Issue Date: March 30, 2009
Leading Clariant Beyond The Crisis
ASKED WHAT his message would be to the analysts he planned to visit on a U.S. tour this month, Hariolf Kottmann, newly appointed chief executive officer of Clariant, said it would be one of reassurance: "Don't worry, there is a life after the crisis."
Which crisis, one might ask? Although Kottmann was clearly referring to the recession, which is pummeling the entire specialty chemical sector, Clariant has been experiencing a prolonged crisis of its own.
Kottmann, the firm's third CEO since 2003, is faced with steadying the course of a company that has gone through six years of restructuring, divestment, and downsizing, largely associated with a disastrous foray into fine and pharmaceutical chemicals. Although other chemical makers made similar ill-fated moves, the subsequent churn at Clariant has many industry watchers—and Clariant employees—anxious about the company's direction going forward.
Stabilizing Clariant will not be easy, given that the company faces yet another round of layoffs. Kottmann announced 1,000 job cuts earlier this year on top of the 2,200 announced in 2006, some of which have yet to be implemented. In all, 1,350 jobs will be eliminated this year. Having divested life sciences and other businesses that registered sales totaling roughly $3 billion between 2000 and 2008, the company now must deal with operations in textile and leather chemicals that are, in Kottmann's words, "destroying value." They are nonetheless tightly woven into the company's industrial fabric, he says, and cannot simply be sold.
Rather than continue the practice of selling or eliminating business units that are struggling, Kottmann says his challenge is to further streamline the company by improving the profitability of existing businesses.
Its textile, leather, and paper chemical operations are a clear testing ground for his approach. "We want to try to gain more strategic flexibility by eliminating the traditional structure and overhead, separating these businesses into three independent units—not legal entities, but business units with clear, dedicated management," he says.
The downsizing is part of a program initiated in 2006 that aims to remake Clariant by 2010. Kottmann says he is focusing "Project Clariant" on generating cash while reducing cost and complexity. "There is only one target for 2010," he says. "By the end of the year, we want to achieve a return on invested capital above the industry average." Kottmann estimates the industry average for 2008 at 10.5%. Clariant's return was 9.0%, compared with 7.8% in 2007.
CLARIANT WAS BORN in Switzerland in 1995 when the Swiss firm Sandoz spun off its specialty chemical operation as a prelude to merging with Ciba-Geigy and forming Novartis. Two years later, Clariant took on Hoechst's specialties business as Hoechst combined its life sciences business with Rhône-Poulenc's to form Aventis.
Kottmann, 54, began his career at Hoechst, where he held various management positions before leaving in 2001 to join the Hoechst spin-off SGL Carbon. He was asked to join the supervisory board at Clariant in 2007 and was tapped for the CEO spot last September when Jan Secher left over differences with Chairman Jürg Witmer.
Kottmann is viewed by some as having been brought in to rein the company back to the path of traditional specialty chemicals that it started on after completing its merger in 1999 with Hoechst's specialty businesses. "We will be back to square one," an executive with the company recently observed, equating square one with Hoechst.
Indeed, the years since then have represented a significant divergence from that path. One year after completing the Hoechst deal, Clariant jumped on the fine and pharmaceutical chemicals bandwagon in a big way with the $1.8 billion acquisition of U.K.-based BTP. Like several other chemical companies that made similar moves, it spent the next several years getting out of the business. Most of the divestment was accomplished with the sale of its pharmaceutical chemical business to TowerBrook Capital Partners in 2006.
Clariant has scaled back to being made up largely of specialty chemical operations once owned by Hoechst, but Kottmann doesn't seem impressed with the symbolism of this full circle. He sees his mandate as shifting the firm's focus from business divestment to profitable growth with fewer people.
"People related to the divested businesses left the company, but this did not increase productivity or efficiency," Kottmann says. "My experience is that if you do not focus the population of your company, if you dilute the focus and allow people an easy way out when it comes to difficult tasks, then you are not going to be successful."
Clariant recently reported 2008 sales of $7.5 billion, a 1% increase over 2007 when adjusted for currency fluctuations. The company also reported a net loss of $34 million, in part due to restructuring of its struggling textile and leather chemical businesses. Business was more stable in its pigments and additives, masterbatches, and functional chemical divisions. During the year, the company sold its Netherlands-based pigments affiliate Dick Peters to Altana and acquired U.S.-based Rite Systems/Ricon Colors.
Martin Flueckiger, a stock analyst with the Swiss brokerage firm Helvea, says Clariant's greatest challenge right now is the economy. "I'd say 50% of their portfolio is highly cyclical," Flueckiger says, adding that the difficulties with fine chemicals are water under the bridge. "Most of the life sciences businesses are sold. BTP is an old sin from past management teams."
Flueckiger credits the current executive team with introducing a new pricing management system and implementing tools with which the company can track profitability across its portfolio. "Until three years ago, top management didn't have a clue as to where the money came from, which was typical of the specialty sector," he says.
Clariant still faces structural problems dating back to the merger between Hoechst and Clariant, Flueckiger says, adding that Kottmann's reputation as a "hard-line restructurer" at SGL figured into his appointment as CEO. Flueckiger calls Clariant's balance sheet "robust, but not failure-proof," adding that cash flow will remain a problem in the current economy. He forecasts a loss of $6.5 million for 2009.
Increasing profitability is a primary objective in the current round of employee reductions at Clariant, according to Kottmann. "Our administrative structure and cost is much larger than it should be for a company our size," he says. "Headcount reductions through mid-2009 will focus on the administrative area and service functions."
In recent months, Kottmann reorganized the company's regional structure, combining its Indian and Asian divisions and merging operations in Europe, Africa, and the Middle East into one unit. He says the firm will withdraw from some countries and eliminate products from "the tail end of our portfolio," but offered no specifics.
Although market watchers speculated last year that Clariant might be acquired, Kottmann says the prospect of an acquisition is not influencing his decision-making. "As CEO of a publicly traded company, you decide what is positive for shareholders," he says. "So if a strategic investor makes an offer for Clariant, we have to consider this." He points to the pending acquisition of Ciba by BASF as an indicator that there is still significant merger and acquisition activity going on in specialties.
"I CAN IMAGINE there is not one financial investor who did not analyze an acquisition of Clariant during the last two to three years," Kottmann says. "Why finally nothing happened, I don't know. We don't have any concerns, however. We will try to stay independent, publicly traded, and headquartered in Switzerland."
As to what Clariant will look like after 2010, Kottmann shrugs. "This is a question I get many times from our global management team, which is about 95 people," he says. "It is a bit surprising to me that many of them are interested in what will happen three to four years from now. I think we have to be interested in what happens in the next three to five months."
Much depends on the length of the recession, which Kottmann says is hard to gauge. "There is no visibility in talking about the economic crisis," he says. "But we assume that the level of drop in demand we reached in the fourth quarter of 2008 will last until the end of 2009." He is skeptical of optimistic analyses predicting recovery in the third or fourth quarter. "If this occurs, we'll take it," he says, "but from today's point of view, we have no indication that this is the case."
Many of Clariant's businesses went into decline a year ago, Kottmann says, indicating they have reached the bottom and can be expected to stay there through 2009. It will be well into 2010 before increased demand sparks a solid recovery. But he insists on the primacy of his shorter term restructuring objective.
"If we don't achieve an above-industry return on invested capital, if we are not capable of running the company on a lower cost base," Kottmann says, "then we are just not the right company to grow profitably."
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