Sale of rubber business increases resilience for LANXESS – CEO

Source: ICIS News


COLOGNE (ICIS)--The full divestment of rubber business ARLANXEO and a gradual portfolio shift towards specialties has left LANXESS more resilient in the face of substantial market weakness at the close of 2018 and macroeconomic and political uncertainty this year, the CEO of the Germany-headquartered producer said on Thursday.

The sale has left the company less dependent on the tyre and automotive markets and on oil-derived feedstock price volatility, as it buys up targets to increase its presence in specialty chemicals in niche mid-sized markets, according to CEO Matthias Zachert.

“The recent changes have led us to a situation where we have a much more balanced structure,” he said.

The company posted stable earnings before interest, taxes, depreciation and amortisation (EBITDA) before exceptional items for the fourth quarter of 2018 despite several key clients and industries suffering downturns in the year.

The fact that quarterly earnings remained resilient year on year despite weaker demand indicates that the company has become less exposed to cyclic volatility, according to Zachert.

“In the past, LANXESS also had to suffer sometimes in the development of some industries,” he said, noting the profit warning the company was forced to issue in 2013 due to collapsing automotive sector demand.

“The fourth quarter showed… [our] portfolio has made us more stable to weather those storms,” he added.

Before the company started to push away from the rubber sector, it derived almost half of its sales from the automotive and tyre sector, with 10-15% each from construction and engineering, agrochemicals and chemicals.

Last year automotive sector sales fell to 20% and chemicals increased to 30%, while construction and engineering sector revenue share rose to 20%.

As well as selling off its remaining 50% stake in the ARLANXEO rubber joint venture, the company has expanded aggressively into specialty chemicals in recent years, acquiring Chemours’ cleaning and disinfectants business, Solvay’s phosphorous chemicals assets, and flame retardants and lubricants specialist Chemtura.

Despite the portfolio adjustments, LANXESS was identified by Baader Bank as one of the worst-performing European chemicals stocks in 2018, with its share price falling from over €70/share in January to lows of €40 in early December.

LANXESS stock has rallied back to almost €50 apiece since then, but the company retains substantial exposure to numerous end markets expected to underperform this year, with a weak outlook for both automotive and construction sector growth.

Earnings for 2019 are expected to come in around the €1.02bn posted in 2018, according to Zachert, and the company has so far managed to cope with market bearishness, particularly in China, in January and February.

“Despite the stormy weather outside, we want to keep to prior year levels, and that means €1bn [EBITDA]… we are not able to tell you whether the trade wars will become weaker, whether there will be Brexit or not”, he said.

“The first quarter [2019] was poor in the markets, particularly in China,” he added. In the fourth quarter there was a volume decline and Jan and Feb there was also a decline, but fortunately we were able to offset that from other sectors.”

European and North American demand counterbalanced weaker fourth-quarter China volumes, and expectations of improved agricultural sector demand will also help to balance out projections of weaker polymers division volumes as a result of tepid automotive sector growth, Zachert said.

Nevertheless, the company’s latest EBITDA margin target of 14-18% - a level it hit in 2018 at 14.1% - will come into effect from 2021, indicating that scope for higher profitability over the next two years remains uncertain.

Focus article by Tom Brown