INSIGHT: Auto sector woes continue to weigh down LANXESS

23 September 2013 16:58  [Source: ICIS news]

By Tom Brown.

Tyres and autos drive LANXESS demandLONDON (ICIS)--German chemicals producer LANXESS reported a banner year in 2012, posting €1.23bn ($1.66bn) in earnings before interest, taxes, depreciation and amortisation. (EBITDA).

A specialist in rubber and plastics, the company’s earnings were buoyed by rising emerging markets sales and increasing agrochemicals business.

However, clouds had been forming from the second half of the year onwards, with LANXESS noting softening demand over the last six months of 2012 in its full-year results.

The company warned that demand was likely to drop even further in the first quarter of 2013.

This proved to be the case, with EBITDA dropping by 53% during in the quarter on the back of spiralling volumes and lower selling prices. With conditions remaining challenging through the next six months, total earnings for 2013 were likely to be significantly below the previous year. But the extent of the drop was unclear until CEO Axel Heitmann revealed last week that the company’s full-year EBITDA was projected to be €700-800m, up to 43% below last year’s result.

The figure is lower than LANXESS’ full-year EBITDA result for 2011 and 2010, and could stand to come in below the €722m EBITDA posted in 2008, the year of the onset of the financial crisis.

This is due to in large part to plummeting demand from the automotive and tyre sector, described by Heitmann as “our problem child”.

LANXESS derives 25% of its annual sales from rubber and tyre sales and 15% from lightweight automotive components. Moody’s has described the company as one of the most exposed to Europe’s struggling styrene butadiene rubber (SBR) market.

EBITDA for the company’s performance polymers division fell by 60% year on year in the first half of 2013 to €206m as a result of the auto industry’s woes which have been prolonged by the sluggish European recovery.

Crucially, margins for the division fell from 18.2% to 8.9% underlining LANXESS’ struggles in maintaining its price-over-quantity strategy.

The European Automobile Manufacturers’ Association (ACEA) estimated last week that new passenger car registrations for the first eight months of the year in Europe had fallen to their lowest levels since figures started to be compiled in 1990.

The extent and duration of the auto and tyre industry slumps have led market players to announce that rock bottom has been hit multiple times over the course of the year with little improvement, but Heitmann told ICIS that he believes the market has at least plateaued.

If improvement is not yet round the corner, it is unlikely that the situation will get much worse, is the reasoning LANXESS is basing its projections on at present.

LANXESS’s in-house forecasts for the sector in 2013 are that EU tyre production volumes will have contracted by 7% year on year while automotive production will have fallen by 5.9%.

Tyre market woes have also impacted the company’s performance chemicals division, with Heitmann attributing the €43m year on year drop in division EBITDA in the first half of 2013 to €118m primarily to rubber volumes.

In response, the company has prioritised other parts of performance chemicals and its advanced intermediates business for expansion. Comprising the company’s basic and fine chemicals – including agro and pharma-focused subsidiary Saltigo – the advanced intermediates division has proved to be LANXESS’ most resilient this year, with first half EBITDA stable at €145m, and a margin reduction of just 0.4 points to 17.6%.

The company’s growth plans in the short-to-mid term are likely to be focused on those two divisions over polymers, as expansion plans are to be whittled down to the projects with the highest potential returns.

According to Heitmann, the markets served by Saltigo are less volatile than those served by polymers, with the potential to partially counterbalance the company’s core rubber and plastics business.

Acquisition-based expansion is likely to be low-key through the rest of the year and into early 2014. The company is aiming for a 2:1 organic to non-organic growth ratio, Heitmann told ICIS.

Growth plans are also more likely to be focused on smaller projects in the near future, as a result of more strictly-managed capital expenditure.

LANXESS’s capex budget for 2013 is estimated at €600m compared to €696m in 2012, and €679m in 2011, with maintenance expenditure likely to exceed growth spending.

The company said that investment is to be focused on debottleneckings and efficiencies, as well as on capital projects seen as most likely to maximise cashflow.

No other large-scale closures currently are planned following the shutdown of the company's rubber chemicals production site in Isithebe, South Africa and related restructuring of its Kallo plant in Belgium.

Future site restructurings will be focused more around the closure of individual production lines, Heitmann said.

Operating rates at several plants in LANXESS’ portfolio are also likely to be cut to reflect market demand and maintain the company’s prive over volume strategy.

The company is also seeking to cut its spending with €100m of annual efficiency savings by 2015 and to reduce headcount by 1,000 by the same deadline, which will be achieved as much as possible through early retirement and voluntary redundancy, according to Heitmann.

Options are being explored for several non-core businesses, including joint ventures and divestments.

Despite the expansions into intermediates and performance chemicals to bolster the company’s bottom line with earnings from more evergreen sectors alongside the cyclical auto sector, performance polymers remain LANXESS’ bread and butter.

Even in light of the historically poor performance of the European automotive sector this year, combined EBITDA of  intermediates and performance chemicals was just €57m higher than performance polymers earnings in the first half, and €249m below last year’s earnings for the division.

With expansion capital restricted compared to recent years, it seems that LANXESS’s fortunes will continue to be tied to the tyre and automotive plastics sectors, which in turn are tied to macroeconomic growth.

The US auto sector remains resilient, while the impact of an economic slowdown and mooted car purchase restrictions in China have yet to be felt.

But sales in Europe, the Middle East and Africa (EMEA) represented 45% of the company’s €9.09bn sales in 2012, with €1.58bn of that total from the company’s home market of Germany.

While the latest composite purchasing managers’ index (PMI) data for the eurozone shows that the recovery is continuing to gather pace, the going remains extremely slow, with any significant uptick in manufacturing output still a long way ahead.

For LANXESS, auto rubber and tyre demand has been depressed enough for long enough that the best hope for now is that the sector will maintain its current sluggish levels instead of falling lower. The company has to clip its wings, embrace efficiencies and invest in the best-returning projects a reduced capex budget can afford while it waits for autos to shift to a higher gear.

($1 = €0.74)

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By: Tom Brown
+44 208 652 3214

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