Commentary: The LANXESS challenge

31 January 2014 11:19  [Source: ICB]

The company’s new CEO faces formidable barriers in developing a fresh growth strategy. Poor demand and overcapacity plague some key end-use markets such as automotive rubber

The abrupt announced departure of LANXESS CEO, Axel Heitmann has certainly taken the markets by surprise. And reaction to the news that his successor is to be Matthias Zachert, currently CFO at Germany’s Merck, has been greeted with great enthusiasm amongst the investment community – the LANXESS share price leapt at the news.

 

 LANXESS management face some tough choices

Copyright: LANXESS

Zachert was CFO at LANXESS from its inception in 2004 until he left for Merck in 2011. Some analysts credit mostly him for LANXESS’s turnaround in its early years. According to one former analyst, Zachert imposed a strict regime of cost-cutting together with a focus on working capital and margins.

After he left, Heitmann switched the company towards a more capital expenditure-based growth strategy. As a market leader in specialty rubber chemicals, the industry followed LANXESS, leading to overcapacity. The slump in automotive demand came at a bad time for LANXESS which was relying on sustaining healthy growth rates, especially in performance rubber materials - during this decade. There were moves to cut costs, expand in emerging markets, and focus growth on other business units such as Saltigo, its agrochemical intermediates business. But these failed to improve the company’s fortunes quickly enough and LANXESS was forced to issue profit warnings in 2013.

The challenge facing Zachert is formidable. According to analysts at JP Morgan Cazenove, there are few “low hanging fruit” left as the company has already achieved fixed and variable cost savings of more than €500m ($683m). Asset sales would help reduce debt, but could also cut profit margins because the most attractive businesses are also LANXESS’s most profitable.

UBS analyst Joe Dewhurst believes the big focus for LANXESS now will be the reinstatement of its price over volume strategy in rubber which, he says, failed to operate after Zachert left to go to Merck. “The real profit driver here is smart pricing given they are significantly exposed to C4 feedstocks, which we see as continuing to be structurally short, largely inelastic supply and as a result [they are] prone to continued sharp volatility in pricing.”

He believes the company could do some work on the Performance Chemicals cost base, adding: “Axel did a great job in building LANXESS after the Bayer divesture. The company now enters a phase where commercial excellence is critical for maximising profits and here Matthias is an expert. He is the most focussed and commercially astute CFO and now CEO I have ever met.”


By: Will Beacham
+44 20 8652 3214



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