Arkema
CEO Thierry Le Hénaff  is leading the company  into a new phase of development

French group Arkema is moving into a phase of rapid organic expansion as it seeks to boost capacity to serve fastgrowing specialty chemicals and materials segments. The €8.4bn sales company, founded in a spin-off from Total in 2004, is now commercialising its research and development (R&D) pipeline through rapid scale up to satisfy growing demand for products linked to lightweight materials and design, electronics, new energies, home insulation, bio-based products and water treatment.

CEO Thierry Le Hénaff, who has led the group since its inception, is driving growth in the value-added, specialties side of the business which is targeted to reach 80% of group sales by 2023, from 71% in 2017.

Geographical balance is expected to change from slightly Europeheavy (38% of sales in 2017) to one third of sales in each key region of Europe, North America and Asia/rest of world over the same period. His choice of new projects largely reflects this. Arkema is boosting capital expenditure from around €420m-450m/year to around €550m, adding €100m to fund the expansions. Around 45% of capex spend is earmarked for the wave of new projects, which include a €300m investment in Asia to increase global polyamide 11 capacity by 50%, due onstream in 2021.

Eight other projects are due to start up between 2018 and 2021 (see chart). Meeting at his head office in Paris, Le Hénaff told ICIS: “Today what slows down growth is not our innovation power or opportunities. It is the fact we have grown so much that we need to put in more capacities. This is why we have a whole wave of new expansions coming onstream.” He says the new projects have been made possible by the pipeline of new products that have created the sales to support these plants. “It’s a wave of new projects for Arkema and significant capex which is very good for the value creation of the company.”

POLYAMIDE

11 Polyamide 11 is a non-compostable bioplastic made from castor oil, marketed for 70 years by Arkema and its predecessors under the Rilsan brand. It has applications for tubes, connectors and cases in automotive and electronics. Significantly, it can also be used for the fastgrowing 3D printing, battery and auto lightweighting segments. The company’s existing plant in France is nearly overbooked and the location within Asia of the new plant should be made public in the course of this year.

“In the life of Arkema we have had several significant milestones and clearly the PA11 investment is one of them. For the first time in the history of Arkema we have a massive investment plan for PA11 – for us a big bottleneck is this monomer,” says Le Hénaff. Polyvinylidene fluoride (PVDF) has been developed by Arkema under the Kynar brand and is a real success story.

The material is used as a binder in batteries and is now present in one third of all smart phones globally.

In 2018 the company started up a project in Calvert City, US, which boosted US Kynar capacity by 20%. “I’m sure we’ll be announcing new capacity in the coming months because we have grown in PVDF at 7%/year since the start of Arkema – this has been supported by the battery and solar markets,” he says. The acquisition of Bostik, the world’s number three in adhesives, in 2015 gave Arkema a decent entry into adhesives and the integration has been a success so far with earnings before interest, tax, depreciation and amortization (EBITDA) increasing by 53% from 2014 to 2017.

The division is targeted to more than double sales from 2016 to 2023 and this growth is being fuelled by bolt-on acquisitions (Den Braven, CMP and XL Brands) as well as organic growth. A project to boost Asia Sartomer photocure resins by 30% is due onstream at Nansha in China in 2019. This market is growing by 5%/ year, according to Le Hénaff. Arkema is a global leader in thiochemicals (sulphur-based chemicals used for animal nutrition, petrochemicals and refining).

It has 11 production sites globally – seven in Europe, three in the US and one in Asia – and is doubling capacity in Malaysia in a project due to start up in 2020. In June 2018 the group said it has partnered with Novus International to double capacity at Beaumont in the US. A final investment decision is due in 2018 with start-up scheduled for 2021. Capacity expansion has become a major part of Arkema’s growth strategy as the R&D pipeline starts helps to boost demand for new products and applications.

R&D STRATEGY

Arkema introduced the concept of R&D platforms linked to megatrends at its inception, and with an average six- to seven-year cycle from starting point to end of pipeline, a steady stream of new products are helping fuel demand. Innovations like the polyamide Rilsan, the thermoplastic resin Elium, and Kepstan PEKK composites grew out of this strategy.

