Lanxess: Heitmann rode out 2009 with flexible costs and BRIC bets, then doubled profit

Lanxess, the chemicals business Bayer had bundled with a third of its polymers operations and listed in January 2005, hit the financial crisis in its fourth year as an independent company. In 2008 it was still setting records: sales of €6,576M and net income of €183M.

Then demand fell off a cliff. Chairman Axel Heitmann wrote in the 2009 annual report: 'We were hit extremely hard by the global economic crisis. New orders declined to an extent previously unseen, while orders already placed were cancelled... a challenge for which there are no off-the-shelf solutions.' Sales fell 23.1% to €5,057M, EBITDA before exceptionals dropped 35.6% to €465M, net income collapsed 78.1% to €40M, and return on capital employed fell from 15.4% to 5.9%.

The response was the Challenge09-12 program, introduced in two steps. Instead of mass layoffs, Lanxess flexed everything else: shortened working hours and voluntary wage cuts from employees, plus 'flexible asset management throughout the Group' that throttled production to demand, avoiding overproduction, bloated inventories and wasted spending on raw materials, energy and logistics. 'We will need them urgently when the economy picks up again,' Heitmann said of the skilled workforce he was determined to keep.

He also bought through the trough, taking over Gwalior Chemical Industries in India and Jiangsu Polyols in China in 2009 to deepen the BRIC exposure that kept the group afloat. The bet paid off exactly as framed: in 2010 sales jumped 40.8% to €7,120M, EBITDA pre exceptionals nearly doubled to €918M (a 12.9% margin), net income reached €379M, ROCE 17.0%, and the dividend rose 40% to €0.70 — with capital expenditures up 82.2% to feed the recovery.

2010: sales +40.8% to €7,120M, EBITDA pre exceptionals +97% to €918M (12.9% margin), net income €379M, ROCE 17.0%, dividend +40% to €0.70.

Fixed-cost chemicals plants punish under-utilization, so flexing labor cost through short-time work and wage cuts preserved cash without destroying the skilled workforce the recovery needed.

Flexible asset management — running production at the pace of demand — avoided the classic chemicals trap of making product into a falling market and warehousing inventory.

Counter-cyclical acquisitions in India and China bought capacity and distribution when valuations were depressed, and BRIC output was first back to pre-crisis levels.

Investing and paying dividends through the trough signalled confidence to a market that had read the 2005 spin-off as a home for Bayer's least exciting assets.

Flexibility beats headcount cuts in a downturn: short-time work and wage sacrifice kept skilled crews intact to serve the rebound — and buy weak rivals cheap.

The rebound year reset the trajectory. With 2010 results in hand, Heitmann laid out a five-year strategy targeting €1.4B of EBITDA pre exceptionals by 2015, built on BRIC growth, the megatrends of mobility, urbanization, water and agriculture, and organic investment in the strongest businesses. The bolt-on pipeline kept moving: the announced purchase of DSM Elastomers and Argentina's Darmex pushed Lanxess toward leadership in synthetic rubber. The group entered 2011 with record profitability, an upgraded margin structure and a workforce it had kept through the worst year in its young history.