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Fibres/​Yarns

Outgoing chief highlights challenges faced by Lenzing

In the Group’s Annual Report for 2014, published today, Peter Untersperger outlines the challenges Lenzing faces in a market with falling prices.

25th March 2015

Knitting Industry
 |  Lenzing, Upper Austria

Knitwear, Sports/​Activewear, Technical Textiles, Collections

This week the Supervisory Board of Lenzing AG appointed Stefan Doboczky as the new Chairman of the Management Board (CEO) of Lenzing AG.

Mr Doboczky will start in his role on 1 June 2015, taking over from Peter Untersperger, who will step down from his function as CEO at his own request prematurely.

In the Group’s Annual Report for 2014, published today, Peter Untersperger outlines the challenges the cellulosic fibre manufacturer faces in a market with falling prices. The outgoing Chairman of the Management Board addressed shareholders as follows in the report:

“2014 turned out to be a year in which the Lenzing group faced major challenges, similar to the two previous financial years. We did manage to successfully counteract the adverse market situation. Our entire team showed tremendous energy and commitment, enabling us to generate very respectable operating results under difficult conditions. However, looking at the year as a whole, there is no way we can be completely satisfied.

As expected, the price situation in our core business of producing manmade cellulose fibres, which was already extremely strained beforehand, deteriorated even further in 2014.

Our sales markets followed the general global downward price trend for industrial raw materials. Actually, the causes are quite similar. Global economic growth is simply too modest to offset high industrial surplus capacity. The consequences are continuing good growth and an interesting increase in sales volumes accompanied by strongly volatile and falling prices.

In addition, due to its sheer size and globalized nature, the market for standard viscose fibres is increasingly displaying the typical characteristics of a commodity market. What I mean is a clearly delineated supply and demand profile and strong cash-driven pricing, especially in what has become a buyer’s market.

In this market segment, the opportunities for a premium supplier such as Lenzing to stand out from the competition are shrinking. The bottom line is that it is absolutely essential to continually adapt our operations to reflect changing market conditions by optimizing production and sales structures.

This is accompanied by the path Lenzing has taken up until now, which is increasingly oriented to specialty fibres, whereas strict cost optimization for standard viscose fibres will continue to be resolutely implemented in the spirit of commodity economics.

This is why TENCEL® is the cellulose fibre of the future. We are only conducting research and further developing standard viscose fibres in a selective manner. At the most, all manufacturers in this segment are working on cash cost optimization when it comes to production technologies.

This will lead to even more capacity expansion in the viscose fibre industry in the future, but on the basis of strict investment criteria, stringent cost management and a pricing and quality policy, which is typical for a commodity product.

The sales market for viscose fibres was also impacted by special effects in 2014. The most significant development was the slump in global cotton prices, which fell by about a quarter as a result of the long-expected change in China’s subsidy policy, and the on going surplus supply of cotton on the world market.

This situation was aggravated in the fourth quarter by the drastic fall of oil prices, massively reducing the cost of the most important raw material required for producing polyester fibres.

This triggered even more unease on the fibre market, which continued to show high volatility at the beginning of 2015. The lack of predictability with respect to how prices for fibres and yarn would develop and the low visibility led to a corresponding uncertainty along the textile value chain.

In turn, this resulted in a further decline in global market prices for viscose fibres, which Lenzing could only partly offset thanks to the strong value of the US dollar.

The way prices developed was not a surprise to us. That is why we already implemented timely countermeasures in the fourth quarter of 2013. In the light of current market trends, we significantly cut back on our previous pace of growth, in order to productively minimize risks. We realized that we could not sustainably generate the targeted yield on expansion projects featuring an EBITDA of 14-18 % in a structurally difficult viscose fibre market.

All capacity expansion projects were stopped with the exception of construction of the TENCEL® fibre production plant in Lenzing. The business model was updated to further minimize risk, optimize cash costs and reduce net financial debt. These measures were accompanied by a change implemented at the beginning of 2014 in the previous division-based organizational structure to create a faster-reacting and leaner functional organization.

Simultaneously, Lenzing’s excelLENZ initiative was launched to generate massive cost savings in all business areas, all cost items and on all organizational levels. During the course of 2014, these measures gradually began to have a major impact on earnings.

Thanks to resolute analyses and additional optimization measures, cost reductions ended up being twice as high as originally expected. In this way, we at least managed to partly counteract the erosion of fibre selling prices. Lenzing even succeeded in bucking the prevailing trend and stabilizing fibre selling prices at a low level on the basis of intensified marketing measures and an improved product mix.

By combining a variety of internal measures, value-enhancing marketing efforts and the improved product mix with a greater focus on higher priced specialty fibres, we successfully thwarted the impending drift into the red and a deterioration of our balance sheet.

Let me take this opportunity to address the criticisms of all these measures, which we have been confronted with, both within and outside of the company. For us, it was not at all easy to implement such extensive and far-reaching cost savings, in particular with downsizing the workforce.

The Management Board is aware that the news of job cuts is always difficult for the affected employees and their families, regardless of the employee’s personal performance. Every person involved considers this to be unjust, and even a good system to cushion the effects and a variety of accompanying measures can only partly compensate for the loss of a job.

Naturally, we would definitely have preferred to retain all those who had to leave the company in 2014 or will first do so in 2015. However, it should be mentioned that the job cuts were implemented without a single lawsuit, and without a single employee being laid off in Austria. This shows that we were able to carry out these unpleasant but necessary measures with sound judgment and a sense of proportion.

What’s more, the required steps taken at the Lenzing site did not have any long-lasting effects on the local job market in Upper Austria.

A company subject to global competition cannot afford to jeopardize its competitiveness. There is no doubt that this would lead to destroying the assets and value of the company and ultimately to a loss of autonomy.

For these reasons, we initiated a far-reaching restructuring and reorganization of the technical units (maintenance, workshops, Lenzing Technik) at the Lenzing site and other major production plants. Considering the expected decline in investment activity in the pulp and fibre industries, these measures are indispensable, even if they do involve some additional tough cutbacks.

Despite cost reduction measures, Lenzing went on to achieve an all-time high fibre sales volume of about 960,000 tons. This is actually an enormous achievement, both on the part of our production teams and sales teams.

It occurred in the face of severe headwinds, and certainly underlines the market strength and commitment of Lenzing in its role as a global market leader. I would like to express my heartfelt thanks to all employees for this.

One major highlight of 2014 was certainly the completion of the TENCEL® fibre production plant and the unparalleled performance of our TENCEL® team. Our new TENCEL® facility in Lenzing, the largest in the world, was successfully ramped up with what must be record- breaking precision and adherence to schedules.

The coming on stream of the first “jumbo production line” impressively demonstrates the technological leadership of Lenzing when it comes to TENCEL®, the fibre of the future. Towards the end of 2014, we succeeded in almost fully reaching the nominal capacity of about 67,000 tons p.a. by deploying an improved, more efficient and high-performing production technology matured on the basis of the experience we have gained in recent years.

The quality level of the fibres also fulfils our expectations. My sincere thanks go to everyone who contributed to this success, especially the core shareholders, whose foresight made this development possible.

Finally, I would like to thank all our customers for their confidence in our products and services and our shareholders and partners for the trust they have placed in us. As we continue on in 2015, another difficult year seems to be on the horizon. I can assure you that the Lenzing team will move full speed ahead with all the energy and strength at their disposal to work for the benefit of our customers and the company.

Yours,

Peter Untersperger”

View the full Lenzing Group 2014 Annual Report

Stefan Doboczky succeeds Peter Untersperger as Lenzing CEO

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