Future perspectives

Expected results of operations of the LANXESS Group

Following the very challenging fiscal year 2013, we are currently anticipating a slight increase in our key performance indicator, EBITDA pre exceptionals, in 2014. Alone the absence of one-time effects, such as start-up costs or inventory write-downs due to raw material prices, should contribute to this improvement – even if selling prices remain at a low level.

At the present time, we do not expect any tangible effects on our earnings from the forecast growth in the global economy. Existing uncertainties such as the development of market capacities for synthetic rubber, sovereign debt in European countries and global political crises could impact economic momentum and thereby also our company’s performance.

Against the background of the earnings forecast made for the LANXESS Group, we assume the following development for the 14 business units in our three segments. The expected differences in development in the segments are based on the underlying global megatrends and the changes in the market environment.

For the Performance Polymers segment, we expect a slight improvement in demand from the main customer industries – automotive and tires – in 2014 compared to the low level of demand in the previous year.

We believe the most dynamic growth will be in the Asian growth markets of China and India. In our opinion, demand stimulus in Europe will be only low. In the tire industry, Europe’s legislation for the classification and labeling of tires that was passed at the end of 2011 and similar global labeling initiatives could help support demand for our synthetic rubber products. However, in this segment we expect continued strong competition – especially for our synthetic rubber products – from new producers entering the market and from new capacities.

In the Advanced Intermediates segment, we expect a continuation of good customer demand for our agrochemical products from the Advanced Industrial Intermediates and Saltigo business units. We are assuming further solid development of this business. However, we are planning more scheduled plant shutdowns in the Advanced Industrial Intermediates business unit in 2014, which was taken into account in the earnings forecast for the segment.

In the Performance Chemicals segment, we are expecting a slight improvement in demand overall in 2014. Among other things, we believe that the construction industry will post more dynamic growth, especially in Asia and North America. Following the successful start-up of its CO2 concentration unit, our Leather business unit should benefit from an improved competitive situation. The forecast improvement in demand from the automotive industry should also provide impetus for our Rhein Chemie and Rubber Chemicals business units. In this connection, the cost position of the Rubber Chemicals business unit should be enhanced by the restructuring measures that have been implemented. For our Liquid Purification Technologies business unit, which serves the key water megatrend, we expect further growth opportunities given the continued good demand for our water treatment products following successful product diversification through the introduction of our membrane technology in the current year.

Expected cost development of the LANXESS Group

On account of the challenging economic environment in the year under review, LANXESS initiated the Advance program with extensive measures aimed at countering the effects of weak demand. In connection with this program, exceptional charges of around €150 million have been budgeted until 2015. In 2013, we brought forward some €30 million in exceptional charges for the program, which diminished earnings overall by around €110 million.

In addition to the Advance program, we have continued to flexibilize our cost base through flexible asset management and high cost discipline. We seek to respond quickly and as necessary in adapting our cost development to the economic environment.

In 2014, we are assuming a continuing volatile trend for raw material costs, which were at a comparatively moderate level at the end of the year under review. We are generally assuming that price trends for the individual strategic raw materials will vary and that the trend toward higher procurement costs, particularly for petrochemical raw materials, will also continue, with corresponding volatility. We believe energy costs are likely to increase slightly in 2014.

Exchange rate fluctuations may impact our earnings. We have already entered into hedging transactions to ward off the effects of such developments in 2014 as well as 2015.

The U.S. dollar will remain the key currency for LANXESS’s businesses. We expect this currency to remain volatile against the euro in 2014, moving within the range of US$1.25 and US$1.45.

For 2014, we are assuming lower depreciation and amortization compared to the year under review, following the impairment charges recognized in the Performance Polymers and Performance Chemicals segments in 2013. The start-up of new plants will result in additional depreciation expense in 2014. We project depreciation and amortization of between €400 million and €420 million in fiscal 2014. Higher costs are to be expected as a result of the increase in wages and salaries associated with the collective bargaining agreement.

