As Arkema prepares to unveil new targets and discuss long-term strategy in a July 10 Capital Market Day, the company’s CEO says that the group’s future development and transformation is more about evolution than revolution.
The French group, founded in 2004 when it was split from parent Total, has changed in the intervening years into one focused on service-oriented advanced materials with less exposure to cyclical commodities.
A top priority for growth will be adhesives and sealants, which is a very fragmented market
The company periodically sets financial, geographic and divisional targets (currently for 2017 and 2020), which will be updated at the investor day. According to CEO and chairman Thierry le Henaff: “The idea for the Capital Market Day is to go beyond 2020. It’s an opportunity to discuss where we want to take the company. It’s very important externally and internally to give the long-term direction.”
Future strategic development will evolve from current foundations rather than move in totally new directions: “Arkema is a supplier of advanced materials – we don’t want to invent a business model outside of our core - we have enough on our plate. With our positioning we can partner with innovative companies and bring to them all our knowledge and creativity in materials.”
Arkema is on track to meet one major target for 2020: to rebalance the company’s geographical exposure from heavily Europe-focused to one third of sales in each main region. In 2016, the split was around 36% in Europe, 34% in North America and, for the first time, Asia and rest of world (ROW) reached 30%.
SEGMENTS FOR GROWTH
Another key target in the transformation from commodities to specialties is to boost the high performance materials (HPM) division to 50% of sales. The group is also close to meeting this target as at the end of 2016 HPM accounted for 46% of sales. This was before the acquisition in December 2016 of €350m sales sealants specialist Den Braven, which will add a few more percentage points to the HPM portfolio this year.
HPM comprises specialty adhesives (including Bostik, the €1.5bn sales February 2015 acquisition which was the company’s largest to date), technical polymers and performance additives.
According to Le Henaff, a top priority for future growth will be adhesives and sealants, which is a very fragmented market.
The second area – here the majority will be organic growth but with acquisitions if there are opportunities – is the engineering plastics area of advanced materials. These are engineering plastics and materials that follow megatrends such as sustainable energy, water filtration, lightweight materials in automotive as well as windmills, aeronautics, consumer electronics, sports shoe design and performance.
These are all in the universe of advanced materials based on polyamides such as Rilsan (PA11), polyamide 12, Pebax, Kynar and poly-ether-ketone-ketone (PEKK).
Arkema has a commodity upstream acrylic acid (AA) business which now comprises less than 10% of company sales. To balance its cyclicality the CEO wants to continue to grow the acrylic downstream segment which comprises coatings resins and additives. These are acrylic resins for the coatings industry, Coatex products (biologic products), and high value rheological additives.
“We want to grow acrylic downstream for two reasons: we have strong know-how in terms of applications in the paints sector, adhesives etc. Secondly, acrylic downstream is more focused on innovation, is close to the end consumer, and is less capital-intensive. It is not subject to the cycle that affects more capital-intensive businesses like AA.”
He points out that downstream plants are smaller and cost far less to build. Innovation and new applications are more important than running a plant at 95% operating rate.
Another area of focus for investment Le Henaff picks out is thiochemicals (sulphur-based chemicals), which serve refining, petrochemicals and animal nutrition. When Arkema was created its presence was mostly in France. Then it added a plant in Beaumont, Texas, US, and then in 2015 started up a €200m project at Kerteh, Malaysia giving it a base in the high growth Asia region.
Molecular sieves are the fifth catalyst for growth identified by Arkema. The company is the world’s second-largest producer of the products, which are used for their adsorption and dehydration properties. End users include industrial gases, petrochemicals, medical oxygen, construction and pharmaceutical packaging. In April it started up a new plant in France.
Le Henaff says: “It does not mean the other segments will not grow but you cannot put your cash on everything – you need a balance between your growing segments and your “cash cows”. We don’t want to get rid of capital-intensive segments – it’s just a matter of balance.”
He agrees that AA is more commoditised and cyclical but claims it is still a niche which is quite specialised. As a percentage of the whole Arkema the more capital-intensive businesses will continue to decline. When Arkema began capital expenditure was 7.5% of total revenues and now it has declined to between 5.5-6%.
“This reflects the evolution of the portfolio with the arrival of adhesives which are less capital-intensive and the decline of AA as a percentage of our portfolio.”
