Welcome to LANXESS Annual Report 2012!

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Value management and control system

Value Management and Control System
    2008 2009 2010 2011 2012
EBITDA pre exceptionals € million 722 465 918 1,146 1,225
EBITDA margin pre exceptionals % 11.0 9.2 12.9 13.1 13.5
Capital employed € million 2,989 3,475 3,750 4,784 5,442
ROCE % 15.4 5.9 17.0 17.2 15.6
Days of sales in inventories (DSI) Days 66.9 55.1 53.7 60.1 64.7
Days of sales outstanding (DSO) Days 44.6 47.0 46.3 49.9 47.4
Net financial liabilities € million 864 794 913 1,515 1,483
Net debt ratio   1.2x 1.7x 1.0x 1.3x 1.2x
Investment ratio % 5.4 6.8 7.4 8.0 8.1

To achieve our strategic goals, we need specific controlling parameters against which we can measure the success of our efforts. 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.

Financial performance

The key controlling parameter for 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 operational depreciation and amortization and any exceptional items. Every operational decision or achievement is judged by its sustainable impact on EBITDA. As part of the annual budget and planning process, targets are set for this benchmark of our company’s success, which are then incorporated into the assessment of employees’ variable income components (see the “Employees” section of this combined management report).

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. When raw material prices fluctuate throughout the year, we adjust our selling prices in line with our price-before-volume strategy. This has an effect on sales, but almost none 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 profitability 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 controlling parameters are prepared.

Certain parameters used in the 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 has a significant impact on the timely adjustment of selling prices in line with our price-before-volume strategy. 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 controlling parameter at Group level. ROCE is a profitability ratio that indicates how efficiently we utilize our capital. This makes it an important criterion in capital expenditure decisions, for example. All new capital expenditure projects must at least meet the Group’s ROCE.

Chart: Profitability ratios

Interest-free liabilities comprise provisions (except those for pensions), income tax liabilities, trade payables, and items included under “other liabilities.” In addition, we use a simplified variant of ROCE, called “business ROCE,” to manage 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.

At 15.6%, ROCE in 2012 (2011: 17.2%) was well above our weighted average cost of capital (WACC), which was adjusted for comparability. After adjustment for the €500 million bond issued at the end of the reporting year to secure our long-term financing needs, ROCE was exactly the same as the previous year at 17.2%. The after-tax WACC, which is used for steering purposes, amounted to 8.4% and was unchanged from the previous year.

Capital employment

To control our working capital, 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 2012, DSI was at 64.7 days (2011: 60.1 days) and DSO at 47.4 days (2011: 49.9 days). Another important performance indicator is business free cash flow, which indicates how much cash our business units are generating directly. It is calculated for the operating units using a simplified cash flow method.

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 the “Capital expenditure strategy” section 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 the solid result for the reporting year and lower net financial liabilities at December 31, 2012, we were able to reduce the net debt ratio to 1.2, against 1.3 at the previous year’s reporting date. We achieved a slight reduction in net financial liabilities despite continued high capital expenditures made in the implementation of our growth strategy.

Net Financial Liabilities
€ million 2008 2009 2010 2011 2012
Non-current financial liabilities 9591) 1,462 1,302 1,465 2,167
Current financial liabilities 168 94 176 633 167
Liabilities for accrued interest (14) (47) (41) (55) (54)
Cash and cash equivalents (249) (313) (160) (178) (386)
Near-cash assets 0 (402) (364) (350) (411)
  864 794 913 1,515 1,483
1) After deduction of €27 million in specific exchange hedging of financial liabilities


Key Figure Analyser