Berkshire’s Lubrizol Expects $10 Billion of Sales Under Buffett

Friday, 20 Apr 2012 09:43 AM

 

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Lubrizol Corp. Chief Executive Officer James Hambrick plans to increase revenue by about 60 percent at the chemical maker as he sets goals under the new ownership of Warren Buffett’s Berkshire Hathaway Inc.

“There’s no reason in my mind why we shouldn’t be a $10 billion company,” Hambrick, 57, said in an interview yesterday from Wickliffe, Ohio, where Lubrizol is based. “Warren and I talked about that.”

Buffett, 81, empowers Berkshire’s top managers to help invest the roughly $1 billion of profit that the company’s operating subsidiaries generate each month. The billionaire said in February that Lubrizol will have “many opportunities for bolt-on acquisitions.” Hambrick has already struck at least three deals since the chemical maker was acquired by Omaha, Nebraska-based Berkshire in September for about $9 billion.

“We’re always hopeful to do one or two or three a year at a reasonable size,” Hambrick said. “Sometimes it doesn’t happen and sometimes you do more than that.”

Since becoming CEO in 2004, Hambrick has tripled Lubrizol’s revenue to about $6.2 billion as he acquired products such as hair-gel polymer and skin-care additives, and expanded in Latin America and Asia. He said he plans to pursue a similar strategy to reach $10 billion of annual sales, with an emphasis on acquisitions for the advanced-materials unit.

About 70 percent of the company’s revenue in 2010, before the Berkshire deal, came from lubricant additives, which deliver specialty chemicals to the surfaces inside engine cylinders, drive trains, transmissions and similar rotating metal parts. Gross profit is 35 percent of sales in the unit, and demand grows about 2 percent a year, Hambrick said.

Faster Growth

The gross margin is 25 percent in advanced materials, which makes additives for skin-care products and acrylic resins for specialty coatings. While the margin is narrower than lubricant additives, growth is two to four times faster, he said.

Hambrick plans to boost sales in the advanced-materials business to about $1 billion each through a combination of organic growth and acquisitions. Increasing sales will make margins on par with lubricant additives, he said.

“As we get bigger we will naturally generate economies of scale that will bring those two in line,” Hambrick said.

Lubrizol has agreed to acquire businesses including Active Organics Inc., a supplier of cosmetics ingredients. The total cost of the three announced deals was $493 million, Buffett said in his annual letter to shareholders in February.

‘On the Prowl’

Buffett, Berkshire’s chairman and CEO, said in the same letter that he’s “on the prowl” for large acquisitions after record earnings at his company’s railroad and energy units helped build cash holdings. He praised Hambrick and other managers for acquisitions that bolstered Berkshire, which comprises more than 70 operating businesses selling everything from ice cream to underwear.

“James is a disciplined buyer and a superb operator,” Buffett said, adding that he and Berkshire Vice Chairman Charles Munger are “eager to expand his managerial domain.”

Hambrick said he and Buffett talk “a couple times a month” over the phone and in person and have “good, robust discussions.” Buffett has a streamlined process for talking about acquisitions, he said.

“Warren makes it pretty easy,” Hambrick said. “It didn’t take very long for either one of us to get right into a good dance step.”

Buffett’s Management

Buffett has built Berkshire using a management style that thrives on relationships and trust. Even as the company grew to employ more than a quarter-million people, he continues to directly oversee the heads of all the operating units. Munger said at a press conference last year that the model of oversight differs from the standards taught in business schools and joked that some of Buffett’s direct reports actually “don’t report.”

“Talk to me about what is going on as little or as much as you wish,” Buffett said in a 2010 letter to Berkshire managers, whom he dubbed “the All-Stars.”

“Each of you does a first-class job of running your operation with your own individual style and you don’t need me to help,” Buffett wrote. “The only items you need to clear with me are any changes in post-retirement benefits and any unusually large capital expenditures or acquisitions.”


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