Charleston.
We basically over the last six to seven months negotiated with Solvay and it fits perfectly now in our global footprint. And therefore, on Page number seven, we highlight the strategic rationale.
Of course, when you look at our asset footprint at our additives technology, we can add tremendous value to this plant, because we will upgrade here the plant in order to enter into the derivatives -- phosphor derivatives business, additives business, flame retardants business and agrochemical business. We have here the customer access, we have the technology.
We will make certain investments, between 5 million to 10 million, in order to bring our additives technology into the site. But it's far more interesting for us because we will not have to build an entire new plant in North America, which would have been the alternative scenario.
With this, for the first time in our history, we expand our phosphor value chain into North America and fits perfectly the strategic direction we have communicated to you in September that our market leadership position, we would like to strengthen. And with this, in phosphor, we basically catapult ourselves into the top league.
Second, we would like to strengthen our regional footprint. And if you look into potential synergies we might obtain, they achieve at very limited costs.
As far as financial rationale is concerned, of course, here, it's very attractive for us especially when you look at the decision make or buy. Synergies will come.
The seller of Solvay has asked us not to disclose the purchase price. And of course, we acknowledge this.
Of course, in the fourth quarter in the annual report, we are forced legally to convey certain financial information. And taking synergies not into consideration, looking just at overall the financial picture, I think LANXESS has never made such a financially attractive and multiple acquisition ever in its history.
Of course it's small, but eventually, I think it is a mouthwatering attractive transaction. So going to Page 8, I would like to stress that we did a good development over the last few years as far as margin expansion, cash flow generation is concerned.
As we highlighted to you in September, this is not where we want to stop. By 2021, we would clearly like to lift margins further upwards but in a more narrow span.
So volatility should be reduced; cash generation, profitability, margin should be clearly expanded. And as you can see, what we've done just in one little quarter, we are very focused now on executing our strategy further.
And I think in the next two years, you would see that further nice improvements are going to yield results. And as far as financial metrics is concerned, nobody else than Michael Pontzen can give clarity to you on this.
And so I pass on the word to Michael. Michael, please go ahead.
Michael Pontzen
Thank you, Matthias. Good morning as well from my side.
Yes, indeed, we recorded a very strong operational Q3. Sales and EBITDA were driven by price and volume increases.
And don't forget, we were comparing ourselves to an already strong Q3, 2016. Next to the drivers of price and volume, obviously, the contribution from the Chemtura entities was as expected.
And we were, for the first time now since some quarters, recording a U.S. dollar which had a negative impact on our overall EBITDA and, obviously, the margin.
Nevertheless, we were in a position to further upgrade the financials. Next to the EBITDA, EPS pre developed nicely in line with the EBITDA.
And the cash generation in the third quarter put down our net financial debt by some €260 million which was better than expected. Turning to the next page, number 10.
We see that the segments performed well as well. Starting with Intermediates segment, we saw a good quarter in a remaining challenging environment, especially because of the agro environment.
Saltigo was suffering. We recorded a volume decline in that business unit.
On the other hand, we saw AII performing well. Prices were passed through to the customers successfully.
In the additives segment, the former Chemtura business performed as we expected them to do so. We recorded some price increases in our raw materials, especially in the lubricants, which we were passing on to our customers, which obviously, then led to a decline in the margin.
In that segment, we as well have a relatively high exposure to the U.S. dollar given the structure of the business.
Nevertheless, we were able to maintain the margin level which we recorded end quarter '16 which was already a strong quarter. Turning to chemicals.
Performance Chemicals is continuing to deliver very strong numbers. As Matthias said, better than we previously expected.
Volume growth of 5% is showing that, that segment structurally changed. We saw that volume growth in all business units especially in LPT and in MPP.
MPP is clearly benefiting from the acquisition which we did last year, the Chemours transaction. So the segment is structurally changing and structurally improving continuously the margin.
The next segment you find on Page number 11. The next success story is Engineering Materials.
Here as well better than expected. I think a 7% volume growth is a very, very strong number.
Next to the volume growth, we kept improving the mix of product we sold into the market. The pay-off of our strategy to go downstream and to the end compounds helped to further improve EBITDA and the margin.
And the urethane business which we bought from Chemtura is as well contributing to that nice margin and overall EBITDA development. ARLANXEO is still acting in a very challenging environment.
