Coat of many colours

18 May 2007 17:32  [Source: ICB]

SINCE BAIN Capital purchased SigmaKalon from Total in early 2003, the second-largest supplier of coatings to the European market has moved sharply up the profitability ranks. "We are now in the pack [of main producers] and our goal is to break out," declares CEO Pierre-Marie De Leener.

To do this, he says: "We need to become an ambidextrous organisation, capable of growing organically and by acquisition, and at the same time, continuously improving operational performance." Not, he readily admits, an easy trick to achieve.

But there are signs from the company's recent performance that it might just be possible. This is largely because of management's freedom to act under Bain's private equity ownership and a consistent, well-focused strategy.

After the buyout, SigmaKalon concentrated first on costs and financial performance, but then started to build an external growth engine with the capability to identify and close deals, and then integrate the acquired business within the company. "This did not exist before, when we were part of a big oil company," explains De Leener, who has led the company since it was created in 1999 through the merger of PetroFina's SigmaCoatings unit and Total's Kalon Group.

Speaking in the SigmaKalon head offices in the Netherlands, he describes how SigmaKalon started gradually, buying minority stakes in joint ventures, then making small, selective buys. But, he intimates, bigger deals could now be tackled, as long as the companies fit with existing distribution channels and brand strategy and can be integrated effectively and with cost savings.

If a big, company-transforming opportunity did rear its head, he believes Bain would back such a move. "It's part of the agenda, but obviously something we cannot programme in time," De Leener points out. Even a big merger is not ruled out, he adds. But, in the meantime, the acquisition pipeline of smaller targets is well primed for the next three years.

Eastern ambitions

In the normal run of business, declares De Leener, "our goal is to be the favourite coatings company in Europe, Africa and Asia". His strategy to achieve this is based on three pillars: profitable growth and commercial development in key markets the roll-out of SigmaKalon's business model to new geographies and a continual focus on operational improvement. On the organic growth side, he expects to grow the company by 2-3% above market rates, by sustainably taking value market share by balancing volume growth or price increase.

SigmaKalon's main strength is its decorative coatings business, based largely in Europe, which accounts for some 72% of sales. The balance is made up of its marine and protective coatings business (17%), which operates globally, and industrial coatings, which now accounts for 11% but is growing strongly with niche positions in western and eastern Europe (see page 23). Overall, 70% of sales are based in western Europe, with 14% in eastern Europe and 10% in Asia.

Given the emphasis on the European decorative sector, where it is second only to Akzo Nobel, top-line and bottom-line growth in today's market is not an easy task to achieve. The market in western Europe is mature and slow-growing, and there is significant pressure on margins from high raw material costs - especially in industrial and marine coatings - and from price reductions demanded by the big retail outlets for private label decorative paints. Trade sale margins, on the other hand, have been stable - and this is SigmaKalon's largest business (see box).

Growth potential in eastern Europe is better, and this has led SigmaKalon to look for expansion here through acquisitions. It recently purchased Primalex (2004) and Triga (2005) in the Czech and Slovak republics and two distributors in the Slovak Republic.

Overall market demand in the European decorative coatings sector has been inching up by 1-2%/year. But SigmaKalon has seen turnover rise steadily from €1.67bn ($2.27bn) in 2002 to €1.9bn last year. This year, De Leener expects to breach the €2bn barrier. Half the advance has come from organic growth and half from selective acquisitions.

But the real improvement has been in profitability. Earnings before interest, taxes, depreciation and amortisation (EBITDA) have been rising steadily since 1999, but the growth has accelerated since the Bain takeover in 2003. EBITDA margin has improved to 10.5%, adds De Leener, who would like to see this increase to 12%.

Sharpening performance

The improvement has been brought about by a focus on operational improvement on many fronts, including reducing the number of formulations, raw materials, stock keeping units and the complexity of tinting systems.This has reduced costs all along the supply chain, says De Leener. In the next few years, the company will move to using a single tinting system across all operations and affiliates in Europe, further reducing costs.

Also helping improve performance has been a reduction in the number of decorative production units and the transfer of marine coatings production from western Europe to Asia, notably to SigmaKalon's joint venture with Samsung Fine Chemicals in South Korea, and the transfer of industrial coatings production from western to central Europe.

