Lanxess to Realign Operations, Increase Equity by 10%

08.05.2014 -

On the eve of Matthias Zachert's first press conference as CEO, German chemical producer Lanxess announced plans for a major overhaul of operations and portfolio, along with an equity increase to help restore profitability.

The Cologne-based company also published financial results for the first quarter of 2014. Presentation of the figures, originally scheduled for March, had been postponed to await Zachert's return to management at the beginning of April.

"We must be significantly more competitive and profitable," said the executive who served as chief financial officer at Lanxess for seven years, prior to taking the same position at Germany's Merck three years ago,

Alongside optimizing administrative structures and streamlining decision- making processes, customer and market orientation are to be improved in the business units. Zachert said Lanxess will analyze the profitability of its production sites and consider temporary or permanent shutdown of plants.

At the same time, he said the company "will explore options to make its rubber activities more competitive and balance its portfolio." The financial world interpreted this to mean that a sale or a partnership would be sought for some ailing businesses.

In German stock market circles, rumors of a takeover immediately began circulating.

Spun off from Bayer in 2004, Lanxess is dependent on the automotive industry for about 40% of its sales revenue. Its earnings have suffered recently from sagging demand for tires as well as stiff competition from Asian rivals challenging its dominant position in rubber markets.

After the supervisory board forced the resignation of the company's first CEO, Axel Heitmann, in February, it was revealed that Lanxess had made a net loss in 2013.

To finance the envisaged realignment and strengthen the rubber specialist's financial position along with its investment-grade credit rating, fresh capital is being sought. Zachert said 8.3 million shares, equal to 10% of equity, will be placed on the stock market. Subscription rights of current shareholders are being excluded.

Based on the company's closing share price on May 7, the share package is estimated to be worth about €445 million.

The new shares will be offered by an international banking consortium to institutional investors in a private placement, using an accelerated book-building process similar to that conducted by another German chemical producer, Evonik, when it returned to the stock market two years ago.

The placement price is to be revealed on May 8.

Earnings flat in 2014 first quarter

For the first quarter of 2014, Lanxess announced first-quarter net profit flat at €25 million. This was below analysts' expectations - in a poll conducted by the news agency Reuters the average estimate was €38.1 million. Sales were down 2.5% to €2 billion, compared with the consensus estimate of €2.08 billion.

EBITDA for the quarter rose by 17.8% to €205 million, slightly above the guidance of €200 million announced in March. The EBITDA margin pre-exceptionals rose to 10% from 8.3% in the 2013 quarter.

Lanxess said the earnings improvement reflected "positive effects" in all business segments, a lower cost base resulting from the company's Advance efficiency scheme and the absence of one-off charges - especially in the Performance Polymers segment, which includes engineering plastics PA and PBT in addition to rubber.

Worldwide staff cuts of around 1,000, which were part of Advance, have been completed, according to the company.

"This year's first quarter was characterized by a persistently challenging market environment" for rubber, Zachert said. In contrast, the agrochemicals business continued to develop well, and a positive impetus came from the construction industry.

The German company said it expects the economic environment to "slowly recover" during the year, although the rubber business will remain "challenging," with price pressure persisting. For Performance Polymers, development will remain "subdued."

For Q2 2014, Lanxess has forecast "improved year-on-year earnings development," with EBITDA pre-exceptionals expected to come in at €220-240 million.

Zachert gave what he called a "more concrete" earnings guidance for the full year. Management's current expectation is that EBITDA pre-exceptionals will settle in at €770-830 million, he said. This compares with €735 million in 2013.