Arkema’s 10-year transformation

PARIS (ICIS)–10 years after its initial public offering, French specialty chemical company Arkema is on track to meet long-term goals which will transform it from a Europe-centric commodity player into a globally balanced specialty chemicals and advanced materials producer, according to its CEO and chairman Thierry Le Henaff.

Le Henaff, who has led the company since its spin-off from Total through an initial public offering on 18 May 2006, began Arkema’s move to reduce exposure to more cyclical commodities through a series of acquisitions and new projects in areas such as thiochemicals, downstream acrylic acids and adhesives focussed on Asia and the US with some European expansions.

A major move saw the disposal of the group’s polyvinyl chloride (PVC) operations to Klesch Group in 2012 as well as the €240m China acrylics Sunke joint venture with Jurong Chemical in 2014. The group’s largest piece of M&A swallowed up French adhesives group Bostik for €1.75bn last year. By 2016 around 50% of the portfolio had been added since the group’s formation.

Bostik – with €1.53bn sales – gives Arkema a boost in industrial, construction and consumer adhesives (Bostik is number three globally), and moves it down the acrylics value chain. As a consumer of acrylics it allows the group to operate Bostik as a business integrated upstream into its industrial specialties unit which produces acrylic acid. 

The €1.75bn deal, which closed in February 2015,  was not driven by the desire to reach closer to consumer markets so much as the drive to acquire businesses complimentary to Arkema’s end-use markets such as polymers for insulation which is a very fragmented market, according to Le Henaff.

He knew the Bostik business very well, having been its CEO 10 years ago.

“I was convinced there was strong potential for growth and the EBITDA increase from €158m in 2014 to €183m after a year with us proves this,” he said.

He says the companies share the same end markets and entrepreneurial spirit.

“Bostik has a great marketing culture,” he said. “In the past Arkema had a product line marketing strategy, but now with Bostik we are increasingly working with OEMs (original equipment manufacturers) to bring solutions to the end markets and customers.”

The acquisition also joins together the companies’ R&D operations: “It’s a unique combination of Arkema’s polymerisation expertise with Bostik’s formulating expertise.”

Adhesives are very important for lightweight materials.

The switch to emerging markets has seen Asia as a percentage of sales move up from 13% in 2005 to 24% last year. The US business has grown from 25% to 33% last year whilst Europe fell from 60% to below 40% over the same period.

Arkema has established its largest industrial site globally at Changshu, north of Shanghai, for production of organic peroxides, specialty polyamides, fluorogases, PVDF fluoropolymers, and rheology additives.

It has also invested in an organic peroxide production plant in Saudi Arabia.

Slowing and volatile growth in China and other emerging nations does not deter Le Henaff from continuing his pursuit of Asian market share. He will not be distracted by what he sees as short-term trends, and does not buy into the argument that slow emerging market growth may signal a structural change driven by demographics.

“To be balanced and diversified is the best way to combat volatility and our long-term aim for 2020 is to have one third of sales each in North America, Europe and Asia. Growth in China and Asia will still be above the rest of the world and you need to mix these with less volatile, more mature markets.”

Earnings before interest, tax, depreciation and amortization (EBITDA) margins had declined each year from 2011 but this trend reversed, along with sales and EBITDA during 2015. Market capitalisation has tripled during the last 10 years.

The company has grown from around €5bn in sales at creation to €8bn now, and is on track to exceed €10bn by the targeted 2020 date. “Our balance sheet remains strong at with under 40% gearing one year after the Bostik acquisition. We continue to grow in specialty materials whilst keeping a strong balance sheet,” he added.

Arkema had an EBITDA margin of 13.8% in 2015 and expects to beat that this year. Le Henaff aims for it to reach close to 17% by 2020.

There are five platforms for growth: lightweight material, bio-based raw materials, alternative energy, potable water technologies and electronics.

The High Performance Materials division is expected show the most growth over the next few years. It has moved from 25% of group sales in 2006 to reach 44% today and is forecast to rise to 50% by 2020. “It’s the most resilient, innovative segment and the most supported by megatrends.”

