Right Trends, Right Markets
Lanxess’ New CFO Dr. Bernhard Düttmann on Controlling Outside Influences in the Industry
Finance - For all the planning that goes into any company's strategy, there will always be outside factors that limit the ability to control one's financial destiny. Right now, those factors include the wavering euro and political indecisiveness in Europe; a debt crisis and upcoming presidential election in the U.S.; as well as a volatile raw materials market worldwide.
Lanxess CFO Dr. Bernhard Düttmann talked to Brandi Schuster about how chemical companies can gain control over how outside factors influence their financial health and how his company stays one step ahead.
CHEManager Europe: Dr. Düttmann, the business climate today is full of uncertainties that affect the financial performance of companies. On the other hand, business in mature markets is stagnating while success in new markets such as the BRIC countries requires significant upfront investments. Is there a panacea for this situation?
Bernhard Düttmann: The overall economic environment is currently unclear. The growth rates in the BRIC countries may not be as dynamic as they have been in the past, still there is a positive sentiment overall. The American market has performed slightly better than anticipated. The one looming question mark is hanging over the European market; right now. It's impossible to predict what will happen with the debt crisis.
In this kind of environment, it is therefore crucial for a chemical company to have the right strategy, the right products and to be focusing mega on the right trends.
What does that mean specifically for Lanxess?
B. Düttmann: The current shift from commodity to high-performance rubbers for tires is clearly benefiting our company. This trend will be given a boost by the EU's tire-labeling initiative, which is set to go in effect in November this year alongside labeling in South Korea.
Besides green mobility, we are also following the agricultural trend. The world's increasing population dictates that agro will remain a growing market.
But agro also ties into mobility as well, with the trend moving away from petrochemicals and toward biofuels. Another trend we are supporting is urbanization, although growth in this area is currently restricted because of decreasing governmental investments in infrastructure. However, looking to Brazil or China, the trend is still healthy. And I should not forget the need for clean water - something that is often taken for granted in the developed parts of this world. Lanxess is one of the leading providers of water treatment chemicals and benefiting from this megatrend.
All this coupled with our focus on the BRIC markets leads me to be cautiously optimistic for 2012.
It sounds like Europe is the one weak spot on the horizon. Has the instability of the euro affected your business?
B. Düttmann: Is the euro instability a real or merely a politically-driven issue in the current environment? When we compare the fundamentals of the euro against the dollar, I don't see a weak euro. The German industry has certainly benefitted from the euro since our industry is a key exporter. I believe the euro will become stronger as soon as the political uncertainties have been removed.
Besides following the right trends, what else can chemical companies do to protect themselves from outside influences?
B. Düttmann: As I mentioned, it is important to be in the right markets with the right products. We have a clear growth target to achieve €1.4 billion EBITDA pre exceptionals in 2015. At the same time, we need to be able to adapt very quickly to changing order patterns. Flexibility is key. Lanxess proved this during the last crisis when we had to adapt quickly. That meant delaying large investment projects and managing capacities, which is not easy in the chemicals industry - you can't just switch off a chemicals plant!
Has this flexibility always been a part of Lanxess' strategy, or was it borne out of the financial crisis in 2008/2009?
B. Düttmann: The financial crisis certainly gave us the opportunity to see what we are capable of. It brought management and employees closer together with a high degree of solidarity. Lanxess also had to be flexible when it was spun off from Bayer in 2005. It was also in a very precarious situation then - businesses had to be sold, costs had to be cut. With this focus on track record, we run our growth plan and can react immediately if needed.
One outside influence that is not as easy to control is raw material prices, and the higher cost of raw materials has been dragging down the Q4 numbers for several chemical companies. How do you expect this to develop over the next 12 months, particularly in terms of volatility?
B. Düttmann: There was tremendous raw material inflation in the first three quarters of 2011; this finally let up in Q4. We now see some prices rebounding or at least leveling off. Reacting to this volatility is important. Lanxess has a clear price-before-volume strategy. This strategy has worked out well for us; over the last five to six years, we have consistently been able to pass along the cost of raw materials.
Has your company been affected by scarcities of strategic raw materials?
B. Düttmann: We are one of the biggest merchant buyers of butadiene. There haven't been a lot of investments in the last few years to bring up capacity for ethylene production, of which butadiene is a side product. In addition, the U.S is focusing more and more on light cracking. Nevertheless, our global procurement team does a great job in focusing on secure log-term contracts.
Another potential outside factor that affects the chemical industry is energy prices, particularly in Europe.
B. Düttmann: It certainly has an impact. We saw rising energy costs in 2011, even though our energy consumption per ton has been decreased over the years and we are always looking for more opportunities to further reduce our energy consumption per output.
How has the German government's decision to exit nuclear energy by 2020 affected Lanxess as a company headquartered there?
B. Düttmann: We see the rising energy costs in Germany clearly reflected in our P&L but we don't yet see any potential shortages from the government's policy change. The only way to minimize further burdens in the future is for us to reduce our own energy consumption by developing new technologies.
Are the high energy prices in Western Europe a reason to take some production sites elsewhere?
B. Düttmann: There is no real concern if energy prices rise across the board globally; the concern is when they only rise in Europe while they fall in America, which is the case because of the growing interest in shale gas there. Also, in some countries, energy prices are subsidized by governments. And this is when it starts to become an issue.
Are these kinds of subsidies for energy-intensive industries missing in Western Europe?
B. Düttmann: I don't believe we need incentives on energy costs - what we definitely need to avoid are any extra burdens. Today in Germany we are in a good situation. We are cost competitive.
It would be a big mistake to overburden the industry with fees or rising energy costs, particularly in light of the jobs the industry brings to the country. The German chemical industry is one of the top four industries in Germany!
Looking to regions outside of Europe, how are you taking advantage of strong growth in emerging markets, particularly in the BRIC regions?
B. Düttmann: The most important factor here is that we are local in the BRIC countries. We're not just exporting there, but we're producing there as well. Specifically, we are investing heavily in China and India. We are also strengthening our footprint in Latin America. In 2005, our share of sales in the BRICS nations was about 12%. Today it is 24%.
Lanxess has just opened three new plants in India. Is it difficult to justify such investments when many companies are tightening their belts?
B. Düttmann: When deciding on investments we allocate resources with only one thing in mind - profitability. We apply strict financial criteria to every investment project. It must improve the company's overall profitability and must conform to an aggressive payback period. On top of our cost of capital, we assign a standard 1.5 percent risk premium and a country-specific premium. These criteria highlight how we go through every investment with great thoroughness.
The concept of "shareholder value" is a fine line to walk, particularly for a chemical company. How can a publically traded company find the right balance?
B. Düttmann: It is about credibility. We have laid out a clear growth plan to our investors. Our job is to deliver what we promise. That, along with our existing track record, is how we create value.