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ANNUAL REPORT Lanxess AT A glance LANXESS AT A GLANCE Group Structure Advanced Specialty Performance Engineering Intermediates Additives Chemicals Materials Segments Advanced Industrial Additives Inorganic Pigments High Performance Intermediates Materials Rhein Chemie Material Protection Saltigo Products Urethane Systems Leather Businessunits Liquid Purification Technologies › Agrochemicals › Plastics and rubber › Disinfection › Automotive › Automotive additives › Protection and › Construction › Construction › Phosphorus- based preservation of wood, › Medical technology › Aroma and flavors and brominated flame construction materials, › Electrical/electronics › Pharmaceuticals retardants coatings and foodstuffs › Mining › Tire chemicals › Lubricants › Color pigments › Tires and wheel Applications › Semiconductors and › Materials for leather › Oil and gas photovoltaics production and water › Industrial and treatment mechanical products Europe no. 1–2 Top 3 position No. 1–4 in niches Leading position Market positions LANXESS Annual Report 2018 Global presence GLOBAL LANXESS AT A GLANCE PRESENCE GLOBAL PRESENCE 54.1% 48.8% 19.7% 22.5% 22.7% 21.2% 16.7% 13.3% 5.6% Germany 31.2% Asia-Pacific North America 16.3% 15.3% 4.9% 5.4% 2.3% EMEA w/o Germany Latin America Employees Sales Capital expenditures LANXESS Annual Report 2018 KEY DATA 2018 LANXESS Group € million Q4 2017 Q4 2018 Change % 2017 2018 Change % Sales 1,635 1,766 8.0 6,530 7,197 10.2 Gross profit 395 385 (2.5) 1,734 1,834 5.8 Gross profit margin 24.2% 21.8% 26.6% 25.5% EBITDA pre exceptionals1) 179 179 0.0 925 1,016 9.8 EBITDA margin pre exceptionals1) 10.9% 10.1% 14.2% 14.1% EBITDA1) 147 166 12.9 709 935 31.9 Operating result (EBIT) pre exceptionals1) 72 68 (5.6) 558 595 6.6 EBIT1) 40 45 12.5 299 504 68.6 EBIT margin1) 2.4% 2.5% 4.6% 7.0% Net income (loss) (49) 99 > 100 87 431 > 100 from continuing operations (49) 19 > 100 60 277 > 100 from discontinued operations 0 80 > 100 27 154 > 100 Earnings per share (€) (0.54) 1.08 > 100 0.95 4.71 > 100 from continuing operations (0.54) 0.21 > 100 0.66 3.03 > 100 from discontinued operations 0 0.87 > 100 0.29 1.68 > 100 Earnings per share from continuing operations adjusted for exceptional items and amortization of intangible assets (€)2) 0.43 0.61 41.9 3.84 4.45 15.9 Dividend per share (€) 0.80 0.9010) 12.5 ROCE3) 9.3% 11.4% Cash flow from operating activities 275 185 (32.7) 568 472 (16.9) Depreciation and amortization 107 121 13.1 4107) 4317) 5.1 Cash outflows for capital expenditures 194 240 23.7 397 497 25.2 Total assets 10,4118) 8,687 (16.6) Equity (including non-controlling interests) 3,4139) 2,773 (18.8) Equity ratio4) 32.8%9) 31.9% Provisions for pensions 1,4909) 1,083 (27.3) Net financial liabilities5) 2,2529) 1,923 (14.6) Net financial liabilities after deduction of time deposits and securities available for sale6) 2,2529) 1,381 (38.7) Employees (December 31) 19,0299) 15,441 (18.9) Personnel expenses (€ million) 1,291 1,328 2.9 Work-related injuries resulting in at least 1 day’s absence (per million hours worked) 1.79) 1.5 (11. 8) Hire rate of apprentices in Germany 80.0%9) 84.0% Turnover resulting (from voluntary resignations) 2.3%9) 3.1% Specific energy consumption (gigajoules per metric ton of product) 7.2411) 5.05 (30.2) Specific Scope 1 CO2e emissions (CO2 equivalents, metric tons per metric ton of product) 0.2511) 0.27 8.0 Specific Scope 2 CO2e emissions (CO2 equivalents, metric tons per metric ton of product) 0.469) 0.30 (34.8) Emissions of volatile organic compounds (in thousand metric tons) 5.011) 1.0 (80.0) 1) EBIT: earnings before interest and taxes. 3) ROCE: EBIT pre exceptionals in relation to capital employed (total assets less EBIT pre exceptionals: EBIT disregarding exceptional charges and income. deferred tax assets and interest-free liabilities). ROCE for 2017 as published EBIT margin: EBIT in relation to sales. including ARLANXEO. Capital employed as of December 31, 2018, adjusted. EBITDA: EBIT before depreciation of property, plant and equipment and See “Value Management and Control System” in the Combined Management amortization of intangible assets, less reversals of impairment charges Report for details of capital employed. on property, plant, equipment and intangible assets. 4) Equity ratio: equity in relation to total assets. EBITDA pre exceptionals: EBITDA disregarding exceptional charges and income. 5) Net financial liabilities: Sum of current and non-current financial liabilities EBITDA margin pre exceptionals: EBITDA pre exceptionals in relation to sales. (adjusted for liabilities for accrued interest) less cash, cash equivalents See “Value Management and Control System” in the Combined Management and near-cash assets. See “Value Management and Control System” in the Report for details. Combined Management Report for details. 