Still, the volume demand is good, especially in our TSR segment. Prices were passed through in the third quarter, especially in our HPE business unit.
But the EBITDA was impacted by basically three elements. One element is obviously the weaker U.S.
dollar. As you all know, we have a rather high exposure of U.S.
dollar in that segment. Second was the unplanned shutdown which we're recording in orange due to Hurricane Harvey.
And the third is the raw material volatility which we were recording in the third quarter. That is a quick update about the strong operational performance of our portfolio as Matthias will now guide you through our guidance.
Matthias Zachert
Thank you, Michael, and so let's look briefly at Q4. Business unit Saltigo will be having a subdued performance.
As indicated, fourth quarter always is the weakest in agro. But this year, it will be more pronounced.
So I think we will have here definitely a clear -- the toughest quarter in agro for the last two to three years. It's embedded in our guidance.
We still consider that 2018 will be a bad year for agro. But of course, if you look into the overall setting of Advanced Intermediates segments, despite agro bringing trophy, we've, I think, shown the strong resilience that we have in the segment.
And this, of course, for us, is clearly the demonstration, the proof that the segment itself is rock solid. And in the bottom of an agro cycle we still post strong numbers.
How can this business be performing once agro returns? Fourth quarter will also show the toughest comparable base versus U.S.
dollar. You all recall that after the election in North America, the dollar strengthened to something like 1-6 -- 1.06, 1.07.
We have now €0.10 difference. And of course, that's weighs on our performance.
So this is something which is embedded in the guidance that we provide in a moment and, of course, the HPM turnaround and Antwerp is of major impact. We see that in the profitability as highlighted already with the first quarter financials.
So this will burden Q4, and it's anyhow seasonally weaker. It will be also the weakest quarter.
But of course, in light of the guidance, it will be a strong quarter compared to previous year financially due to the cost savings we implement and also the consolidation of the acquired assets. So as far as full year 2017 is concerned, we narrowed the bandwidth.
So we -- despite weakness on currencies and agro, we increased the lower bandwidth of our guidance. And therefore, the new guidance is now at €1,250 million to €1.3 billion EBITDA.
And from what I see today, we will land -- we will make sure that we will land in this range. And assumption is that it will be somewhere in the midpoint of this range.
But of course, there's still six weeks to come, and we will do everything to finish the year on expectation and deliver our numbers as we've always done in the past. With this, ladies and gentlemen, we finished the formal presentation and now move to the Q&A sessions.
So please feel free to press respective buttons.
Operator
[Operator Instructions] First question comes from the line of Martin Roediger with Kepler Cheuvreux. Please go ahead.
Martin Roediger
Thanks for taking my three questions. First on acquisition of this, first of all, additives business from Solvay in the U.S.
Given the high sales per employee figure, is it fair to assume that this business has already an even higher EBITDA margin than your Specialty Additives business? Second question is on the reconciliation line.
Are there any funny items included in Q3, or is the strong improvement year-over-year, from minus 50 million to now minus 22 million, solely due to hedging effects? And the third question is on exceptional.
And here, especially on the exceptional on the EBIT line, not on the EBITDA line, which was -- the EBIT line was minus 61 million. Did you shift any restructurings from 2018 to 2017?
And can you update us on your expectations for the exceptional in the current year 2017 for the EBIT line?
Matthias Zachert
Martin, all valid questions. Michael will take all the technical ones on recon and exceptional EBIT versus EBITDA.
Let me address the acquisition question. If I look from a certain distance at this acquisition, I have to say that I would rather consider this business as clearly noncore under Solvay.
If I look at the portfolio of Solvay, and it was, from our perspective, margin rise rather a stranded business. And therefore, I do have full respect and understanding why Solvay wants to get out.
We are in completely different market access and product capabilities on the next steps from what they produce. So we would basically enlarge the value chain.
And through enlarging the value chain and reallocating sales that currently are being exported from Europe to North America, we would basically make these sales over the next two to three years local sales, which will be then cheaper produced in North America with the next value step, penetrating the market customer proximity. So we would turn this business into a high-margin business that would fit our financial ratios.
But currently, clearly, this business is underperforming. And we find all means and possibilities on the cost side and on the top side to make this a really attractive business to us.
