The new global company, Lanxess, presented themselves to the public on November 25, 2004. Formed from the chemicals arm and some of the polymers activities of Bayer AG, Lanxess will begin operating as an independent company at the start of 2005. A completely new company with some 20,000 employees, their own corporate structure and 2003 sales of euro6.3 billion (based on the combined financial statements) has been created in record time since the decision was taken to spin off these operations in November 2003. It is expected that Lanxess will rank sixth among Europe’s listed chemicals companies.
Dr Axel C Heitmann, chairman of the board of management of Lanxess, outlined the company’s strategy and three main goals: independence, competitiveness and profitability. Independence will be ensured by focusing on the opportunities and challenges of the global chemicals and plastics markets. ‘Activities that were classified as non-core at Bayer are now part of Lanxess’ core business’, explains Heitmann.
Lanxess have four segments, each of which already reports annual sales of well over euro1 billion. The performance rubber segment specialises in solid rubber for the rubber and tire industries. Engineering plastics focuses on the production of high-quality plastics for electrical and electronics appliances, furniture, sports and leisure applications and automotive engineering.
The chemical intermediates segment comprises basic chemicals, intermediates for the pharmaceuticals and crop protection sectors and inorganic pigments for colouring concrete and coatings. Performance chemicals is a classic area of the speciality chemicals business. Its portfolio comprises material protection products, processing chemicals for leather, textiles and paper, ion exchange resins, polymer additives such as flame retardants.
Heitmann acknowledges that the company faces major challenges in the next few years. Nevertheless, he is confident that Lanxess will achieve all its strategic goals in the medium term: ‘I am convinced that we will make it.’ The uptrend on the chemicals market that started this year is expected to peak in 2006 or 2007. However, Lanxess is not relying solely on positive market trends. Consequently, it expects to derive more benefit from future upswings than it has in the past.
Lanxess have a 40% stake in Bayer Industry Services, enabling them to influence decisions at individual sites. Reducing their euro1.1 billion net debt (excluding pension obligations of euro0.4 billion) has high priority for Lanxess. The company already have a sound capital structure and an investment-grade credit rating.
The principal goal at first will be to quickly raise the efficiency and effectiveness of the company and improve their cash flow. Lanxess have already identified immediate measures with a savings potential of millions of euros that should have a full impact on earnings next year.
Moreover, they have achieved their aim of introducing far-reaching changes. In the initial stages, the spotlight was on establishing a completely new organisational structure. This was accomplished in the first half of the year. Worldwide, 150 appointments were made to management positions. The clear structure comprising 17 business units grouped in four segments optimises the company’s ability to focus on their other strategic goals: a long-term improvement in performance and profitability.
Heitmann lists the action required: ‘Steadily reduce costs, optimise processes, improve the product mix, develop new price/volume strategies and generate organic growth.’ On the basis of these criteria, strict portfolio management is to be introduced for Lanxess’ extensive product range.
The consistent result-driven strategy is already bearing fruit. In the first nine months of this year sales increased 4.5% to euro5 billion, up from euro4.8 billion in the same period last year. In the first nine months of 2004 the EBITDA margin before special items increased to 7.6%, compared with 6.7% in 2003.
On 60% of sales Lanxess already achieve an EBITDA margin before special items of over 5%. The margin on half of these is over 10%. ‘That is a sound basis. We should therefore be able to report an EBITDA margin of around 7% in 2004’, reports Heitmann. That would be a substantial improvement on the previous year – even though the far-reaching cost-containment and restructuring drive is not yet having full impact. ‘However, it will become clear very soon’, according to Heitmann. Profitability should then rise further: ‘From 7% this year to an estimated nine to ten percent in 2006.’
According to Heitmann, portfolio management will also include restructuring: ‘Under-performing business units need to ensure a rapid and sustained improvement in their performance so they make a positive contribution to cash flow. The key criterion for portfolio management will be improving profitability. Targeted divestments are therefore possible. In the medium to long term Lanxess will also be examining selective acquisitions to strengthen their operations. However, no acquisitions are planned at present. Alliances are another cornerstone of the new company’s strategy.
Lanxess intend to step up internationalisation of their business. They already haves 50 production sites and more than 50 companies in 21 countries. Asia and above all China will still enjoy high priority because this region is the main growth driver in the global chemical industry. In September Lanxess announced that they would be transferring their hydrazine hydrate facility from the United States to China.
Organic growth is concentrated on selected areas that are profitable. For instance, a euro40 million investment programme is planned for the butyl rubber business unit. ‘There are even opportunities for basic chemicals, which are often viewed with skepticism’, stresses Heitmann. This business would benefit from a genuine upswing in many regional markets. ‘We have a clear strategy, we know we have to work hard, and we are convinced that we will make it’, concludes Heitmann.