To take advantage of growth in the 3D printing market Arkema is growing its poly ether ketone ketone (PEKK) business through the construction of a new production line in France and a new plant in the US. A plant in Normandy, France, will double capacity to under 1000 tonnes/year by 2018. And in the US a greenfield site is being chosen for another plant of under 1000 tonnes/year with startup planned for 2018-2020.

“This product will be a star performer in the long term,” said Le Henaff.

Industrial specialties – comprising thiochemicals, fluorogases, polymethyl methacrylate (PMMA) and hydrogen peroxide – includes some of the company’s more cyclical businesses. As a proportion of total sales the division fell from 35% in 2005 to 30% in 2014.

The long term aim is for this to fall further to below 25% by 2020, and for cyclical products (acrylics, fluorogases and PMMA) to fall to less than 20%. Le Henaff insists the company remains committed to cyclical products: “They serve our downstream markets and are very complimentary in terms of technologies and upstream integration. We can accept a certain level of cyclicality as they are profitable over a cycle of five or ten years.”

Arkema’s €200m thiochemicals (sulphur amino acid) and dimethyl disulfide (compound used for hydrocracking catalysts) project started up in January 2015. It has already reached 80% capacity utilisation and represents around a quarter of the group’s thiochemicals business.

“I would not be surprised if before 2020 we would expand this plant and we are thinking about it,” said Le Henaff.

The global acrylic acid market has been mired in overcapacity and poor demand growth during 2015 and 2016. But, says Le Henaff, it should begin to turn around this year.

“AA has stabilised and after spending a large part of the year at the bottom of the cycle it should show some improvement towards the end of the year. AA is only 10% of Arkema and has an upside in the long term in terms of profitability,” he said.

The group has AA operations in France, China and the US. He says that there are no plans for capacity reductions because the group is a global leader with competitive plants. But some smaller players are very challenged so he hopes there will be some market rationalisation.

“Demand is growing at 4% over time driven by markets such as coatings, water treatment and detergents.  It’s a consolidated business and nice to have as a feed for our downstream businesses,” he said.

Future bolt-on acquisitions will be focused on advanced materials and downstream acrylics, according to Le Henaff.

Arkema has a target to make €700m of disposals from 2014 to 2017. In 2015 it sold PMMA distributor Sunclear, with €180m sales. The company has €500m remaining to meet its targets: “These are small businesses with a small market share. We want to concentrate on products where we are number 1-3 in any market.”

Arkema is a mid-sized chemical company, ranking at 56 in the 2015 ICIS Top 100 Chemical Companies listing. Le Henaff insists size is not the best judgement of the quality of a company. “I don’t care about our size globally and I don’t want to be one of the largest companies. What I do want is good market share, improving performance, strong investment in specialties and balanced geography.”

He also puts a lot of emphasis on value creation. “We want to grow at GDP organically and then double that growth through acquisitions.” Arkema is number 1-3 globally in each of its key business lines. 

Adhesives are a strategic priority for M&A as are innovative materials such as new polymers to replace metal or composites. Downstream in the acrylics chain is also a target: “We are the right size in acrylic acid but want to develop downstream.”

“In terms of our transformation we built up very good momentum through 2015 with the arrival of Bostik and startup of our Malaysia thiochemicals plant. We’ve increased our market capitalisation by three times since our creation and that is pure value creation, not the market,” he said.

Le Henaff insists the ageing population in mature and emerging markets will not be a drag on demand growth. In fact it will feed growth through higher demand for super absorbent polymers.

“I think the chemicals industry will continue to grow but companies will have to focus on portfolio positioning. In a volatile world companies have to be resilient. Companies with a clear vision and strategy will grow and their end markets will grow.”

For Arkema the weak euro helped boost earnings by €80m from US dollar operations in 2015. Profitability was also improved by the low oil price which fed through into lower feedstock prices whilst it maintained selling prices.

Interview article by Will Beacham