Market Leadership in Specialty Chemicals
Interview with Clariant’s CEO Hariolf Kottmann about the future development of the Swiss company.
Even if not quite 20 years old, Swiss-based specialty chemicals producer Clariant can nevertheless look back on an eventful history. With years of extensive restructuring, reorganization, portfolio realignment and several changes in top management now under its belt, the company is moving into a new development phase. At the company's recently held annual Capital Markets & Media Day, CEO Hariolf Kottmann highlighted his forward strategy.
When Hariolf Kottmann took over as CEO of Clariant on October 1, 2008, the company, though by that time 13 years old, had not yet really found its feet. Well into the second decade of existence, it found itself, like a gangly adolescent, still needing more time to position itself for future growth. In part, the reasons lay in its somewhat unusual history.
The Evolution of Clariant
It is difficult enough to carve a fully functional standalone unit out of a tradition-steeped company but Clariant had to face the challenge twice. Just two years after its first founding in 1995, the Swiss specialty chemicals player had to reinvent itself, taking in the specialty portfolio business of the now defunct German conglomerate Hoechst. The new businesses picked up in Frankfurt were more than twice the size of those at home in Muttenz, near Basel and the German border.
Without having had time to deal with the cultural identity crisis this created - was it Swiss or was it German - Clariant was thrust headlong into the chemical industry's latest fashion trend - the rush to embrace life sciences. Hoping to participate in the growth prospects of this specialty focus, as they were perceived in the late 1990s, the fledgling firm stepped quickly into line with its competitors, marching straight into the mined field of fine chemicals M&A.
With every intention of becoming a major supplier to the lucrative pharmaceutical market, in 2000 Clariant bought UK-based fine chemicals producer BTP for $1.8 billion. As was the case for most companies that followed the fad, the overpriced acquisition never really paid off. By 2003, the Swiss player was already licking its wounds.
Hit broadside by crisis, the company launched its first strategic realignment initiative, shedding assets that included traditional businesses of its predecessors, including polyvinyl alcohol and polyvinyl butyral, cellulose ethers, electronic materials and monochloroacetic acid. To reduce the debt burden stemming from its ill-timed foray into life sciences, Clariant was even forced to unload even the former BTP activities, by then called Pharmaceutical Fine Chemicals.
Back On the Growth Track
Fast-forward to 2008. With Hariolf Kottmann - who began his industry career at Hoechst in 1985 - at the helm, Clariant once again set out to reduce its debt burden and cost base, refocus its portfolio, and further expand on its core specialty chemicals businesses. In due course, the company was back on track toward its goal but work was still needed to become more cost-competitive. This required a clear, communicative strategy. A chemist by training and a manager with hands-on experience, Kottmann brought with him the right background to steer the company toward profitability.
For Clariant to pull low-growth businesses up to scratch, the new CEO understood that he would have to put the specialty chemicals producer's portfolio to the test. Under his leadership, several bold steps were taken during the five-year-period up to 2013. The company's biggest move after absorbing the Hoechst activities was the 2011 acquisition of German specialty chemicals player Süd-Chemie. In announcing the buy, Kottmann said management was convinced that the venerable Munich-based firm with a broad portfolio encompassing catalysts, rare earths, resins, additives and packaging was "the right strategic fit for Clariant." Its high growth businesses provided access to new attractive market segments and lessened cyclicality.
The Süd-Chemie coup, pulled off amid stiff competition from rivals such as Honeywell and Mitsui, was a "powerful transformational stepping stone for the new focus," as Kottmann recalls. "It created great potential for the future."
Another watershed for Clariant, a year later, was the divestment of five traditional businesses: Textile Chemicals, Paper Specialties, Emulsions, Detergents & Intermediates, and Leather Services - activities that generated revenues of almost 1.75 billion Swiss francs in 2012.
"Additional, smaller divestments allowed us to eliminate margin-diluting businesses and bolt-out acquisitions helped us gain access to promising technologies or regions where we were underrepresented," the CEO says.
Positioning for a Brighter Future
With these moves behind it, Clariant has now completed the divestment of its mature and margin-diluting businesses and is looking toward a brighter future. "The portfolio we now have is the one we will count on to drive growth," Kottmann says. Interestingly only about 2% of current business derives from the original Sandoz activities.
Midway through 2014, the Swiss company can claim a well-balanced product slate, a sound financial position and a competitive cost basis. It is organized into four business areas (Care Chemicals, Catalysis & Energy, Natural Resources, and Plastics & Coatings), with attractive end-user markets that management believes offer above-average growth rates.
"Based on the strength of our current organization, profitability has consistently increased over the past four years," Kottmann stresses. "Between 2009 and 2013, most of our continuing businesses achieved some top-line growth, and overall profitability nearly doubled."
Sales from continuing operations generated revenues of about 6.1 billion Swiss francs in 2013. The EBITDA margin rose from 12.7% in 2010 to 14.1% and is expected to exceed that figure in 2014. Nevertheless, the Clariant chief acknowledges, "we are not yet where we want to be in terms of sales growth. There is still a significant gap to the target we have set for 2015 and beyond."
For 2014, clear priorities have been set, with the emphasis on performance, growth and innovation. "From a competitive cost position, we will further increase our profitability and significantly invest to capture short-term growth opportunities and develop our mid- to long-term pipeline," Kottmann asserts.
Along with concentrating on growth businesses, Clariant's geographical strategy will have equal weight. In addition to China, India, South East Asia, and South America, another high strategic priority is North America - due in particular to the opportunities arising from shale gas.
Looking forward from 2015, the goal is to increase Clariant's EBITDA margin to 16-19%, a level some of the Swiss company's peers - such as German rival Evonik - have already reached. The margin increase, the German-born executive says, will be achieved in part through cost control and through growth in businesses promising above-average returns.
Kottmann's ultimate vision for the future is to move the company back to the top of the specialty chemicals markets, where analysts positioned it in the early days after the split from Sandoz and the takeover of the Hoechst activities. Along with increasing profitability, seizing growth opportunities and optimizing the company's portfolio, management is firmly focused on fostering R&D and innovation.
Innovation is a Priority
Clariant's research efforts are focused on three megatrends, which are written large in its growth strategy: Environment Protection, Globalization & Urbanization, and Resources & Energy. To meet management's targets, the plan is to intelligently link the company's global technology platforms in chemistry and materials, biotechnology, catalysis, and process technology. "These are areas in which Kottmann says "we have established a solid foundation of expertise."
To improve its basis for innovation and achieve critical mass, the company has concentrated R&D activities in the new Clariant Innovation Center (CIC) at the Höchst industrial park in Frankfurt, Germany, which is also its largest production site. The CIC, planned to be the fertile basis for the innovation initiative, will be flanked by another 50 decentralized technical application labs worldwide.
Spending on R&D, which was relatively minimal five years ago, has been beefed up again and is now close to 200 million Swiss francs annually. Funds are being channeled into growth opportunities in markets with perspectives for the future as well as strong growth rates and businesses where Clariant has competitive market positions and significant pricing power.
To assure that sufficient monies are allocated to the most value-creating activities, management has analyzed the company's 45 businesses with an eye to their market position and industry attractiveness. "We have identified key growth areas such as Catalysts and Personal Care to receive the lion's share of investment in developing new products and solutions," Kottmann says.
Other areas regarded as having sufficient growth potential to receive funding are the Crop Solutions, Oil Services, Mining Solutions and Bio-based Chemicals units. Some product groups regarded as cash cows will not see significant spending. The CEO hints that a few businesses, which are no longer as attractive to Clariant, or where it has poor competitive positions, may not only be excluded from funding but also could be candidates for divestment.
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