Jun. 05, 2014
TopicsManagement

The Steep Climb Back to Profit

New Lanxess CEO Matthias Zachert Prepares the First Steps

  • Matthias Zachert, CEO, Lanxess: "Let's Lanxess Again!"Matthias Zachert, CEO, Lanxess: "Let's Lanxess Again!"

If Matthias Zachert mounted the steep steps to the new Lanxess headquarters on the Rhine River in Cologne, when returning to the German chemical producer as CEO on April l, he may have mused that the climb could be symbolic of the challenges he soon would be facing.

When the now 46-year-old manager stepped down as CFO in 2011 to take the same position at Merck KGaA, the company whose financial affairs he had guided since its 2004 spinoff from Bayer was still "living at home" - headquartered at its former parent's Leverkusen site. Axel Heitmann was still CEO and the share price was still rising.

Just three years later, the situation had radically changed. After several years of upward momentum - interrupted by an earnings slump of "historic proportions" in the 2008-2009 economic crisis - Lanxess, a company with more than €8 billion in sales and assets in rubber, plastics, fine chemicals and intermediates, had slipped into the red.

The share price was rapidly losing ground. Heitmann, reportedly at odds with the supervisory board about how to turn the rudder around, was "out of office" - permanently - and Zachert had been asked to take over the helm.

What had led to the dramatic development, whose public airing was unusual for a German chemical producer?

Without explicitly pointing a finger at his predecessor, the new CEO - who as finance chief still held the purse strings when some of the now controversial investment decisions were made - has hinted that over the past several years too much money was spent on too many of the wrong things. Or at least at the wrong point in the cycle.

Rising Capital Spending

Perhaps in an effort to shed the company's unflattering image as "Bayer's bargain basement" or simply lulled by the siren song of the stock market - Lanxess' papers were elevated to the DAX 30 blue-chip index in 2012 - observers say its management clearly overheard or chose to ignore warning signs that market conditions were deteriorating.

Worldwide rubber output was already swelling as Lanxess, with leading positions in such high performance specialties as EPDM, S-SBR, Nd-PBR and butyl rubber, announced several new projects.

Low-cost competitors were entering the market. In Europe especially, the motor of growth in the automotive industry, on which the company depends for around 40% of its overall sales - was beginning to sputter.

As Lanxess' historical charts reveal, capital spending budgets rose sharply from €275 million in 2009 to just under €700 million in 2012 before tapering off to around €625 million in 2013 and 2014.

In March 2013, reporting on 2012, Heitmann declared the year just ended "the best in our growth story so far. Our business model proved itself once again." Not quite three months later, presenting figures for Q1 2013, he blamed the "weak start" on "a poor business climate worldwide."

By half-year reporting time in August, the then-CEO conceded that "customers were destocking," only to confirm a month later plans for a new €235 million, 160,000 t/y EPDM rubber plant at Changzhou, China. Lanxess' biggest-ever investment in the People's Republic is set for start-up in 2015, as is its 140,000 facility for Nd-PBR rubber - billed as the world's largest - in Singapore.

With Q3 net earnings down 88% year-on-year and the writing on the wall, in October 2013 Heitmann was obliged to announce plans for a new efficiency scheme, one of several in the company's short history. The Advance program, expected to return annual savings of €100 million from 2015, led to the loss of 1,000 jobs by year's end.

Impacted by impairment charges of €257 million in the Performance Polymers segment, which along with engineering plastics PA and PBT includes elastomers, and Performance Chemicals with the rubber chemicals unit, Lanxess' full-year balance sheet for 2013 showed a net loss, of €159 million, for the first time since 2005.

Let's Lanxess Again

At his first press conference as CEO in May 2014, Zachert highlighted some of his plans for a return to growth. Under the heading "Let's Lanxess Again," the newest restructuring scheme, steered by Boston Consulting Group, at least has a verbal new twist.

To ease the financial burden of restructuring and replenish its diminished cash flow, the company a day earlier announced it had quietly increased equity. With subscription rights of current shareholders excluded, 8.3 million shares, equal to 10% of equity and priced at €52 each, were placed with institutional investors in an accelerated book-building process. The flotation netted €430 million.

In Cologne, Zachert explained to journalists that Lanxess' portfolio was imbalanced, in particular too dependent on the automotive sector. In view of the increasingly competitive landscape and its high level of indebtedness, the company must become "significantly more competitive and profitable."

The heavy emphasis on rubber that existed when Lanxess was created increased further with the substantial investment of recent years, he noted. Of the €3.4 billion capital spending for 2009-2013, Performance Polymers received more than 60%, compared with 20% for Performance Chemicals and only 15% for Advanced Intermediates.

Zachert said overhead costs have also increased substantially since 2009 and are now back at the level of 2005, before the fledgling company's first restructuring effort began. R&D costs have risen 110% since 2007, and the debt-to-EBITDA ratio is too high.

Turning Heitmann's remark about the successful business model on its ear, his successor suggested that to deal with heightened competition, higher energy costs and increasing complex customer relationships, a new model could be needed, a reevaluation of Lanxess' entire strategy required,

While optimizing administrative structures and streamlining decision-making, Zachert said he wants to improve customer and market orientation in the business units. Toward this goal, management will analyze the profitability of production sites and consider mothballing or even permanently shuttering plants.

Adapting to the Competitive Environment

"We are currently facing major challenges - especially as the competitive environment for our business with synthetic rubber has changed. And this is clearly reflected in our results for fiscal 2013," Zachert said at this year's Annual Meeting of Stockholders a couple of weeks ago.

To make its rubber activities more competitive and balance the portfolio, Lanxess will seek partnerships with other producers, customers or raw materials suppliers for businesses that have lost some of their bounce.

In the herculean effort to restore profitability, Zachert will need to perform some fancy footwork, but financial analysts and shareholders and employees alike seem convinced that the avid runner, physically not a tall man, will be able to fill the tall order. On the news of his return to his former employer, Lanxess shares' rose 9%, while Merck's fell 11%. In reaction to the successful equity increase, shares also nudged higher.

Most observers believe the financial markets will give Zachert - who is credited with excellent communications skills - a longer breathing spell than many new CEOs. Analysts have already applauded the partnership plan, with one speculating that - depending on the outcome - divestment of a majority stake in rubber assets could generate up to €1.7 billion.

While job cuts in the 17,000-member workforce appear a foregone conclusion as the scheme progresses, at a recent meeting with their new top boss in Leverkusen, German staff at least seemed to feel assured their jobs were safe - especially as most of Lanxess' rubber production is based outside the country.

To the stockholders, Zachert said: "I would like to already prepare you today for the fact that the next two to three years won't be easy. But I am sure that Lanxess as a company will emerge from the realignment stronger than before."

Outlook for 2014 Somewhat Brighter

Even if Zachert has warned that it could take two or three years for the company to twist again like it did just that many years ago, his forecast for full year 2014 appeared to signal no especially unpleasant surprises in the short term.

With sales down 2.5% to €2 billion in Q1, net profit was flat at €25 million. While Performance Polymers shed nearly 7% and Advanced Intermediates just over 3%, revenue of Performance Chemicals rose nearly 6%. The 10% rise in EBITDA pre-exceptionals is credited to "positive effects" in all segments, a lower cost base resulting from the Advance scheme and the absence of one-off charges.

For the second quarter of 2014 the company's EBITDA pre-exceptionals is expected to come in at €220-240 million, and settle in the range of €770-830 million for the full year 2014, up from €735 million a year earlier.

Authors

Contact

LANXESS Deutschland GmbH

51369 Leverkusen
Germany
Phone: +49 (0) 214 30 33333

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