Lanxess Faces Hard Choices as New Firm

It was the first annual press conference on results for Lanxess, following its official launch early this year. But it was not a joyous occasion.

The team of executives facing the press was determinedly optimistic. But their optimism could not mask the troubled state of many of the businesses that had been carved out by former parent Bayer and clumped together as Lanxess.

The company posted pro forma sales in 2004 of $8.4 billion, up 7% from the comparable figure for 2003. It reported a net loss of just under $15 million for 2004, an improvement from a loss of $1.24 billion in 2003. The overall operating profit margin in 2004 was 6.6%--compared with an average of 12.5% for Lanxess' major European competitors.

Chief Financial Officer Matthias Zachert would not be drawn to comment on this year's outlook. But he said Lanxess has set a target of achieving an operating profit margin of 9-10% in 2006, and he insisted that the company could meet that target.

This year, though, will be a challenging one. Following the company's carve-out from Bayer last summer and its launch on the Frankfurt stock market in January, the new company's managers embarked on an in-depth scrutiny of its businesses. The assessment "has shown that the need for action is more urgent than we could have realized before we became independent," Heitmann conceded.

He said that 70% of the company's sales yield an operating profit margin of less than 10%, and 40% actually yield a margin of less than 5%. "In other words, these businesses are deeply in the red," he said.

Most in need of urgent restructuring measures are the styrenic resins and fine chemicals business units.

The styrenic resins business unit "has been posting losses for years," he said. Since 1995, roughly $1.3 billion has been invested in the business, he said, "yet it has never achieved sustained profitability."

And in fine chemicals, he noted, "our plants are running at below capacity and in some cases are obsolescent and no longer suitable. Moreover, significant sales to Bayer and former Bayer businesses have continuously declined in recent years, a negative trend for us which is likely to continue in the coming years."

The result, he observed, was that "the fine chemicals business unit has been posting losses for five years." In the past four years alone, he added, these losses amounted to hundreds of millions of dollars. Competitors in this field, by contrast, are achieving average operating-profit margins of 18%.

The firm last month announced that it would close one European styrenics plant--either in Dormagen, Germany, or Tarragona, Spain--and a fine chemicals plant in Leverkusen. And it is weighing whether to rebuild a fine chemicals unit in Spain, part of the joint venture Novochem 2000 that was destroyed by fire in March. Ulrich Koemm, a Lanxess board member, said the plant's status "definitely will be part of our thoughts on the fine chemicals business."

Complicating matters is that Lanxess management is hobbled when it comes to cutting costs. At its German production sites, the company is bound by the employment pact to which Bayer had earlier committed. The pact--which Heitmann says Lanxess will not unilaterally terminate--rules out dismissals for business reasons through Dec. 31, 2007. Closure of a fine chemicals plant would eliminate 800 jobs, however, and closure of a styrenics plant would affect roughly 400 people.

Lanxess managers are now in serious negotiations with the firm's employee representatives and councils to allow the closures to take place. "The goals are so important for us all," Heitmann said. "We don't want to shift jobs to Asia; we want to secure jobs here in Germany. But we need quick solutions. Without tackling and succeeding in meeting these challenges, we can't be successful."

THE ONLY CERTAINTY, he argued, is the alternative: withdrawing from the businesses completely, jeopardizing thousands of more jobs.

In addition to restructuring, Lanxess' strategy includes portfolio adjustment. First to be addressed is the paper chemicals unit. This sector, Heitmann said, "is currently undergoing a global consolidation process, and clearly gaining ground are the one-stop suppliers, which offer all the chemicals necessary for paper production." The Lanxess product range is more limited, hence the company's decision to consider a strategic partnership--if not an outright sale.

Not all the company's business news was gloomy. As Zachert pointed out, performance rubber was one star unit, with sales up 4% and operating profits trebled compared with 2003. In fact, the company has embarked on a $50 million capital investment program for its butyl rubber business, to expand production capacities by 25% in Belgium and Canada. And basic chemicals and inorganic pigments also showed healthy operating margins, he said.

Nonetheless, there was a touch of grimness to Heitmann's acknowledgment that "2005 is the year of truth for us. We aim to demonstrate that we are capable of successfully mastering the challenges facing us. A difficult path lies ahead of us." But he added, "I am confident that we can exploit the existing opportunities and potential in order to guide Lanxess to a bright future."