So that's the strategic rationale, and we are happy that we could find here an agreement which I think for both companies is a solid transaction. Michael?
Michael Pontzen
Martin, with regards to recon. Basically, the major effect on recon is indeed hedging, and the next major effect are the synergies, so there are no funny items in there.
With regards to the exceptional booking, the 29 million of depreciation or exceptional depreciation which we took now in the third quarter was related to the decided closure of the Ankerweg site in the Netherlands. We will give a fully fledged update as we usually do and we always did when we come out with the full year numbers.
But for the time being, my expectation is that on EBIT level, so on additional depreciation exceptional, you should not expect the fourth quarter any number of this size.
Operator
The next question comes from the line of Andreas Heine with MainFirst. Please go ahead.
Andreas Heine
Also three if I may. These U.S.
dollar hedges you have, if the U.S. dollar stays on this current level, what are the mean for this recon line in 2018, please?
And could you give an update how you progress with your price increases in the additives line? That was discussed widely under management that you only could start to do that after you have acquired the business and that before, they were not very speedy in that.
Maybe you can shed some light here? And last, Advanced Intermediates, indeed, a very good margin of 19% despite the weak business environment for Saltigo.
And as far as I know, Organometallics is also not a high-margin business. The first is Saltigo has no negative operational leverage, so if you have less business, the margin is protected or how is it here?
And on Organometallics, were you able to improve the margin, since the consolidation or is the strong margin really reflected that the third part of this segment is doing very, very well?
Matthias Zachert
Well, I would take the second and third question and so Michael will take number one. So let me start with number two.
I would say according to our business assessment on Specialty Additives, bromine did well in Q3. And of course, what we rejoice, we saw that Chinese competition had tougher territories to circumvent and because of regulatory and especially we've seen some environmental shutdowns forced by Chinese government, so for that very reason, our brominated products did reasonably well.
The area where we had -- as we've communicated also in September, where we had some, let's say, more modest performance was the lube adds area. Because here, you saw that in Q3, raw materials were on the rise further.
And as Chemtura, as we indicated last year, let's put it like this, pushing prices in 2016 aggressively, of course, we are at this point in time, modest in the approach of pushing prices. We are doing this but not excessively, because we are here going for long-term profitability, long-term growth, volume growth part with reasonable pricing.
So we passed on the prices. And you see that with some of our customers who flagged this that we are doing it.
So there's a back test for you that we see where you see that we are doing it. But we are running the lube adds business in a sustainable way.
And therefore, we will most likely see here for this year, some margin squeeze and then from '19, '20 onwards, that's our internal plans for lube adds, you will see that the business is being repositioned for the long term, fitting with the margin expectations we had. So underlying-wise, you will see that the restructuring will come through and then the business will be there margin-wise and adding to the margin expectation we had for the entire segment, which I think I clearly flagged that by delivery of the synergies, the additives division should be up to 20% margin.
As far as Advanced Intermediates is concerned, I mean, the storyline is pretty clear. Saltigo will, despite agro weakness and despite the brutal environment, have a decent performance in 2017.
Of course, lower than in the past two years, so it has been a gradual squeeze now over the last two years. But it will still be an okay performance.
Fourth quarter, fourth quarters are always weak. And this fourth quarter, the answer to your question is the idle capacity and the little volumes are simply impacting the business, so therefore, it will be do weakest quarter, but that's basically it.
So if volumes are not there, you don't post sales. If you don't post sales, you don't absorb your fixed cost structure, and that lingers in the profitability.
As far as Organometallics are concerned, we've always said that this is a stranded business with basically margins that you hardly see and profitability that you hardly see. So it weighs on the margin of the entire segment.
And, Andreas, within one or two quarters, you don't turn suddenly margins around. We are not alchemists, if you want to turn a business, it takes round about two to three years.
And I think in the next six to 12 months, we will understand this business so well that we will be able to say if we can bring it to our financial metrics standards and implement better business model or not. And therefore, the strategic decision for how we run this business is still to become.
But from everything that we are seeing right now, is we have the capabilities of making this stranded business a reasonable business. How reasonable, we will convey in the next one to two years when we regularly give updates on this.
And Michael will answer the technical question.
