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Lubrizol Chemical Week Feature Cover story Lubrizol Advancing portfolio upgrade Free from public glare as a standalone company, Lubrizol continues to build and diversify its specialty chemi- cal franchise under Berkshire Hathaway ownership. Strategy remains centered on nurturing a highly profit- able, market-leading position in lubricant additives, which accounts for roughly two-thirds of sales, and growing the advanced materials portfolio, including a burgeoning life sciences segment. ↘Robert Westervelt the $400-billion conglomerate controlled by course, has to make sense. Warren is not a Warren Buffett, acquired Lubrizol for $9 chemistry guy. It comes down to the ubrizol (Wickliffe, Ohio) says that the billion in 2011. financials. Return on incremental invested mandate under Berkshire Hathaway The company has made more than a dozen capital is a primary criterion. And if we can ownership is to protect the existing acquisitions since the deal closed, mostly in meet the threshold, he’s been very Lfranchise and grow the business, which advanced materials. Capital spending has supportive.” posted revenue of $6.5 billion in 2016. “It’s a ramped up as well over the past few years very unique situation, where you have (chart). “These have to be good opportuni- Additive investment probably the most capable capital allocator ties,” says Schnur, who succeeded James Lubrizol pioneered development of lubricant and investor that has maybe ever lived,” says Hambrick as CEO on 2 January. “[Buffett] is additives in 1920s and remains the market Lubrizol chairman and CEO Eric Schnur. “We known as an accomplished capital allocator leader. The company estimates that roughly have access to capital and resources that we for good reason. We can talk about steps to half of vehicles on the road today use Lubrizol would have struggled to tap as a public build the company over the next ten or petroleum additives. It remains a slow growth company of our size.” Berkshire Hathaway, twenty years. The vision and strategy, of business with expected volume increases of chemweek.com 5/12 June 2017 | IHS Chemical Week | 19 Cover story 1–2%/year. The overall lubricant oil additives from the single-digit range in the 1990s to the transition occurring very slowly over time, market was valued at roughly $14 billion in mid-20% range or higher. “Overall, industry we’re going to be just fine.” 2015, according to IHS Chemical estimates. has been able to get more value for what it Lubrizol, Afton Chemical, Chevron Oronite, offers to the marketplace,” Sheets says. Advanced materials and Infineum, a joint venture between More demanding requirements, and In the late 1990s, Lubrizol started looking to ExxonMobil and Shell, account for roughly develop a specialty chemicals component to 90% of the market. offset the low growth in additives and Lubrizol’s additives business has annual diversify the portfolio. The company made sales of roughly $4 billion. “It is a very modest some small surfactant acquisitions, but the growth environment,” says Dan Sheets, core of the advanced materials business was president of Lubrizol additives. “What we brought in as a result of the $2-billion strive very hard to do is to position ourselves in acquisition of Noveon in 2004. Lubrizol’s the sweet spots where we have competitive personal, skin, and home care specialties advantage and can grow.” Those advantages business has a strong position in acrylate include strong positions in attractive regions, rheology modifiers, based on Carbopol including China and India, and higher-value technology. Performance coatings are a market segments or applications. “In addition, SHEETS: Targeting spots for TOLIN: Life sciences is key major supplier of specialty resins, polymers growth in additives. investment focus. it’s all about partnering with the right and additives. In engineered polymers, the customers. That’s really how we try to go to higher-value additives, should help maintain company is a provider of thermoplastic market and then try to get a matrix where that performance despite modest volume urethanes and chlorinated polyvinyl we’re in growth mode. If you grow at the rate growth. “Not too long ago cars generally had chloride. of this market, you wouldn’t be growing.” four-speed automatic transmissions,” Schnur Life sciences has become a key growth Lubrizol’s additives business is in the says. “And now, it’s eight or nine speeds. It focus. “This isn’t a guarantee, but there is the middle of a long-term $1-billion capital possibility in the future that that life sciences investment and upgrade program that started Seeking revenue lift will be as big of a business for us as additives,” in 2010. The largest investment is a $200- (annual sales in billions of dollars) Schnur says. “And that doesn’t assume that million wholly-owned additives manufactur- 7 additives will shrink.” Acquisitions have ing site in Zhuhai, China that started included Vesta, a maker of medical devices, 6 operations in 2013. The company is also and Particle Sciences, a contract drug 5 integrating back to highly reactive development and manufacturing organiza- polyisobutylene (HR-PIB) in the United 4 tion. Lubrizol announced plans last week to States at its Deer Park, Texas, facility, with 3 invest $60 million to increase capacity and startup planned for the first half of 2019. 