Annual Report KEY DATA 2017 LANXESS Group € million Q4 2016 Q4 2017 Change in % 2016 2017 Change in % Sales 1,915 2,337 22.0 7,699 9,664 25.5 Gross profit 370 482 30.3 1,754 2,145 22.3 Gross profit margin 19.3% 20.6% 22.8% 22.2% EBITDA pre exceptionals1) 183 248 35.5 995 1,290 29.6 EBITDA margin pre exceptionals1) 9.6% 10.6% 12.9% 13.3% EBITDA1) 162 214 32.1 945 1,072 13.4 Operating result (EBIT) pre exceptionals1) 56 84 50.0 514 695 35.2 EBIT1) 35 49 40.0 464 434 (6.5) EBIT margin1) 1.8% 2.1% 6.0% 4.5% Net income (loss) 2 (49) < (10 0) 192 87 (54.7) Earnings per share (€) 0.02 (0.54) < (10 0) 2.10 0.95 (54.7) Earnings per share adjusted for exceptional items and amortization of intangible assets (€)2) 0.24 0.44 83.3 2.69 4.14 53.9 Dividend per share (€) 0.70 0.80 7) 14.3 ROCE3) 6.9% 9.3% Cash flow from operating activities 157 333 > 100 689 868 26.0 Depreciation and amortization 127 165 29.9 481 638 8) 32.6 Cash outflows for capital expenditures 211 260 23.2 439 547 24.6 Total assets 9,877 10,396 5.3 Equity (including non-controlling interests) 3,728 3,413 (8.4) Equity ratio4) 37.7% 32.8% Provisions for pensions 1,249 1,490 19.3 Net financial liabilities5) 2,394 2,252 (5.9) Net financial liabilities after deduction of time deposits and securities available for sale6) 269 2,252 > 100 Employees 16,721 19,029 13.8 Personnel expenses (€ million) 1,467 1,663 13.4 Work-related injuries resulting in at least 1 day’s absence (per million hours worked) 2.0 1.7 (15.0) Hire rate of apprentices in Germany 81.0% 80.0% Turnover resulting (from voluntary resignations) 2.45% 2.34% Specific energy consumption 2.2 (gigajoules per metric ton of product) 7.14 7.30 Specific Scope 1 CO2e emissions (CO2 equivalents, metric tons per metric ton of product) 0.26 0.28 7.7 Specific Scope 2 CO2e emissions 9) (CO2 equivalents, metric tons per metric ton of product) 0.45 0.46 2.2 Emissions of volatile organic compounds (in thousand metric tons) 4.7 4.9 4.3 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). See “Value Management and EBIT margin: EBIT in relation to sales. Control System” for details of capital employed. EBITDA: EBIT before depreciation of property, plant and equipment and 4) Equity ratio: equity in relation to total assets. amortization of intangible assets, less reversals of impairment charges on property, 5) Sum of current and non-current financial liabilities (adjusted for liabilities for accrued plant, equipment and intangible assets. interest) less cash, cash equivalents and near-cash assets. See “Value Management EBITDA pre exceptionals: EBITDA disregarding exceptional charges and income. and Control System” for details. EBITDA margin pre exceptionals: EBITDA pre exceptionals in relation to sales. 6) See “Value Management and Control System” for details of the financial assets See “Value Management and Control System” for details. deducted. 2) Earnings per share pre exceptional items and amortization of intangible assets: 7) Dividend proposal to the Annual Stockholders’ Meeting on May 15, 2018. earnings per share disregarding exceptional charges and income, amortization 8) Net of reversals of write-downs of €1 million. of intangible assets and attributable tax effects as well as non-recurring earnings 9) Figure restated. effects of the U.S. tax reform. See “Business Performance of the LANXESS Group” for details. CONTENTS 02 To Our Stockholders 03 Letter from the CEO 05 Strategy 11 Corporate Responsibility 12 CR Management 23 Employees 34 Value Creation Chain 46 Corporate Citizenship 48 LANXESS on the Capital Market 51 Corporate Governance 52 Corporate Governance Report 59 Report of the Supervisory Board 63 Financial Information 64 Combined Management Report 117 Consolidated Financial Statements 181 Responsibility Statement 182 Auditor’s Report 187 Further Information 188 About This Report 190 Non-financial Group Report: Independent Assurance Report 192 GRI Content Index 199 Glossary 203 Financial Calendar/Contacts ✓ Audited disclosures of the LANXESS Group that are included in the 2017 separate non-financial consolidated report. LANXESS AT A GLANCE Group Structure Advanced Specialty Performance Engineering ARLANXEO Intermediates Additives Chemicals Materials Segments Advanced Industrial Additives Inorganic Pigments High Performance Tire & Specialty Intermediates Materials Rubbers Rhein Chemie Leather Saltigo Urethane Systems High Performance Material Protection Elastomers Products Business units Liquid Purification Technologies › Agrochemicals › Plastics and › Disinfection › Automotive › Automotive rubber additives › Protection and › Construction › Construction › Phosphorus- preservation › Medical › Aroma and flavors based and of wood, technology › Pharmaceuticals brominated flame construction › Electrical/ › Tire chemicals retardants materials, coatings electronics › Semiconductors › Plastics additives and foodstuffs › Mining and photovoltaics such as flame › Color pigments › Tires and wheel Applications retardants and › Materials for › Oil and gas plasticizers leather production › Industrial and › Lubricants and water mechanical treatment products Europe no. 1–2 Top 3 position No. 1–4 in niches Leading position Globally no. 1–3 Market positions LANXESS Annual Report 2017 LANXESS GLOBAL at a glance Global PRESENCE presence 42.2% 41.0% 27.9% 15.4% 16.8% 19.2% 17.6% 13.9% 9.3% Germany 28.2% 25.0% Asia-Pacific North America 19.6% 9.3% 7.5% 7.1% EMEA w/o Germany Latin America Employees Sales Payments for investments LANXESS Annual Report 2017 » LANXESS IS GENERATING PROFITABLE GROWTH. OUR JOURNEY IS FAR FROM OVER.« Letter from the CEO 03 LETTER FROM THE CEO 2017 was a year in which LANXESS made great strides. We chemicals business of the Belgian chemicals group Solvay. This re alig ned our company while achieving the best results in its acquisition is another example of our rigorous implementation history. LANXESS is now a repositioned global group – profitable, of our growth strategy, focused on medium-sized markets and stable and fast-growing. the regions of North America and Asia. The acquisition of the U.S. company Chemtura at the end of April Since spring, we have also been supporting our growth with 2017 – the biggest in our history – was a key strategic milestone. the newly created dLX Group function for digitalization. Across It has made us one of the most important players on the global functions, countries and all business units, it works on various additive market, and the acquired Urethanes and Organometallics initiatives to actively shape the digital future of our Group. divisions have given us a foothold in new business areas. As a result, the “New LANXESS” is taking shape more quickly than To us, being future-proof also means operating in a sustainable, expected. responsible way. We have firmly embedded the principle of sus- tainable development in our corporate strategy. In our view, this LANXESS is generating profitable growth. However, our journey philosophy also includes fulfilling our responsibility to humankind is far from over. In the years ahead, we aim to enhance quality and the environment all over the world. We re-emphasized this in within the Group and boost income even further. We have set 2017 with our commitment to the principles of the U.N. Global ambitious new medium-term financial targets. From fiscal year Compact. 2021, our average operating margin – measured by EBITDA pre exceptionals – is expected to be between 14% and 18% over a Our great success in 2017 was the result of hard work and would business cycle. In addition, we intend to carry out further rigorous not have been possible without a strong team. We achieved a differentiation of our product range, increase our regional diver- huge amount last year and can be proud of that. The whole Board sification even more and continue to reduce our dependency of Management would like to thank all employees worldwide for on individual sectors. their dedication and sound collaboration with our customers. We regard organic growth as crucial to achieving our goals. Con- We are making good progress, and our tireless work is bearing sequently, we will invest around €400 million across all segments fruit. My fellow Board of Management members and I would like by 2020, thus further strengthening our international sites as well to thank all our shareholders for their continued confidence in us. as our large domestic sites in Germany. However, we also aim to Let us keep on working hard together to ensure that LANXESS maintain our inorganic growth; in 2017, we significantly enhanced remains successful. our additives segment, and in 2018 we acquired the phosphorous Matthias Zachert Chairman of the Board of Management LANXESS Annual Report 2017 04 LETTER FROM THE CEO THE BOARD OF MANAGEMENT THANKS ALL OF THE GROUP’S EMPLOYEES AND THE EMPLOYEE REPRESENTATIVES FOR THEIR WORK IN FISCAL YEAR 2017. LANXESS Annual Report 2017 STRATEGY LANXESS 2021: leading positions, more stable and with a stronger cash flow 06 STRATEGY The Success Story Continues In an increasingly volatile political and economic environment, we have managed to get LANXESS back onto a sound footing. However, the Group’s development is far from complete. With a clear strategy, we aim to make full use of our potential and continue to post profitable growth for years to come. A CHANGING WORLD, requirements. In many cases, these requirements are driven by A CHANGING INDUSTRY sustainability. More than ever, chemical companies are required to take responsibility for their products and production processes Change is anything but an unknown quantity in the chemical – from the acquisition of raw materials to disposal.