The company is investing heavily into R&D and filed 240 patents in 2017. It has a new R&D centre in Korea and R&D capacity is doubling in China. R&D intensity is weighted towards the High Performance Materials unit, which receives 75% of R&D spend even though it accounts for 46% of sales.

In Advanced Materials, for example, 4-7% of sales are invested back into innovation compared with closer to 1% for acrylic acid. “We have unlimited opportunities in all industries, starting with automotive, aeronautics, 3D, sport and flexible packaging for Bostik,” he says. Arkema is seeking M&A targets in three areas: Bostik, technical polymers and acrylic downstream.

The adhesives market where Bostik sits enjoys lower capital intensity and resilience across the cycle. “It is a very fragmented market, which means you have opportunities to make smallto-medium-sized bolt-ons every year. We have a strategy to be a worldwide leader in the two areas of sealants and flooring. M&A will help us achieve our goal of over €3bn in sales for Bostik in 2023,” says Le Hénaff.

TECHNICAL POLYMERS

Arkema is also looking for opportunities in technical polymers to complete its range beyond PVDF, polyamide 11, 12, Pebax and Sartomer products. However, this is a more consolidated market, as is advanced materials, where it is also seeking bolt-ons. “We believe we could apply our existing know-how in polymers to other polymers. It could be a smaller acquisition, say in compounding, which would be high-value or a larger one such as a new polymer,” says Le Hénaff.

In acrylic downstream Arkema is permanently looking for mid-sized targets though this is also a consolidated market. “We have to focus on the right timing and allowing time for integration.

Through M&A and organically we can really accelerate our growth,” says Le Hénaff. M&A valuations and multiples are currently at historical highs, with few targets and a lot of competition from buyers, especially for specialty chemicals businesses. According to Le Hénaff, valuations are high because interest rates are low and there is a lot of money flowing in the market.

“You have to be very selective and make acquisitions where you have significant synergies – you need to take your time. Our acquisitions averaged 11X EBITDA – you have to be cautious in the markets of today,” he says.

Integrating acquisitions can also be particularly difficult in specialties where there may be few easy synergies between companies producing different niche products. But Le Hénaff insists it is possible to be successful if you can find synergies in either feedstocks or innovation. 

“You have different types of synergy: feedstocks for Sartomer and Coatex where we could supply more acrylic acid; and innovation where you have common end markets such as Sartomer 3D fitting in with the 3D of Arkema.” He adds that the Coatex acquisition benefitted from Arkema’s coatings expertise while Den Braven benefits from significant cost and cross-selling synergies with Bostik.

ARKEMA IS NOT FOR SALE

Le Hénaff insists Arkema works best as a midsized, independent company rather than becoming part of a larger conglomerate.

“When I look at our financial flexibility, our level of innovation, the relationship we have with customers, our employees and management – we have all the right ingredients to create value.

We don’t need to be associated with a big one to add more complexity.” Unlike new or externally appointed CEOs, Le Hénaff has deep knowledge of his company, and is – in a way – its founding father, having led the group since its creation. Earlier he headed up Bostik when it was part of Total.

A financial analyst agrees that this helps him lead the group effectively and hold lower tiers of management to account (see box). The CEO says: “One of our qualities is speed: the executive committee and I have a level of knowledge of the company which is very detailed.

This is very important because we can move very quickly when the management team comes to me as they don’t need to explain for hours and hours starting from scratch.”

TRENDS IMPACTING ARKEMA

Like everyone in the chemical industry, Arkema has to find ways to grow in an era of permanently unspectacular GDP growth driven by demographic trends such as the aging population. Le Hénaff recognises this, saying:

“How to generate growth – the world itself is growing more slowly than 5-10 years ago in terms of GDP. You need to offset that with more innovation.” The shift of China from low-cost producer to a knowledge-based economy is an opportunity for Arkema and its customers.

