31 January 2014 16:38 [Source: ICIS news]
By Will Beacham
LONDON (ICIS)--The abrupt departure of LANXESS CEO, Axel Heitmann, in February 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.
Zachert was CFO at LANXESS from its inception in 2004 until he left for Merck in 2011. Some analysts credit primarily him, rather than Heitmann, for the rapid turnaround of the company in its early years.
According to one former analyst who covered LANXESS in its formative years, 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 him, leading to the overcapacity we’re encountering now and, probably, over the next 2-3 years.
LANXESS has global market-leading positions in ethylene propylene diene monomer (EPDM), and the high performance butadiene rubbers solution styrene butadiene rubber (S-SBR) and neodymium based performance butadiene rubber (Nd-PBR). It is global number two in butyl rubber.
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. LANXESS reported an 88% year-on-year drop in net income for the third quarter of last year.
LANXESS has been described by credit ratings agency Moody’s as one of the companies most exposed to the European auto sector, which experienced its worst year in almost two decades 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. Asset sales would help reduce debt, but could also cut profit margins because the most attractive businesses for buyers 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. Here commercial excellence kicks in to keep pricing ahead of raw materials. “
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.”
This is quite some praise for the new CEO who – unusually for a German chemicals executive – has no higher degree. He completed an apprenticeship with Mercedes Benz before graduating with a degree in business administration.
According to the former analyst: “Zachert is a machine – one of the most efficient guys I have ever met … he has one Espresso with each meeting (up to 8 meetings a day) and is sparkling in each one.”
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