2) Earnings per share from continuing operations pre exceptionals and amortization 6) See “Value Management and Control System” in the Combined Management of intangible assets: earnings per share from continuing operations disregarding Report for details of the financial assets deducted. exceptional charges and income, amortization of intangible assets and attributable 7) Net of reversals of write-downs of €1 million. tax effects as well as non-recurring earnings effects of the U.S. tax reform in 8) Figure restated. For background information, please see the “Restatement of the previous year. See “Business Performance of the LANXESS Group” in the prior-year figures” section of the Notes to the Consolidated Financial Statements. Combined Management Report for details. 9) Prior-year figures as published, i.e. including ARLANXEO. 10) Dividend proposal to the Annual Stockholders’ Meeting on May 23, 2019. 11) Prior-year figures restated, including ARLANXEO. CONTENTS 02 To Our Stockholders 02 Letter from the CEO 03 Strategy 07 Corporate Responsibility 08 Good for Business, Good for Society 09 Active Stakeholder Dialog 09 Systematic Prioritization of Sustainability Topics 13 Good Corporate Governance 19 Employees 30 Resilient Sourcing 31 Safe and Sustainable Sites 38 Climate Action and Energy Efficiency 42 Sustainable Product Portfolio 43 Business-Driven Innovation 44 Valuing Customer Relationships 45 LANXESS on the Capital Market 48 Corporate Governance 49 Corporate Governance Report 56 Report of the Supervisory Board 59 Financial Information 60 Combined Management Report 109 Consolidated Financial Statements 184 Responsibility Statement 185 Independent Auditor’s Report 190 Further Information 191 About this Report 193 Non-financial Group Report: Independent Assurance Report 195 Environmental and Safety Performance Data: Independent Assurance Report 197 GRI Content Index 202 Glossary 205 Sustainability Initiatives and Indices Financial Calendar/Contacts ✓ Audited disclosures of the LANXESS Group that are included in the 2018 non-financial NGR Group report. The Annual Report 2018 is published in print and in PDF format. The print version does not include the Notes to the Consolidated Financial Statements and the GRI-related information, this can be found in the PDF version on the LANXESS website under the section Investor Relations. Vorwort 02 Letter From the CEO LETTER FROM THE CEO 2018 was another very successful year for LANXESS. This is Our strengthened business profile and improved financial situation reflected above all in the figures: With EBITDA of €1,016 million, are also recognized in the most recent ratings from Moody’s, we significantly exceeded the previous year’s good figure again Scope Ratings and Standard & Poor’s, each of which upgraded by 9.8%. But the figures are always just a reflection and result our rating by one notch last summer. of the many different steps and measures that we take to keep making LANXESS a little better all the time. And in this respect, For LANXESS, economic success goes hand in hand with taking 2018 was a very eventful year. on social responsibility. We therefore also focus on strong environ mental and social commitment. The success of our work We invested significantly in all segments in the past year. When in these areas is confirmed by the fact that we are included in the opportunities present themselves, we supplement or further two Dow Jones Sustainability Indices again this year. Taking on balance out our value chain by way of acquisitions. In 2018, responsibility for people and the environment is an essential part for example, we acquired Solvay’s U.S. phosphorus chemicals of our identity. In 2018, we emphasized this with our renewed business, which makes an ideal addition to our product range. commitment to the principles of the U.N. Global Compact. In another project, we are breaking completely new ground: Together with the Canadian company Standard Lithium, our LANXESS’s excellent performance in the past year is the result of U.S. site in El Dorado is currently examining the technical and unique cooperation by a strong team. The whole Board of Manage- economic feasibility of producing lithium suitable for use in bat- ment would like to thank each of our more than 15,000 employees teries from the brine obtained there. for their strong motivation, creativity and energy. But our thanks also go to our stockholders, customers, suppliers and partners: The most striking sign of our corporate restructuring was un - Without you, our success would not have been possible. doubtedly the fact that we completed the sale of our 50% stake in the rubber company ARLANXEO to Saudi Aramco at the end We have achieved a lot since the start of our strategic realign- of the reporting year. With this transaction, which brought us ment. And in the future, we want to keep strengthening the proceeds of approximately €1.4 billion, we reached the biggest things that make us successful: our value-based, responsible milestone in our strategic realignment launched in 2014 – and and reliable action, combined with clear strategic guidelines and did so considerably earlier than originally planned.