But it could also be a challenge as new competitors emerge in the same technologies and markets. “Internally we have to transform these from risks to opportunities so we decided to invest in more R&D skills. Instead of just trying to protect ourselves we said ‘Let’s do it differently by being more proactive and open.’ We put in more R&D in China, though we do protect it.

“And we have more partnerships with Chinese companies. We have a lot of big customers which lack technology in China and we are not afraid to discuss technology with them. In China we are Chinese and play the game fully.”

VOLATILITY

Le Hénaff recognises that volatility is increasing in terms of raw materials (linked to the oil price) and currencies. He sees this as a good reason to stay diversified geographically and in products. “We don’t want to be in one or two markets but to diversify – also to be well-balanced in terms of geographies. More than 85% of our raw materials are based on naphtha so we are as exposed as everyone.”

Geopolitics change all the time and are having a larger and larger influence on the activity of chemical companies. “You have to be aware of this. We must understand what is happening and be proactive – by diversifying your base of countries you can make adjustments,” he says.

DIGITISATION

Arkema sees digitisation as both a threat and opportunity and has appointed a chief digital officer who reports directly to Le Hénaff. The company has introduced 3D and 4D (including time) tools for modelling manufacturing as well as R&D. Tools for marketing new selling platforms and customer experience are in development.

“The risk is to follow too many at the same time – you need to decide on your digital priorities and be good at it when you execute. For me digital is very important in materials because it has changed the speed of innovation for Arkema and our customers.

You can model the behaviour of materials far better than in the past because we have more data and know how to handle it.”

The company claims it saved six months in a four-year plant construction project which started up in France last year by using 3D tools. Plant workers were able to participate in the plant design by wearing 3D glasses to simulate the layout and operation of the unit. “This won us time and money and allowed us to have the workers participate in the design of the plant.

Now we have moved from 3D to 4D where workers can enter the plant at different times.” The tools also save money because Arkema could be more precise with suppliers about exactly how many metres of pipe were needed, for example.

COMMITTED TO COMMODITIES

Arkema’s commodities include intermediates such as methyl methacrylate (MMA), polymethyl methacrylate (PMMA) and fluor gas.

They are targeted to decline from 30% to less than 20% of total sales by 2023 but this will be more by dilution than disposal.

“Looking at the last four years there is a resilience – at the end of last year and beginning of 2018 raw materials increased significantly. Our portfolio behaved very well in this environment as well as in 2016 when upstream prices were low. To have some intermediates in a portfolio of specialties is not a bad thing,” says Le Hénaff.

STRONG ARKEMA PERFORMANCE IMPRESSES ANALYST

Since itS initial public offering (iPO) in May 2006 Arkema’s share price has quadrupled, backed up by strong financial performance. this has impressed Patrick Lambert, global chemical analyst at Raymond James Financial international who says ceO Le Hénaff has been very effective  in transforming and managing  the group.

“this performance has not been by luck. the transformation has been hard work including disposals and repositioning some products onto higher margin applications. it’s not the perfect portfolio yet – the next wave is adhesives with Bostik.”

Lambert believes european chemical companies can only compete globally on knowledge and intellectual property. companies must focus where the effects of the properties of molecules are best understood, selling blends and formulations where the iP of blending adds complexity.

“this is where Arkema is developing through blends of plastics and monomers for resins and adhesives. next to that you have some good niches which can be used as cash cows. For example, Arkema control more than 50% of the global thiochemicals market. Although the molecules don’t change from one year to the next, this market position gives very good margins.”

One risk for Arkema is its relatively small size, which means it does not have the financial muscle to compete in M&A with the likes of BASF or Henkel. “they are fighting for the same M&A assets so this is a weakness at the end of the day. You have to be ready to pay a bit more if needed.”

Lambert admires the speed and effectiveness of Le Hénaff’s management of Arkema which he has led since it was created. “He is very hands-on and also very demanding and this shows up in the numbers... i don’t think many ceOs could have transformed a company as quickly as Le Hénaff.”