2013 was overshadowed by increasing competition and volatile raw material prices, especially in the rubber business. We therefore launched an extensive efficiency program as a major step toward returning as quickly as possible to sustained and profitable growth.
Leading positions at the core of the chemical industry
As one of the world’s leading specialty chemicals companies, we are positioned at the core of the chemical industry. Our specialist expertise, our applications know-how and our capacity for innovation are demonstrated by our three segments: Performance Polymers, Advanced Intermediates and Performance Chemicals. Within these segments, 14 independent business units manage our global business operations. Effective January 1, 2013, we divided the Technical Rubber Products business unit in the Performance Polymers segment into two independent business units: Keltan Eastomers and High Performance Elastomers. While Keltan Elastomers focuses exclusively on the production and marketing of ethylene-propylene-diene (EPDM) rubber, High Performance Elastomers has been assigned the remaining Technical Rubber Products portfolio, which includes various high-performance rubbers and specialties.
Our concept of “entrepreneurs within the enterprise” ensures short communication lines, flat hierarchies and motivated employees – all of which are crucial in enabling us to respond quickly to specific customer requirements and to changes in market and regulatory conditions.
LANXESS Focuses on the Core of the Chemical Industry
Our aim is to position the businesses in our broadly diversified portfolio at the forefront of their respective markets. We support this with targeted development activities in all segments. LANXESS serves the following industries in particular: tires, chemicals, automotive, plastics, electronics, agrochemicals, leather and footwear, pharmaceuticals, food, water purification, construction and furniture. Other important sectors to which we supply products include medical supplies, coatings, printing technology and packaging. We believe that targeted development of our Advanced Intermediates and Performance Chemicals segments especially harbors opportunities for further improving our response to the cyclical nature of specific customer industries in the polymers sector. Diversification means that we are not dependent on individual customers. In 2013, our ten biggest customers accounted for only around 24% of our business. Our global profile, which we have steadily improved in recent years, also plays a key role in the stability of our business performance.
A Leading Specialty Chemicals Company
Innovative thinking …
Through targeted additions to our product portfolio and innovative solutions, we are improving our technical expertise. We maintained this approach in 2013, reliably delivering premium-quality products to our customers, actively supporting their innovation processes and thus adding measurable value for them. In this way, we are able to strengthen customer loyalty and achieve clear differentiation from our competitors.
Our research and development activities are closely allied to the needs of the market and our customers. Each business unit therefore has its own development capacities. Over and above this, our Innovation & Technology Group Function is an efficient central organizational unit that coordinates all research and development activities within the Group and handles cross-business unit projects. The high significance of innovation for our company is also demonstrated by the fact that R&D spending in 2013 came to 2.2% of sales, which was once again well above the average in recent years.
Further information about our research and development activities can be found in the combined management report.
… to ensure sustainability
In our business activities we are committed to taking account of the demands of economics, ecology and society. “Good for business, good for society.” This short sentence perfectly sums up our approach to business. It reflects our conviction that our products and our expertise in the area of sustainable development can make a significant contribution to supporting our customers, protecting the environment and improving the quality of life of people everywhere.
The greatest benefits of our corporate responsibility (CR) activities are achieved if they are balanced with our entrepreneurial and, especially, economic objectives. They must therefore be linked to our core business or to our available expertise.
Further information about our commitment to sustainability can be found in the “Corporate Responsibility” section.
Advance program launched to increase competitiveness
At the start of 2013, we were already predicting that it would not be an easy year for LANXESS. In particular, our synthetic rubbers business in the Performance Polymers segment was exposed to increasing competition – not least from new market entrants – in a weak market environment.
LANXESS Acts Sustainably
We therefore launched a new program, alongside our flexible asset management and strict cost discipline, to cushion the impact of a partially changed competitive situation in a persistently difficult market environment.
Known as Advance, the program aims to generate annual savings of around €100 million from 2015 through efficiency enhancements and selective restructuring. It will result in exceptional charges of around €150 million in 2013 and 2014.
