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Lanxess begins realigment under new CEO, raises capital
4:28 PM MDT | May 9, 2014 | —Natasha Alperowicz in Cologne
Lanxess has launched a process to realign itself following a major downturn in some of the markets it serves. New CEO Matthias Zachert, who took the helm on 1 April, says the company must become more competitive and profitable. “The focus will therefore be on the business portfolio, our business units, the efficiency of our administration, and our production sites,” Zachert says. Lanxess, to finance the restructuring, announced on 8 May that it had completed a share capital increase through an accelerated bookbuilding process. The new 8.32 million bearer shares were placed with international institutional investors at a price of €52/bearer share ($72), resulting in proceeds of about €430 million, which will be used to restructure. The issue was oversubscribed, Zachert says.
Zachert, at a media briefing and question-and-answer session at Cologne on 8 May, said that he is looking at all options to strengthen the company’s performance. These includes possible alliances or joint ventures in some of Lanxess’s core businesses, such as butyl rubber (BR) and neodymium-based polybutadiene rubber (Nd-PBR). The synthetic rubber industry is suffering from 20% overcapacity, particularly in BR and ethylene propylene diene monomer (EPDM) rubber, and Lanxess’s own investment in a world-scale EPDM plant in China, scheduled to be onstream next year, will exacerbate the difficulties. But, equipment has been ordered and the project will not be stopped, Zachert says. New players have entered the synthetic rubber business, some with access to cost-advantaged feedstocks and low energy prices.
Lanxess is working with Boston Consulting Group to analyze Lanxess’s cost structure under the accelerated restructuring program, which should be completed within two to trhree years, Zachert says. The company’s Advance cost-savings program has been completed and replaced by the realignment initiative. Zachert says that the company needs to bring its finances into a better shape. The debt to Ebitda ratio, in particular, needs to be reduced, he says.
Lanxess put several businesses up for sale last September with a combined annual revenue of €500 million, Ebitda of €30 million, and headcount of 1,000. Only one small, activity among these, the Perlon-Monofil operation, has been divested. Zachert confirms that Lanxess has hired Macquarie Bank to advise the potential sale of its rubber chemicals business. But, “the probability of stopping the process of divestment of the nitrile butadiene rubber business is high,” he says. That business was among those put up for sale in September. Zachert has also confirmed that a previously announced project to convert an emulsion styrene BR (E-SBR) plant to make solution styrene BR in Brazil is on hold and could be canceled.
Under the realignment initiative, adminstrative structures are to be optimized and decision-making processes streamlined. Customer and market orientations in the business units are to be improved. The profitability of Lanxess’s sites will also be analyzed, which may temporarily or permanently shut down plants. Lanxess will also explore options to make its rubber activities more competitive and to balance its portfolio. Lanxess operates 16 synthetic rubber facilities worldwide. Further details of the company’s realignment will most likely be provided during the second half of this year.
Lanxess’s major investments, meanwhile, are progressing. The company has spent about 40% of the total capital expenditure (capex) allocated for the Nd-PBR project in Singapore. Spending on a nylon project at Antwerp has reached 75% of the project’s total, and the capex on the EPDM rubber unit in China has reached 45% of the total. Responding to a question about the future of the BR plant at Zwijndrecht, Belgium, near Antwerp—where a strike by employees ended recently—Zachert said that the plant in 2013 produced high volumes, but BR prices dropped, bringing down the plant’s earnings. Another issue concerns the feedstock contract covering the plant, which will soon run out, and Lanxess will be unlikely to renew it under current conditions. “The good times for butyl rubber are over,” he says.
Zachert, meanwhile, reiterates that Lanxess—with sales to the automotive and tire industries accounting for about 40% of the group total—is satisfied with conditions in the auto and tire markets but that the company’s business needs to be more competitive. Lanxess’s other businesses may receive higher shares of group capex in the future.
Lanxess has also given its first-quarter results and an outlook for the year. Net income in the quarter was €25 million, similar to the first quarter of 2013. Sales were down 2.5% year-on-year (YOY), to €2 billion, with an increase in volumes in all segments insufficient to offset a drop in selling prices and negative currency effects. Ebitda pre-exceptionals rose by 17.8% YOY, to €205 million. The Ebitda margin pre-exceptionals rose by 10% from 8.3% in the year-earlier period. “The first quarter was characterized by a persistently challenging market environment for synthetic rubber. The agrochemicals business, however, continued to develop well … [and] positive impetus also came from the construction industry,” Zachert says.
Sales in Europe, the Mideast, and Africa, excluding Germany, were flat, at €618 million, and accounted for 30.3% of group sales. Sales in Germany rose 3%, to €381 million, accounting for 18.6% of the group total. North America sales rose 1.2%, to €331 million, 16.2% of the total. Sales in Latin America dropped 11.4%, to €217 million, representing 10.6% of the group total, and sales in Asia/Pacific decreased by 6.4%, to €496 million, accounting for 24.3% of the group total.
Lanxess anticipates that the economic environment will continue to recover slowly during the rest of this year, with the main impetus coming from the established economic regions. But, Lanxess says the challenging, competitive environment for the company’s synthetic rubber businesses will continue, with price pressure persisting. Lanxess, as a result, continues to predict subdued business development for the performance polymers segment. Zachert forecasts 2014 group Ebitda pre-exceptionals of €770–830 million.