Michael Pontzen
Andreas, at current U.S. dollar rates of around €1.16, we expect that the recon will be, for the total year, rather in the ballpark of €170 million for the complete year.
Andreas Heine
That is '17 or '18?
Michael Pontzen
'17.
Andreas Heine
And the interest do you have for the year 2018? I think most substantials you have already done.
Does that have the same impact or is that then an even lower line as you have more hedge gains with the U.S. dollar?
Michael Pontzen
That is what we will discuss when we start discussing about 2018, which is not the case today.
Operator
Next question comes from the line of Markus Mayer with Baader-Helvea. Please go ahead.
Markus Mayer
One question. Hopefully, I have not overheard your comment.
Can you give us some light on the Harvey impact in Q3? And then again, coming back to Advanced Intermediates, could you give us a kind of a number of what would have been the underlying growth or i.e., the growth excluding the weak agro business?
Matthias Zachert
Well, Harvey. Of course, we were impacted by Harvey as well, but rather indirectly, and we had in Baytown a shutdown of round about five to 10 days, something like this.
But the financial impact of this is single digits, so it's something that, in the overall context, we highlight it verbally, but it did not, fortunately, have a big impact on us different to other chemical, especially petrochemical companies. What is very fortunate, I think we did everything and worked really hard over weekends, night shifts to avoid that our customers were impacted.
And many of our customers were very pleased as they saw that we made sure that the delivery change and the production chains were fully guaranteed, and there was no further impact for our customers. So all in all, I would say, Harvey, we saw it but single digits.
As far as Saltigo is concerned, I mean, this is -- we don't report operating results adjusted for operational trophy environment. We saw that volumes were negative in agro.
This is embedded in the 1% volume growth on Advanced Intermediates, no further comments regarding our -- to single out an operational downturn environment, I think that would be somewhat unserious.
Operator
Your next question comes from the line of Andrew Benson with Citi. Please go ahead.
Andrew Benson
Can you give us a bit more of a flesh on ARLANXEO and how you are going to manage the volatility of costs there? On the net debt, do you think given the strong performance in the third quarter, there could be further inroads in the fourth quarter?
And just can you give us some magnitude. You may have already about a bit of the shutdowns or turnarounds, maintenance turnarounds you're expecting in the fourth quarter.
I think you said it was in the high-performance materials area, but if there are any others as well, that would be great.
Matthias Zachert
Well, let me address them one by one. As far as the ARLANXEO is concerned.
Volume-wise, as you can see from the reported numbers, despite the strong comparable base, last year, we did reasonably well. So the underlying market environment is still tough.
But in the market, I would say we compete reasonably well. The contraction in the margin is basically, I mean, it's a volatile business.
It is more volatile than any of our other businesses as we've always flagged in the last few years. What we saw now in the third quarter was predominantly a margin squeeze, stemming from raw materials that were bought in Q2 at a higher price, and then being digested and moving through the P&L in Q3 when, of course, then prices -- product prices were not there where they had to be.
We are currently in the process of moving product prices up in the fourth quarter, whilst also raw materials are on the rise. So that has basically led to a certain squeeze in third quarter and that is driving the modest profitability.
We are currently doing everything, and you might see that on the market prices that are posted by CMAI, that rubber pricing by the rubber suppliers are being addressed. And therefore, third quarter was not an easy one.
I'm not saying that fourth quarter is a great one. It will be potentially also not an easy quarter, but I think we will manage fourth quarter better than third quarter.
As far as net debt is concerned, very crisp. Of course, the fourth quarter is always one where we have the lowest profitability in the year and, of course, the highest CapEx whilst also restructuring costs are being cashed out, because you have terminations that have been announced according to our synergy plants.
So I would not have a big -- I would not have big expectations on further deleveraging in Q4. But as you can see, the deleveraging that we wanted to do in 2017, we've already delevered more than originally planned.
HPM is visible. But here, we have never flagged precisely how much it's going to be.
We basically indicated somewhat in the very low double digits. I think 10 million can be a good orientation.
But where it is precisely, we can only say once the plant is fully up and running. If we are according to plan, then it might be in this area of 10.
If we are fast, it might be lower. If we are having a few days more of turnaround, it might be a little bit higher.
But I think 10 is a good cornerstone for financial modeling. And with this, Andrew, I think all questions have been answered.
