JOCHEN WERZ - LENZING AG - (LENV.VI)
CEO Interview - published 02/12/01

DOCUMENT # LAS018

JOCHEN WERZ is the Chief Executive Officer of Lenzing AG, a leading producer of viscose fibres, a chemical fibre used in the textile and nonwoven industries, quoted in Vienna. Prior to this, Mr Werz was the Chairman of the Board of the UK group of companies of Auricon Beteiligungs AG, a listed Holding company engaged in acquiring, restructuring, and selling or floating medium sized engineering companies. Mr Werz had been Senior Consultant in Strategic Management and operational projects for multinational corporations, with Roland Berger & Partner in Munich. From 1997, Mr Werz has also been Chairman of Lenzing Fibers Corp, USA; Chairman of South Pacific Viscose, Indonesia; Member of the Board of Industria Bacell SA in Brazil. He was Member of the Board of Werzalit & Co in Germany from 1990 to 1997. Mr Werz holds an MBA from Munich University, specialised in Marketing, Industrial Management, and Psychology. He is married and has one child.

Sector: Manufacturing

TWST: Can we start with a brief overview of Lenzing AG, a little bit of history; what are your core activities, and where do you see yourselves in the marketplace today?

Mr. Werz: Lenzing AG is the leading manufacturer of man-made cellulose fibres, which basically extends to viscose staple fibres as well as lyocell staple fibres. We are either number one or on an equal footing with the Birla Group in India; nevertheless because their quality of product is probably not as sophisticated as our fibres are, we consider ourselves to be the leading manufacturer of man-made cellulose fibres. Last but not least, we offer both the conventional viscose technology as well as the lyocell technology, whilst Birla being possibly equal with us when it comes to tons of production, only offer the traditional viscose technology fibres. The history of Lenzing goes back to 1938. The core business of the group is viscose staple fibres, which accounts for about 80% of the consolidated revenues. We have production facilities in Austria, the United States and Indonesia, and we are the only manufacturer of viscose fibres or man-made cellulose fibres which has its own production facilities in all three major world markets, which is an asset in itself. We have a special focus on technology. The quality of our product is partly a result of the intense R&D effort where clearly the focus of our R&D is in Lenzing itself. Lenzing has around 100-plus employees in that area and the subsidiaries have a small number of R&D and engineering people. We are unique in that approach whereby we focus our strategy heavily on the technological aspects both of the finished products of the fibres as well as the production process. So we consider ourselves to be a high-tech manufacturer despite the fact that we are clearly an old-economy company.

TWST: Can we just talk about the market you’re in. What is the size of the market and what is the growth potential of your industry?

Mr. Werz: The worldwide market for viscose staple and lyocell fibres is roughly 1.8-1.9 million metric tons. Lenzing is currently in a programme of de-bottlenecking; our capacity is 360,000 tons in both viscose staple and lyocell. The overwhelming majority, though, is viscose staple, with a capacity of about 340,000 tons, with the remaining 20,000 tons being lyocell fibres. We are one of the very few manufacturers in the industry that have their own source of pulp. Pulp is the raw material for the fibres production; it’s very similar to paper pulp but it’s a special grade of pulp, what you call dissolving pulp. And on top of that we are one of the even fewer manufacturers that have an integrated mill, which is where you have a pulp plant and a viscose plant right next to each other and you can convey the white sludge pulp from the pulp plant into the viscose plant with zero transportation or drying costs, which is a built-in competitive advantage. It gives you cost advantages as well as a quality advantage. Lenzing’s market share is about 21% world-wide.

TWST: What are the key trends that you’re facing in the industry today?

Mr. Werz: The most striking trend is clearly the growth of the nonwovens business, both in Europe and North America. Viscose fibres traditionally were used predominantly in the textile industry. Today, with the arrival of the nonwovens business there is a shift away from this rather monolithic textile application into a diversified market which consist of about two-thirds textile and one-third of nonwovens; whilst the nonwovens side is growing very quickly, the textile side of the market is relatively stable.

TWST: What would you say are your company’s advantages?

Mr. Werz: Our advantages are scale, technology, and first and foremost, market share. Not only do we have a much higher market share than anybody else other than Birla, we also have a first-class reputation and we are a global player, which is not the case for any of our competitors. Birla focuses heavily on the Asian market; Acordis, which is a competitor of ours in Europe and North America, is not represented in Asia. Lenzing is the only player in the market which offers the entire spectrum of man-made cellulose fibres ranging from conventional viscose fibres to nonwoven fibres to modal and lyocell fibres, plus a lot of specialities, but there are too many to mention. To sum it up, we certainly do have the most complete portfolio of products.

TWST: Are there any changes that you’re planning, to improve your market position?

Mr. Werz: Our commitment is clearly to grow further in the nonwovens sector. We are already number one, but we would like to widen the gap from our competitors. In addition to that we have a special focus on new innovative fibre products which we will soon bring to the market.

TWST: Are there any visible changes that you expect over the next couple of years in your industry?

Mr. Werz: We expect further consolidation. We expect a few fringe players to basically fall off the cliff, which would obviously make it easier for the big players to grow further. Our growth from last year to this year in revenues is already more than 20%, and we see plenty of potential for further growth. Our earnings are up tremendously; in fact profit before tax has increased 5.5 fold.

TWST: Can you just highlight some of the key figures in your recent third quarter results?

Mr. Werz: Earnings before tax were up from EUR 6 million in 1999 to almost EUR 35 million for the first nine months. The operating results increased fivefold. EBITDA went up by more than 50% to EUR 67 million, and that’s for the first three-quarters. The revenues increased by 23%, and we are oversold because the viscose market is so strong, so we have a backlog of orders, which will carry us nicely into the first half of 2001.