The effective tax rate for the LANXESS Group is significantly influenced by the regional distribution of its earnings. For the medium term, LANXESS is targeting a tax rate of between 22% and 25%. On account of the currently challenging business environment, it will likely be higher in 2014. However, an exact forecast is difficult.

Expected financial position of the LANXESS Group

Liquidity situation
LANXESS will continue to pursue a forward-looking and conservative financial policy. With more than €2.0 billion in cash and undrawn credit lines, as described under “Financial condition,” we have a very good liquidity and financing position which will enable us to fund our selective growth strategy.

Capital expenditures
We will continue to pursue our investment and growth strategy in fiscal 2014. The cash outflows for capital expenditures will again relate to the expansion of existing plants, the construction of new production facilities and the maintenance of existing production facilities. For 2014, we are projecting cash outflows for capital expenditures in line with the previous year. We expect a significant investment volume of around €110 million for the construction of our world-scale facility for high-performance Nd-PBR in Singapore and about €130 million for the EPDM rubber facility in China.

Financing measures
LANXESS is in a good position due to the long-term nature of its financing and ensures the financing for planned capital expenditures by future cash flows, available liquidity and existing lines of credit. The same also applies to the expected dividend payment and the pending redemption of the bond which matures in April 2014. Thanks to the extensive measures taken in previous years to improve the company’s financial position, there will be no significant need for refinancing in connection with the redemption of this bond. In addition, LANXESS will continue its efforts to secure long-term funding as part of a conservative financing policy by further diversifying its financing sources and implementing forward-looking financing measures.

Expected results of operations of LANXESS AG

We expect the administration expenses that LANXESS AG incurs in performing its tasks as a management holding company to increase slightly in 2014 and 2015. Apart from this, the earnings position of LANXESS AG will be dominated by the financial result, especially the net interest position and the balance of income and losses from investments in affiliated companies. In 2014, we expect the net interest position to be negative on account of the financing structure. The balance of income and losses from investments in affiliated companies and the corresponding ability of LANXESS AG to pay a dividend will depend in large measure on the profit transfers and dividends paid by the other companies of the LANXESS Group. We will maintain our consistent dividend policy. In 2014, we expect net income of LANXESS AG to come in slightly higher than in 2013.

Dividend policy

LANXESS follows a consistent dividend policy. As in the past, our future dividend proposals will take into account the business performance of the relevant fiscal year, the Group’s financing goals and development trends in the new fiscal year.

Summary of Group’s projected performance

The LANXESS Group remains well positioned with its product portfolio in the relevant customer industries and will continue its efforts to expand its presence in the world’s growth regions this year. We assume that the efficiency-enhancing and restructuring measures we are taking as part of the Advance program will help to increase LANXESS’s competitiveness in what remains a challenging environment.

However, we currently anticipate very low demand stimulus in light of the forecast development of the global economy. We also expect the situation for our business units with synthetic rubber products to remain challenging in 2014 owing to new competitive and capacity situations.

In our view, the development of raw material costs – especially for butadiene – is a further key factor that could impact business performance in 2014. We assume that prices will remain volatile at a comparatively moderate level. We expect a slight increase in energy costs in 2014.

Against the backdrop of the factors we have described, we are currently anticipating a slight increase overall in our key performance indicator, EBITDA pre exceptionals, in 2014. Alone the absence of one-time effects should contribute to this improvement – even if selling prices remain at a low level.

At the start of 2014, we are seeing a continuation of the challenges for our synthetic rubber businesses in the Performance Polymers segment and so far no sign of any demand stimulus.

However, we are confident of being able to continue growing organically and through targeted acquisitions in the medium term and assume that our efficiency-enhancing and consistent restructuring measures will make a major contribution here. We have set and continue to pursue a mid-term target of €1.8 billion EBITDA pre exceptionals in 2018, although that target has become considerably more ambitious in light of the current business trend.