Operator
Next question comes from the line of Peter Spengler of DZ Bank.
Peter Spengler
First is on ARLANXEO and competitive landscape. Are there are additional capacities in Q3 and what to expect the next six months or so?
And then, maybe a general view on Q3 and maybe already on Q4 concerning potential destocking; the inventory levels in general and potential inventory valuation or devaluation due to raw material volatility in Q4.
Matthias Zachert
Well, as far as ARLANXEO is concerned, capacity wise, I think there is no news. I mean, capacities basically that had been announced are the ones that are on-stream.
So of course, we see the new capacities by Exxon in the Middle East. So there's no change in our communication.
Dow has flagged for EPDM to enter into the market next year, so that's what we also have flagged for the last six, nine, twelve months. Of course, that will be starting with premarketing, and then we have to see how they ramp up.
But that's the reason why we always have kept this year and will keep for next year a humble tone on EPDM. And we don't rule out that EPDM will have a tougher trading environment compared to 2017.
This being said, I would like to stress that EPDM, compared to the other big rubber grades put to PBR is the smallest. And there's some good news in rubber, which of course mitigates a little bit EPDM.
Chloroprene is pretty tight. And here, we have posted over the last quarter's further price increases.
Because here, it's -- I mean, we are in the Western Hemisphere, clearly, the big player. And therefore, we know how to mitigate in this environment.
So on ARLANXEO, capacity wise, no change. Everything that was communicated over the last two to three years is basically coming through.
And as far as China is concerned, of course, in China, we see some cleanups. So on PBR, we saw some capacities being tightened by Chinese government which is positive.
But all in all, if I look at the rubber market, it will still be a trophy market for '18. And then in '19, let's see where the market will go.
We should then start to see some moderate balancing on supply-demand. But of course, let's focus on this once we entered into 2019.
As far as destocking is concerned, we currently see that value chains are not loaded. We see that the automotive value chain but also the rubber value chains are moderate.
And therefore, we don't enter into year-end with high inventories. I do assume that everybody would pay attention to further tighten inventory levels for year-end because it's financial year-end, so everybody wants to have a proper, clean balance sheet.
And therefore, as far as this is concerned, I think this is a good platform then for 2018. And on reval, Michael will take up your question to provide the respective crisp answer.
Michael Pontzen
Yes. Peter, basically, in the given environment of the raw materials, you should not expect any revaluation on the inventory levels, okay.
Nobody knows what the raw material levels will be in two or three months from now. But in that point in time, you should not expect any major changes given the current raw material price environment.
Operator
Next question comes from the line of Patrick Lambert with Raymond James. Please go ahead.
Patrick Lambert
First one is just a housekeeping. The Superior Plus transaction, it has closed in Q4 or already end of Q3.
Just confirmation or has it not closed yet? First question.
The second questions and third are related; it's trying to understand the 16% EBITDA margin on the Specialty Additives versus the almost 19% in H1. If you could comment on is it largely driven by the Chemtura part of the business and also in terms of synergies, can you update us where you are in terms of synergy?
I know you booked some in the reconciliation line. So if you can help us out on those absolute number of synergies realized already in nine months, at the nine months level, that would be good.
Matthias Zachert
Yes, Patrick. As far as your first question is concerned, the chlor dioxide business we closed end of September.
So that would be off the books in fourth quarter. And as far as the more meaningful one, the phosphor business is concerned, here, we need to wait for antitrust approvals, of course.
So we need to file that even though we don't consider that this would pose any roadblock. Then, as far as the second question is concerned, the synergies we have in 2017, by and large, are rather SG&A related, corporate related.
On the business side, the stuff that we have initiated on the production side, procurement side, et cetera, will rather start to enter into the P&L in '18, '19 for obvious reasons. Now as far as margin is concerned, as I indicated before, you need to factor into the underlying business performance Q3 '17 versus Q3 '16 that we have different cost rates.
We are currently operating at a cost rate of 1.17 and 1.18 and if you rewind 12 months, transaction translation was far more favorable also to the specialty segments. We have now have a footprint in North America where we produce, of course, in North America and sell to Europe.
And therefore, that is one answer to your question. The second operational, however, answer to your question is what I highlighted earlier.