TWST: We’ve just talked about your successful growth; what about the limitations on growth for your company?

Mr. Werz: Obviously if the fibres market would totally collapse it would also take its toll on us, but that has never happened before and it’s not on the cards. So apart from a few cyclical ups and downs, which always happen in an industry that is somewhat related to cyclical effects, I do not really see a specific threat on the horizon for Lenzing at all. I think our prospects for growth are very good indeed, especially in Asia. We’ve just established our own sales office in Hong Kong and we are certainly looking for further growth in Asia.

TWST: You mentioned that there’s consolidation in the industry; what else will you do to grow? Are acquisitions or joint ventures part of the strategy?

Mr. Werz: Absolutely. We have looked very carefully at a joint venture with Acordis in the US, and despite the fact that we do compete with them in Europe, we see no problem with having a joint venture in the US, where both our subsidiaries are in fact losing money. That has almost been completed, but then it has been put on hold due to complexity reasons. Nevertheless, this issue may be re-addressed anytime. There are further potential acquisitions available in Europe and in Asia, which we will certainly look at very carefully.

TWST: Can you just give us an overview of the management team? Do you feel that they are equipped to handle the growth strategy and are there any area within the management team that you feel to be outstanding?

Mr. Werz: We have turned the company around successfully and I think we have demonstrated that we’ve got what it takes to increase the profitability of the company, so I think there are no specific bottlenecks when it comes to the management team. Obviously everybody would like to have a few more people, but that’s normal — I’ve never seen any company where this is not the case. But by and large we feel that we are fully equipped to handle further growth and we are on track to generate that growth. So, for example, the market is strong; we have plenty of cash in the bank; the balance sheet is quite strong now and there is no problem to raise any capital for further acquisitions.

TWST: If we can just look at the financials, what are the key areas that create the company sales, because they’ve increased by about 23%?

Mr. Werz: Interestingly enough, the comparatively old product of viscose staple fibre is still the most profitable and the fastest-growing product, because these are the fibres that actually go into the nonwovens area. The growth in nonwovens is powered by convenience — people prefer to use disposable products over reusable ones, also because there is a relatively low cost of manufacturing these products. So we expect further growth in the nonwovens business for the foreseeable future, which is powered by one of the megatrends in western society, which is convenience and disposable products, for example, disposable diapers over reusable diapers. It’s much more efficient to use disposable products, which, since they are made of viscose fibres, which are cellulose fibres, do not pollute the environment at all; they just deteriorate, or, if they are incinerated, they burn like wood.

TWST: Are there any concerns investors should have over the next couple of years specific to Lenzing AG?

Mr. Werz: Not that I am aware of other than obviously the fact that Bank Austria is in the process of selling its majority shareholding in Lenzing AG either off to a group of private investors or to CVC Venture Capital. I think there is as much upside, if not more, than there is downside for any investor if Bank Austria parts with its majority shareholding.

TWST: You just talked about the environmental issues in terms of pollution; do you have any exposure, be it financial, related to the product of any environmental liabilities?

Mr. Werz: Not at all. Lenzing has a first-class environmental record; we are reasonably proud of that.

TWST: How do you feel the market is doing in terms of representing the strengths of your business in your current share price?

Mr. Werz: Like most managers I feel that the market still undervalues our company because a lot of analysts are not fully aware of the structural changes that we have made to the company and how much we have disassociated ourselves from the cyclical side of the market. So I think in that respect the real value of the company is probably not quite reflected yet in the share price.

TWST: You talked about the structural change that you’ve incorporated at Lenzing; how can the investment community improve its understanding and perception of your company? What is it missing, and what are you doing to counter those misperceptions?

Mr. Werz: Lenzing, like many other fibres companies, has had a relatively rough ride in the past, and that effect is still lingering. So what we are trying to do is drum our new message and convey our very encouraging results, which at the end of the day is the proof in the pudding, to as many members of the financial community as we can. And in fairness we have seen some effect, because the share price has improved greatly in the last few months; nevertheless, part of that is driven by the imminent sale of the Lenzing shares; part of it is certainly also due to the very encouraging results. So we are gradually moving to a more appropriate share price considering that we are the world market leader, but we are not there yet — old habits die hard. For example, we have reduced our unit costs by more than 20% over the last five years, which is amazing for a commodity manufacturer.

TWST: If we were sitting down with some potential investors, is there a summary statement that you could give me that would highlight the strengths of the company and compel the investors to buy into Lenzing AG today?

Mr. Werz: I would consider Lenzing AG to be a hidden star performer which has shown some of its potential but certainly not all of it yet, and the best is yet to come. It’s the world market leader; it’s the technological leader in the industry by a big margin; it’s by far the most profitable company in its industry; and it’s the only one that is growing at a substantial rate. We are going forward while the others are retreating.

TWST: Is there anything that you’d like to add to the interview?

Mr. Werz: The proportion of speciality fibres that we manufacture here in Lenzing is 60%-plus, so we have extracted ourselves already from the commodities side and focused on specialities, high-tech fibres, niche markets, and that is what makes us so comparatively immune from cyclical developments all together. Specialities are by their nature less cyclical because few companies can manufacture them. Another aspect is our ad campaign, which is spearheaded by Naomi Campbell. In addition, Lyocell, our subsidiary, has won the European Award for the Environment for clean manufacturing technologies. It has given us inroads to a few manufacturers of environmentally sensitive products, and we are hopeful that it will give us additional leverage in the market.

TWST: Thank you. (RD)

JOCHEN WERZ
 Chief Executive Officer
 Lenzing AG
 A-4860 Lenzing
 Austria
 +43 76 72 70 10
 www.lenzing.com

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