2 product capabilities in life sciences at several HR-PIBs are a raw material for next-genera- 1 manufacturing sites. The investments are tion dispersants and lubricants. 0 aimed at excipients, polymers, drug formula- “We’re going to end up spending more than 2012 2013 2014 2015 2016 tion, and medical device contract manufac- $1 billion overall and that’s a good thing,” turing. Expansions include a commercial drug Sheets says. The higher spending includes the Source: Lubrizol (Wickliffe, Ohio) © 2017 IHS Markit product manufacturing line at the Particle recently announced HR-PIB unit. The significantly improves fuel efficiency because Sciences site at Bethlehem, Pennsylvania, company hasn’t disclosed that cost but Sheets your car rarely gets above 2,000 RPM expected to be complete in the fourth quarter says it is in the “hundreds of millions. And it anymore. That, however, requires different of this year. gives us strong back integration capability fluid formulation and a lot more demands are Lubrizol’s life science capabilities build on into what’s used to make dispersants, which placed on them. The opportunity to add value the company’s formulation capability in are the single biggest component of an with all the resources and assets that we have urethane chemistry and Carbopol technology additive package.” is probably as great now as it’s been as long to develop materials for drug delivery The push for fuel efficiency and higher back as I can remember.” systems, says Rick Tolin, president of engine performance plays well to Lubrizol’s Lubrizol does not see a near-term threat Lubrizol’s advanced materials business, “It strengths. “The rate of change for the from electric vehicles. “Our current view is could be a lotion, it could be a tablet, or it lubricants industry has been accelerating in limited market penetration,” Sheets says. could be a polymer implant where you’re the last five to seven years,” Sheets says. “There are about 1 billion vehicles on the road delivering medicine at a controlled rate,” he “Performance requirements across our currently. That’s projected to grow to 1.6 says. portfolio have changed pretty quickly. And billion within the next 15 years or so even as Advanced materials growth overall will be the technical burden to meet those has also electric penetration remains modest overall. aided by steps Lubrizol is taking to get more risen. And so as a result, you’re offering more So when you think about that overall growth, familiar with customer needs and moving and more higher-performance products.” That and you think about the average age of a beyond supply on ingredients. “We are has helped producers maintain the significant vehicle, in the United States it’s 11 to 12 years working to better tie our molecules, synthesis improvement in margin over the past 15 now, any shift toward electric that occurs and application development capability closer years. Additives’ EBITDA margins have moved would have a very minor impact. With a to end users,” Tolin says. “In additives, it’s 20 | IHS Chemical Week | 5/12 June 2017 chemweek.com Cover story about knowing engine requirements, but in OUT OF THE PUBLIC GLARE: Berkshire Hathaway advanced materials it’s about the needs of continues to support capital investment, acquisitions. human beings. We have 7 billion opportuni- ties to try to come up with a formulation.” Closer to the customer One key initiative for Schnur is extending Lubrizol’s reach down the value chain. The company often lacks a deep view into OEM, brand owner, and customer needs, Schnur says. “We don’t have as much visibility into how the applications and end products are used [as we’d like],” Schnur says. Lubrizol is working to develop a “funda- mental understanding of customer and market behavior and customer needs,” Schnur says. “It’s not just a technology discussion, but also a conversation on ways to additives is,” Schnur says. Previous CEO results. One of the key reasons Lubrizol deliver on consumer needs.” Hambrick, who had served as CEO since agreed to the Berkshire buyout was frustra- It would aid R&D spending and efficiency, 2002, and led the push to diversify beyond tion around the trading discount relative to as well. “In most cases, if new products aren’t additives, had said that the long-term goal specialty chemical peers despite significant successful it’s not because we weren’t able to was a $10 billion company with sales split operating income improvement in the years deliver on the technology requirements.
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