The lube adds business, margin-wise is at a lower performance compared to last year, because here, we are still in the process of passing on raw materials, so sales are higher. But we are passing on raw materials unproportionately compared to the raw material rise for the reason that we mentioned.
We run this business in a sustainable way. And so therefore, mitigate the aggressive pricing that was done by Chemtura in '16 and '15.
And for that very reason, we saw operationally here, in the only business line, a contraction in margin. And that's basically why margins in speciality adds have been stagnating at the 16% compared to previous year.
Operator
Your next question comes from the line of Stephanie Bothwell with Bank of America Merrill Lynch. Please go ahead.
Stephanie Bothwell
Two small points of clarification. The first one was on the cash flow.
Obviously, good cash flow performance in the third quarter. And certainly, as I look ahead to 2018, I think the expectation is that, that should be carried into 2018 as well.
What I really wanted to understand is on Slide 30 of your presentation, you set out the exceptional items for year-to-date 2017 and also looking ahead. When I look at the 2018 cash flow bridge, aside from the exceptionals going through the P&L, so probably around €150 million positive year-on-year into 2018, what are the additional cash-out items that we should be factoring into the cash flow side of things for 2018?
That's the first question. The second one was on ag and Saltigo.
In your opening remarks, you noted that you expected 2018 to be another relatively challenging year for the ag industry overall. As things currently stand, what would be your expectation on Saltigo volumes for 2018?
Would you anticipate another down year at this point given current market views?
Matthias Zachert
Well, I would take, Stephanie, the ag question, and Michael will pick up the question on cash flow. So if I look at ag 2018 for Saltigo, and also factoring in the round about three to six months, depending by customer, some are on the three, some are on the six range, that we only, once customers are positive, see with a three to six months delay, the pickup in agro, I look today that agro, with the assumption that agro will be slightly worse for Saltigo 2018 than 2017.
I'm saying slightly and performance-wise, this is in the single-digit millions EBITDA-wise. Because I'm saying slightly as the business, I mean, it's really already right now ugly.
It's difficult to get uglier than that. So therefore, we look in 2018 still with an ugly expectation.
And that's where we stand. As far as '19 is concerned, however, what I need to stress is we are working already with some of the big agro chemical companies on new products.
So if you look around in the consolidated ag chemical industry, they're basically new products entering, being launched or being intended to be launched in '19, '20 and we are part of that. These are nice products where technology leadership is needed.
We have the technology, and therefore we are quite focused on exactly this. So from today's expectation, if we look at Saltigo, '18 is a year that will be not better than 2017, that might be worse than 2017, but not a great lot.
And we hope that after '18, we will then have digested the agro territory. But of course, this will be something we will more clarify in the course of 2018 when we do the quarterly reporting.
And now, Michael, for the cash flow.
Michael Pontzen
Stephanie, with regards to the cash out related to the exceptionals, we gave the guidance that for 2018, we still expect of our Phase 2 program some €15 million. And for implementing the synergy for the integration of Chemtura, a number of 40 for 2018.
That were the numbers which we gave earlier in the year. As said, we will give an update with the full year results presentation.
Matthias Zachert
So the only thing on '18 potentially on cash flow, I would like to address. The CapEx lag that we communicated 2016 when we announced the Chemtura acquisition, this is something that we will take care of in '18 and '19, that we bring the Chemtura sites to our standards.
So that is one element I would like to simply flag. I think then after '19, it will be digested.
Plants will be where we want them to be. And then, also the production network should show visible results as far as gross margin improvements are concerned.
That will be the key element for us in '18, '19 to upgrade the production network, but also adjust the capacities respectively, so that we here bring the business to the level where we would like to bring it to. Any further questions?
I see that there are no further questions. I look into the lovely eyes of especially are Ulrike and, well, Oliver, no comment.
I would like to take the opportunity to thank all of you for your interest in the company. I can tell you we are very much energized.
We will finish this year on a very solid footing. What we are working on is what you would see in 2018 and '19.
I am extremely enthused by that. We are very focused, and I think you -- the ones of you that take a midterm, long-term view on our company, I think all of you will rejoice because we are transforming this company further.
And with this, I'm looking forward to an exciting road show. And I wish you a good finish of the year.
We will make sure that we do the same, and then we look forward seeing all of you in the weeks, months to come. Thank you very much.
Bye-bye from LANXESS.