How to succeed in quick time

20 November 2006

Dr Axel C Heitmann, chairman, said that since the spin-off from Bayer in November 2004, LANXESS 'have proven that we can re-energise chemistry by turning what was considered an old-school smokestack industry into a dynamic and profitable new venture. Now it is time to aim for a new destination, not just the stabilisation of a turnaround story, but sustained growth… proactively pursuing increased profitability through acceleration and acquisitions.' There will be no overlapping responsibilities and each head of each unit is fully responsible for his business on a global scale. If the company succeeds in exceeding their defined target, all employees will be well rewarded. However, weak performance will result in sharply reduced bonus payments. The first phase of the restructuring concentrated on reducing internal costs and improving performance. Phase two involved the targeted restructuring of loss-making businesses to produce maximum profitability. The third phase of their strategy 'involves portfolio adjustments, running LANXESS like a chemical-based investment portfolio, in which the market drives our decisions.' Their most important decisions were: * the implementation of a 'price before volume' strategy * the consequent streamlining of their product portfolios * implementation of new business models Using the transparency of the business, they were able to introduce strict working capital management and to pass on raw materials and energy price increases. This is, after all, plain common sense and LANXESS are in the business to make money, not to squeeze their own profit margins. Since January 2005, they have initiated cost savings of e260 million in four major restructuring phases. These savings, which are already coming in, will be fully effective in 2009. However, this critical restructuring has not been without pain and has involved closing several sites around the world and a reduction in the number of employees. Nor is it over. LANXESS want to eliminate all loss-making businesses from the balance sheet entirely and Heitmann told the press that the company intend to meet the trends of industry fragmentation and consolidation by being consolidators themselves. 'We need to lower costs year by year, while also gaining margin improvements through pricing excellence. 'In addition we need return-oriented resource allocation. These steps, taken together, will allow us to further close the profitability gap with competitors. LANXESS will have no businesses with less than a 5% EBITDA margin in 2009. This commitment sends the message that LANXESS will not subsidise unprofitable businesses or allow managers to rest on current success. Our goal is strong profits and future growth.' Financial stability Matthias Zachert, chief financial officer, said that LANXESS 'started off with very low profitability and were saddled with a considerable amount of debt. All the financial indicators for 2004 pointed to a difficult situation for the group as a whole, a situation that required prompt and rigorous action. We were burdened by so much debt that we could have got into difficulties in an economic downturn. But over the past 18 months, debt has been brought down by more that e500 and we are now a company with a healthy balance sheet.' It is a remarkable success story that in less than two years, LANXESS have been able to turn themselves around from a low-margin and financially weak organisation into a company with improved performance and financial headroom. Zachert pointed out that 'volatility, not only in raw material prices but also in exchange rates and energy costs, is part and parcel of the business. To minimise the effects of this, LANXESS have developed a risk management strategy for fluctuations in exchange rates and utility prices that is tailored to their needs, making them less vulnerable. Initially their financial position was very challenging, with only short-term funds available to them. Now they have a very sound financial basis and more than 80% of their debt is secured at long-term rates under extremely favourable conditions because they locked themselves in when interest rates were at historically low levels last year. Research and development Dr Ulrich Koemm, a member of the board, said that R&D was the responsibility of the individual business units because they are in constant touch with customers and, therefore, in the best position to know what customers want. LANXESS do not conduct basic research in-house but supports an R&D network with customers, suppliers, universities and research institutes. This leaves LANXESS free to concentrate on optimising products, applications and production processes. In addition, they are developing new applications for existing products and new products for existing applications. In this way, they are able to select and manage R&D projects to achieve maximum added-value with minimum investment in a short time. Human resources Dr Martin Wienkenhöver, also a member of the board, spoke about the important matter of human resources, of energising people. He said that 'LANXESS today is the only chemical company in the world enjoying double-digit growth rates for its share price, sometimes as much as 20%. All of our competitors have had either single digit growth rates or no growth at all.' He put one of the reasons for this down to the fact that 'LANXESS today is a team, not a workforce.' And the team consists of 17,000 people in 18 countries. The starting point for the company was difficult because there was 'too little work for too many people' and 'existing agreements prevented the urgently needed reduction in headcount. 'But contrary to all predictions, we succeeded in finding a solution, although we were not able to prevent the elimination of 960 jobs.' This could have been a far greater number but for the fact that LANXESS introduced the 35-hour working week and reduced wages by 6.7%. Moreover, employees now invest around 10% of their income in the company and will continue to do so to the end of 2007. These steps were necessary to save jobs and achieve savings targets. The company also created a new job centre which has found jobs for 740 of the 960 affected employees, either with or outside of the company. This is a very noteworthy achievement. Without doubt, LANXESS are a global business. Most of their country organisations are headed by top managers from their respective countries and in addition there are six different nationalities represented on the LANXESS leadership team. Today, about 98% of LANXESS' employees in China are Chinese. The company also offer traineeships well in excess of their own requirements. In Germany, for example, 600 young people are learning technical, scientific or commercial trades at LANXESS. Over the next three years, LANXESS expect to hire around 1,000 new employees in Asia, two thirds of them in China. Their workforce is growing at about 30% in China alone. They have a special programme for young Chinese managers which gives them the opportunity to study in Germany as part of their training, enabling them to return to China and support the company's business in one of the five sites LANXESS have so far in that country. One of the more radical moves by the company has been to reduce the number of management levels from nine to four. This bold move has greatly accelerated business processes and decision-making. New goals Heitmann laid out a set of three brand new goals for the company: * In 2009 LANXESS aim to be level with their peer group in terms of profitability, measured by the EBITDA margin * In 2009 there will be no LANXESS business with an EBITDA margin of less than 5% * In terms of finance, LANXESS will maintain their investment grade rating And, he said, 'the time has come to examine possible acquisitions. But LANXESS will only commit itself where additional value can be created for the company as a whole.'

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