Among the areas affected by selective restructuring is the Rubber Chemicals business unit in the Performance Chemicals segment. We have closed the Isithebe site in South Africa because the products manufactured there had reached the end of their market life cycle. In a further move, we focused production processes in Belgium and the United States. Our portfolio adjustments also include exploring strategic options for various non-core businesses. In addition, we launched a voluntary separation program that comprises early retirement packages and severance pay. In this way, we plan to reduce our global headcount by about 1,000 employees.
Mid-term growth target
Despite the unsatisfactory performance of our business in 2013, we remain committed to the growth trends that are the basis for its alignment. The elements described below serve as our operating framework. We have set 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.
We are aligning our product portfolio – and consequently our research and development activities – to four of the most important global megatrends, where we anticipate steady, above-average growth in the coming years.
Mobility With economic growth and rising prosperity, particularly in emerging and developing countries, our world is becoming increasingly mobile. LMC Automotive, a market research company specializing in the automotive industry, forecasts that the number of cars in use worldwide will increase by an average 3% each year through 2020. However, this growth goes hand in hand with increased emissions and higher consumption of resources. Making mobility environmentally friendly is therefore one of the greatest technical challenges of our time. Thanks to our pioneering technologies, our business units in the Performance Polymers segment enable us to significantly contribute toward two strategies for mastering this challenge.
Since around one quarter of a car’s fuel consumption is accounted for by its tires’ rolling resistance, improving the energy efficiency of tires is the primary strategy. As the market leader in high-performance rubbers, we make it possible to optimize the conflicting tire properties defined in the “magic triangle” of tire technology, thus combining low rolling resistance, good wet grip and durability. Regulations mandating the labeling of new tires to show their fuel efficiency, wet grip and noise emissions – like those introduced in the European Union at the end of 2012 – are an important and above all sustainable growth driver for our business. In both the medium and long term, they will translate into an increase in demand for green tires, which can only be produced using high-tech synthetic rubber. However, the European Union is not alone in its efforts. In December 2012, South Korea introduced mandatory tire labeling based on the E.U. model. Japanese tire manufacturers voluntarily introduced a comparable labeling system at the start of 2010. From November 2016, all tires imported to Brazil or manufactured there for the local market will have to be labeled in this way, too. Similar legislation is also being discussed in both the United States and China.
The second strategy for achieving environmentally friendly mobility is the substitution of traditional materials, such as steel or aluminum, with innovative high-tech plastics and intelligent composites. In 2010, modern vehicles contained an average of around 14 kilograms of high-tech plastics. By 2017, this is likely to have increased to around 22 kilograms. There are good reasons for this. Plastics and fiber composites are easier to process than metal components. They have outstanding mechanical properties and weigh up to 50% less than their metal counterparts. By using our high-tech plastics, the automotive industry can therefore lower production costs, increase design freedom and improve vehicle safety in one single step. Other advantages include significant environmental benefits, because lighter cars consume less fuel, which also results in lower emissions.
Agriculture The steadily growing global population is probably the key driver of the agriculture megatrend. According to current United Nations forecasts, it will rise to around 9.6 billion in 2050. The increasing number of people is also driving world demand for food. The Consultative Group on International Agricultural Research (CGIAR) estimates that global food production must expand by 60% by 2050 simply to keep pace with this population growth. The situation is compounded by changing eating habits worldwide and the growing use of crops as alternative energy sources. At the same time, however, climate change and increasing industrialization are likely to decrease the amount of land available for agriculture, thus necessitating a considerable improvement in the efficiency of cultivation. The product portfolios of our Advanced Industrial Intermediates and Saltigo business units include many key intermediates for synthesizing agrochemicals that can help farmers protect their crops and increase their yields.
Urbanization Throughout the world, people are relocating from rural areas to cities. The United Nations forecasts that the proportion of city-dwellers in the world population will increase from slightly more than 50% at present to just under 70% by 2050. The urbanization trend is most evident in emerging and developing countries. It is believed that 11 new megacities – cities with more than ten million inhabitants – will develop in China and India before the end of this decade. All these people will need living space, offices and a robust infrastructure. Our products are used in a large number of customer industries that are benefiting from increasing urbanization.
