Value management and control system

Value Management and Control System
    2009 2010 2011 2012 2013
EBITDA pre exceptionals € million 465 918 1,146 1,223 735
EBITDA margin pre exceptionals % 9.2 12.9 13.1 13.4 8.9
Capital employed € million 3,475 3,750 4,784 5,442 4,969
ROCE % 5.9 17.0 17.2 15.6 5.8
Days of sales in inventories (DSI) Days 55.1 53.7 60.1 64.7 58.0
Days of sales outstanding (DSO) Days 47.0 46.3 49.9 47.4 47.8
Net financial liabilities € million 794 913 1,515 1,483 1,731
Net debt ratio   1.7x 1.0x 1.3x 1.2x 2.4x
Investment ratio % 6.8 7.4 8.0 8.1 8.1
2012 figures restated

To achieve our strategic goals, we need specific indicators that we can use to measure the outcome of our activities. Such assessments are founded on a reliable, readily understandable financial and controlling information system. We are constantly working to further improve the information provided by the Accounting and Controlling group functions through consistent reporting of budget, forecast and actual data.

Our success is largely reflected by our earning power so our control system is focused on steering this parameter.

Earning power

The key indicator for steering the earning power of the LANXESS Group and the individual segments is EBITDA (earnings before interest, income taxes, depreciation and amortization) pre exceptionals. It is calculated from EBIT by adding back depreciation of property, plant and equipment, amortization of intangible assets and any exceptional items. The latter are effects of an unusual nature or magnitude. They may include write-downs, restructuring expenses, expenses for the design and implementation of IT projects and expenses for portfolio adjustments. Income from grants and subsidies from third parties for the acquisition and construction of property, plant and equipment are assigned using the gross method. No adjustments other than for gross depreciation and amortization are made when calculating EBITDA pre exceptionals.

Every operational decision or achievement is judged in the short and long term by its sustainable impact on EBITDA pre exceptionals. As part of the annual budget and planning process, targets are set for this benchmark of our company’s success, which are then taken into account in determining employees’ variable income components (see the “Employees” section of this combined management report). We use EBITDA pre exceptionals as our key controlling parameter because it facilitates assessment of the company’s development over several reporting periods.

Of the exceptional items of €381 million incurred in 2013, €270 million were write-downs with no impact on EBITDA, €257 million of which were due to impairment testing at the business unit level. The exceptional items of €111 million which had an impact on EBITDA resulted primarily from measures related to the Advance program. The “Segment information” section of this combined management report details the distribution of these exceptional items among the segments.

Simple revenue data such as net sales are not among the Group’s controlling parameters because they do not permit any direct conclusions about our profitability. Volatile raw material prices are a hallmark of our industry and their fluctuation throughout the year impacts our selling prices. This has an effect on sales, but largely no impact on the margins that are significant to our profitability. We therefore set no sales targets, either for the short term or medium term.

Company-specific lead indicators

Lead indicators support the timely identification of material changes in assets and liabilities, financial condition and earnings performance and the initiation of appropriate measures.

Our annual budget and planning process delivers key values for the Group’s earning power and our ability to finance operations from our own funds as the starting point for steering the company. This information is used, for example, to make financing and capital expenditure decisions. To ensure a timely response to changes in market conditions and the competitive environment, operational forecasts are prepared twice each year as the basis for updating the full-year budget and the associated key values we use to control the Group. In addition, regular forecasts of the key values for our earning power are prepared.

Certain parameters used in budgets and forecasts are defined centrally and applied uniformly because they have a major influence on the key values. Strategic raw materials, like butadiene, play a crucial role in forecasting. The ongoing development of procurement prices is significant to the timely adjustment of selling prices. Even regional differences in the availability of raw materials over a specific period of time may become significant. Given the regional diversification of our production sites and customer markets, exchange rate development also affects the profitability resulting from sales and cost trends, with corresponding repercussions for pricing and hedging strategies. In addition, we draw on continuously updated growth forecasts for our customer industries and the regions where we do business in order to prepare and review sales and capital expenditure decisions.


Return on capital employed (ROCE) has been implemented as a profitability ratio at Group level which indicates how efficiently we utilize our capital. This makes it an important criterion in capital expenditure decisions, for example.

Graphic: Return on Capital Employed (ROCE)

Interest-free liabilities comprise provisions (except those for pensions and other post-employment benefits), income tax liabilities, trade payables and items included under “other non-financial liabilities.” In addition, we use a simplified variant of ROCE, called “business ROCE,” to evaluate the performance of our business units.

Cost of capital

Borrowing costs are calculated from risk-free interest, i.e. in our case, from the return on a long-term German government bond plus a risk premium for industrial companies in the same risk category as LANXESS. The cost of equity reflects the return expected by investors from an investment in LANXESS shares. Equity investors demand a risk premium due to the greater risk involved in acquiring shares than in buying risk-free government bonds. This is known as a market risk premium and is calculated using the long-term excess return generated by a stock investment over an investment in risk-free government bonds and adjusted by the beta factor denoting the relative risk of an investment in LANXESS stock compared with that of the market as a whole.

In 2012, ROCE was 15.6% and thus well above our weighted average cost of capital (WACC) after adjustment for comparability. It fell below the WACC to 5.8% in 2013.

Capital employment

To optimize our working capital at the operational level, we use two key performance indicators: DSI (days of sales in inventories) and DSO (days of sales outstanding). These represent inventories and receivables, respectively, in relation to sales for the previous quarter. In 2013, DSI was at 58.0 days (2012: 64.7 days) and DSO at 47.8 days (2012: 47.4 days).

Expenditures for property, plant and equipment are subject to rigorous capital discipline and are aligned systematically with those product areas with the greatest potential for success. We prioritize investment projects on the basis of financial indicators such as the pay-off period, net present value and ROCE. For more detailed information about our capital expenditure guidelines, please see “Capital expenditure strategy” above.


The net debt ratio, which we use solely at Group level, is defined as net financial liabilities divided by EBITDA pre exceptionals. Net financial liabilities are the total of current and non-current financial liabilities, less cash, cash equivalents and near-cash assets. The financial liabilities reflected in the statement of financial position are adjusted here for liabilities for accrued interest. Due to weaker earnings development in the reporting year and higher net financial liabilities at December 31, 2013, the net debt ratio increased to 2.4, against 1.2 at the previous year’s reporting date. Our net financial liabilities rose by €248 million to €1,731 million.

Net Financial Liabilities
€ million 2009 2010 2011 2012 2013
Non-current financial liabilities 1,462 1,302 1,465 2,167 1,649
Current financial liabilities 94 176 633 167 668
Liabilities for accrued interest (47) (41) (55) (54) (53)
Cash and cash equivalents (313) (160) (178) (386) (427)
Near-cash assets (402) (364) (350) (411) (106)
  794 913 1,515 1,483 1,731