Lanxess buoyed by Zachert’s return to take helm of group
When Matthias Zachert announced in January that he would step down from his role as chief financial officer at Merck KGaA the pharmaceutical group’s shares tumbled more than 12 per cent. Mr Zachert was revealed as the new chief executive of Lanxess, the German speciality chemical company and its shares surged.
Unfailingly poised and polite, the 46-year-old sent his apologies for the share price hit to Merck, before turning his mind to the challenge that awaited him at Lanxess.
Mr Zachert knows Lanxess the way most parents know their children. As chief financial officer, he helped the chemical company find its feet after it was formed in 2004, when Bayer span off a bunch of unwanted, low-margin assets.
Lanxess expanded its production footprint beyond high-cost Germany, overhauled its portfolio and refocused on high-tech plastics, rubbers and speciality chemicals. Adjusted earnings before interest, taxation, depreciation and amortisation rose by an annual average of 20 per cent between 2004-12.
Mr Zachert joined Merck in 2011, a year before Lanxess posted its highest profit figures and crowned its recovery by taking a place in the blue-chip German Dax index.
But Lanxess’ hard-won revival was almost immediately thrown into doubt. The company began building three world-scale synthetic rubber plants in Asia at the same moment competitors were also bringing new capacity on stream.
The resulting oversupply triggered price declines in synthetic rubber. Lanxess reported a €159m full-year net loss for 2013 and was forced to slash its dividend. Axel Heitmann, who had insisted Lanxess faced only temporary demand weakness, stepped down as chief executive in January.
Acknowledging an emotional attachment to Lanxess that guided his decision to return, Mr Zachert is frank about the difficulties that awaited him at his former employer: “I knew that if I went back I would go back to a situation where Lanxess needed to be reinvented and repositioned again and that several markets in the rubber area would go through pain for some years to come,” he says. “It’s going to be a tough ride for two to three years, but I would like to help the company by bringing it back where it belongs on a successful route again.”
Feted by investors for his financial discipline and transparent communication, Mr Zachert has little trouble diagnosing what went wrong during his absence. If “over four years you basically invest more or less your entire cash flow, this is something that is not that balanced”, he says. “Life is full of imbalances and volatilities, but if you put everything on one card . . . if you win it can be a big bargain, but if you are not right it can create a lot of turbulences.”
About 40 per cent of Lanxess’ sales are linked to the automotive and tyre industries, which has also been a burden because of the depressed state of the European car market.
Since taking up his post in April, Mr Zachert has wasted little time formulating a plan to revive the Cologne-based company. Lanxess’ rather unusual company name derives from the French verb lancer (to launch) and the English word success; Mr Zachert’s revival plan is therefore called: “Let’s Lanxess again.”
In May Lanxess issued new shares equivalent to 10 per cent of its equity capital, raising about €430m to help fund restructuring measures and protect its investment grade credit rating. This month he unveiled a new divisional structure and management team. Some jobs will be cut but Lanxess has not yet said how many.
Mr Zachert also plans to strip out costs, restore capital expenditure discipline, shutter production capacity and seek an alliance or joint venture with raw materials suppliers.
When the price of butadiene, a key raw material, was high and rubber demand was strong, Lanxess could pass on high input costs to customers. But the demand situation has now been reversed, hurting Lanxess’ margins.
Amid expectations of an oversupply situation in synthetic rubber for the next two or three years, Mr Zachert believes it would be “beneficial” for Lanxess to have an integrated supply chain.
The new chief executive has warned that Lanxess could post net losses in coming quarters due to restructuring charges as well as potential writedowns on plants that are mothballed or closed. Further details of the restructuring are set to be announced in November.
“A fundamental margin turnround in our view would require a significant improvement in the rubber market structure, which is not in Lanxess’ hands,” Commerzbank analysts cautioned earlier this month.
Although Lanxess has a diversified international production footprint, its European assets face a cost disadvantage when compared with the US, where chemical companies are reaping the advantage of low energy and feedstock prices because of shale gas.
Mr Zachert notes that European energy costs are two to three times higher than in the US and warns European politicians to be careful that “one of its core industries is not becoming uncompetitive versus Asia and North America”.
In spite of all these challenges, he is convinced he can turn around Lanxess for a second time. Although Lanxess’ rubber business is facing difficulties, its other two business units – advanced intermediates and performance chemicals – are “relatively well positioned”, he says.
He believes competitors are starting to consider reducing their own rubber capacities, which would help restore a more favourable price environment.
“Any successful company has faced its challenges at one point in time. Successful companies manage that and take the challenging times as an opportunity to reinvent themselves or transform themselves,” he says. “That is what separates good companies from the bad.”