Water Usable water is one of the most valuable of all raw materials. Even in areas where it is available in sufficient quantities, water often cannot be used due to high levels of contamination. State-of-the-art industrial processes like those used to generate electricity cannot be implemented safely and economically without ultra pure water. Population growth, environmental pollution and climate change will greatly exacerbate the supply situation in the decades ahead. Studies suggest that the demand for clean water in 2030 will exceed current supply levels by around 40%. We aim to contribute to closing that gap. Products and processes marketed by our business units, especially Liquid Purification Technologies (formerly Ion Exchange Resins), are playing an increasingly important role in the treatment of drinking water, wastewater and process water.
We consider a global production and distribution network, a strong presence in growth markets and the resulting proximity to customers to be key success factors in the competition for market share. By investing extensively, we have steadily improved our global position in past years. In the markets of Asia and Latin America, which are characterized by above-average growth, we have more than doubled sales to around €3.1 billion since 2005. We have a growing, modern production infrastructure in both regions.
We also aim to continue growing organically – by expanding existing production facilities and increasing investment in new state-of-the-art sites, through product innovations and, last but not least, through further improvements in process efficiency. Clear rules have been defined for all growth projects: They must generate a return that is at least equivalent to the average return on capital employed (ROCE) achieved by the LANXESS Group during a normal business cycle.
In 2013, in view of the challenging environment, we reduced our capital expenditure budget and focused on key strategic projects:
- The Performance Butadiene Rubbers business unit is investing around €200 million in a new production plant for high-performance Nd-PBR in Singapore, close to the butyl rubber facility that came on stream at the start of 2013.
- In Changzhou, China, the Keltan Elastomers business unit is investing €235 million in the world’s largest production plant for EPDM rubber.
- To strengthen the High Performance Materials business unit’s high-tech plastics activities, a new world-scale facility for polyamide plastics is under construction at our site in Antwerp, Belgium.
We also intend to continue generating growth through acquisitions, focusing on small to mid-sized enterprises that optimize and complement our existing portfolio. Stringent strategic and financial criteria are used to evaluate potential acquisition targets.
In 2013, we made two small additions to our portfolio in the Performance Chemicals segment.
Through the acquisition of Singapore-based PCTS Specialty Chemicals Pte. Ltd., LANXESS has become one of the leading suppliers of biocides for coatings in the growing Asia-Pacific region. PCTS specializes in the production of biocides for environmentally friendly water-based coatings that meet stringent health, safety and environmental standards. The acquisition has given us access to new biocide applications. At the same time, we are benefiting from PCTS’ product expertise and know-how in coatings. We have already completed the process of integrating PCTS into our Material Protection Products business unit. This included establishing the PCTS facility as that business unit’s new headquarters in the Asia-Pacific region.
Successful Implementation of LANXESS Acquisition Strategy
To strengthen the phosphorus chemicals activities of our Functional Chemicals business unit, we acquired the operations of the French subsidiary of insolvent Dutch company Thermphos International B.V, Vlissingen, Netherlands. This transaction included the production facilities of Thermphos in Epierre, France, and its customer list. Thermphos is a manufacturer of phosphorus pentoxide and polyphosphoric acid. Both of these products complement our existing portfolio and can be used as intermediates in a range of applications including flame retardants and pharmaceuticals.
Outlook for 2014
We assume that the efficiency-enhancing and restructuring measures we initiated in fiscal 2013 as part of the Advance program will help to increase LANXESS’s competitiveness in what remains a challenging environment.
However, we currently anticipate a lower demand dynamic in light of the forecasted development of the global economy. We also assume that the situation for our business units with synthetic rubber products will remain challenging in 2014 owing to new competitive and capacity situations.
Even if selling prices remain at a low level, LANXESS is anticipating a slight improvement in EBITDA pre exceptionals for the full year – due alone to the absence of one-time effects.
We are confident of being able to continue growing organically and through targeted acquisitions in the medium term. The efficiency-enhancing and consistent restructuring measures described in this Annual Report should make a major contribution here.