Le Henaff picks out several long-term trends which underpin Arkema’s growth strategy. The first is sustainability in terms of raw materials as well as recyclability. Secondly, energy savings and light-weighting. Third – performance, design and digitisation in an age of rapid change. Increased mobility and access to potable water are also important. Finally, he highlights demographic changes in the global population – aging and rising standard of living in developing countries as well as the rising global population.
The market for electric vehicles is growing faster than anticipated and this segment opens up opportunities for new players. “When you are not a leader in automotive and you want to bring something different with mobility and electricity it opens the field to players who were not traditionally so strong,” he says.
Arkema’s fluoropolymers and lightweight polyamides serve the electric vehicle market well, according to Le Henaff.
ACRYLIC ACID UPDATE
The global acrylic acid market has been under pressure for at least the past 2-3 years with supply exceeding demand and profitability suffering as a result.
“Our theory was that it would come back gradually starting at the end of last year; in fact this is what has happened. Last year we started to see some improvement coming from Asia and now we see that the US and Europe start to be a bit better.”
In Arkema’s analysis in 2017 AA should be a little below mid-cycle, demonstrating a gradual recovery from 2015 and 2016. “Sometimes you have to patient in acrylics.”
He points out that there have not been any new expansion announcements for AA for many years, helping the market balance.
“We would not consider disposing of AA as it is the backbone of the acrylic downstream. Compared to many chemical companies we have a lower ratio between more downstream, lower capital-intensity businesses and higher intensity.” Le Henaff insists the return on capital employed (ROCE) of Arkema’s acrylics value chain is: “quite good over the cycle and comparable to the other segments. In terms of return to shareholders acrylics has been a good bet.”
He adds: “Our idea is … to build something from where we were towards our specialties and not to remove everything that has a higher capital intensity.”
OIL IMPACT AND OUTLOOK
According to the CEO, Arkema has been profitable in both high and low oil price environments. However, he prefers a low oil price because it is better for worldwide GDP as well as for Arkema’s level of working capital.
“We had good growth in the first quarter of 2017. My feeling is that Europe and the US are “stable plus” and Asia, especially China and southeast Asia are doing well. It’s been an OK start to the year in terms of worldwide GDP.”
As Arkema puts a lot of money into research and development, the CEO is clear that the company is keen to push a lot of new products to its current customer base as well as to new customers. Then there is geographical expansion beyond the 45 countries in which it already has a significant presence.
Arkema is pursuing a service-based, high value materials growth strategy. But at the end of the day Le Henaff concedes that as a chemical company its expansion is linked to GDP.
“When we look business line by business line we think more about business development by application and not so much about GDP. But it’s clear that if I look at the history of Arkema we have never b een far from GDP: this year we started higher than GDP and at the end the idea is to beat GDP a little bit and to add to that some bolt-on acquisitions.”
2017 AND 2020 TARGETS
■ 2017 - €1.3bn in EBITDA – on track
■ 2017 - €700m sales to be divested – below target as of May but expects to meet equivalent internal enterprise value divestment target
■ 2020 - €10bn revenue – on track
■ 2020 – 17% EBITDA margin – on track
■ 2020 – less than 40% debt-to-equity ratio – on track
■ 2020 – balanced split between three global regions – on track
■ 2020 - High Performance Materials (HPM) division = 50% of sales – on track
NEW PROJECTS UPDATE
■ Molecular Sieves – €60m investment for plant at Honfleur in France. Official start-up 24 April 2017. Doubles capacity for sieves for aromatics separation, especially xylenes. HPM segment
■ Kynar fluoropolymers – Changshu, Shanghai, China, start-up April 2017. 25% global capacity increase. HPM segment
■ Polyamides Asia – Zhangjiagang site (Jiangsu Province) – bio-sourced polyamides – two compounding lines for polyamide 11 due on stream in 2017
■ Acrylic acid – $90m to replace two 45,000 tonnes/year reactors in Clear Lake, Texas, with a single 90,000 tonne/year facility reactor. Onstream target mid-2019. Total Clear Lake AA capacity 270,000 tonnes/year
■ Poly-ether-ketone-ketone (PEKK) – February 2017
confirmed doubling of capacity in France and that Alabama, US, will be location of world scale plant with start-up second half 2018
■ China – acrylic acid – in 2016 increased ownership of Taixing Sunke Chemicals (Sunke) JV with Jurong Chemical from one third to half of the plant adding 80,000 tonnes/year of capacity to total 240,000 tonnes/year from that site.