On the geographic front, De Leener says SigmaKalon will continue to add more countries to the list of 53 where it operates. The focus is on Europe, Africa and Asia, notably China. It has just made an entry into Vietnam, for instance, in its marine and protective coatings business, through a deal with a Taiwanese licensee.

The European market is still highly fragmented, with many small companies in family ownership, and there is plenty of scope for consolidation, says De Leener. SigmaKalon has recently improved its position in the fragmented Italian market with a joint venture with Univer, but it is not well placed in Spain and Portugal. Bulgaria, Romania and Turkey are also prime targets.

The one area the company is not concentrating on, though, is the Americas, where De Leener feels it is too late to get involved as the competition is too well established. But, he adds, SigmaKalon does have a limited presence in the US to service international and selected local customers in the marine and protective coating sectors.

De Leener is evidently happy with the way business is developing, and secure in the strategy the board has developed since the sale by Total. The marine, protective and industrial sectors are developing well and the company is positive that its focus on the trade segment of the market via its own 500-plus professional outlets is the right approach.

The one possible upheaval on the cards is Bain's strategy for an exit from the company. Bain has held SigmaKalon for more than four years - longer than it owned Brenntag - and is almost certainly reviewing its options. De Leener is open in his thinking that the most likely outcome will be a secondary private equity sale, or partial sale, to another financial buyer. "We do not need an industry buyer to take us on - we are full of ideas and have a good business plan," he asserts.

INDUSTRIAL COATINGS HAS TAKEN AN UPWARD TURN

The industrial coatings business, with sales of nearly €210m ($285m), is thriving, but five years ago, it was a candidate for closure or sale, says Ruud Jacobs, a member of SigmaKalon's general management board. Turnover was only around €130m and most of the business was making a loss.

The turnaround has been achieved by focusing production on four sites - notably the huge Cieszyn facility in Poland, which is now dedicated to industrial coatings - and by carefully targeting niche applications. The other three facilities are at Veenendaal in the Netherlands Bochum, Germany and Ulsan, South Korea. A production site at Manage in Belgium has recently been sold, but will continue to produce coatings for SigmaKalon.

Now the industrial business is pulling its weight with the rest of the group, says Jacobs. He is keen to point out that the business operates in no less than 12 specialities, giving it a wider coverage than most, if not all, of its competitors. It is active, for example in bicycle paints, paint systems for agricultural and earth moving equipment, coil coatings, powder coatings, joinery (window frames and doors) and furniture coatings, road markings and OEM automotive and car-refinish coatings. SigmaKalon also produces coatings for in-house use and external sales at Cieszyn.

Jacobs points to the large research and development effort dedicated to product innovation, with 124 people, or 12% of the industrial coating staff, employed across the four European sites.

The business has recently been bolstered by two acquisitions - that of D&M, and Bollig and Kemper - production for which has been rationalised within other SigmaKalon sites. D&M specialises in water-based timber coatings, while Bollig and Kemper is active in aluminium coil coatings. Both, says Jacobs, brought good synergies with the existing businesses.

DECORATIVE SECTOR SALE MARGINS ARE STABLE

The market for decorative coatings in Europe should not be viewed as a single entity, declares Philippe Thibaut, general manager for strategic marketing at SigmaKalon. "It's a collection of local national markets, each with its own dynamics and traditions."

This is the rationale behind why SigmaKalon maintains close to 30 brands to serve the market, with different formulations for different countries and regions, and why it offers literally tens of thousands of formulations.

SigmaKalon's main decorative business is its core trade offering, whereby it sells its own premium brands directly to professionals through more than 500 of its own depots. This, says Thibaut, allows SigmaKalon to maintain close contact with its customers, to control the distribution route and offer a premium, value-added service.

Also, he adds, margins are better than in the retail sector, where the large buyers regularly drive down prices. To combat this, SigmaKalon has this year launched a new business unit, SigmaKalon Retail Europe, based in France, which will deal with the 20 to 30 major clients it has across Europe. These buyers regularly tender for large volumes of paint on a cost basis.

The European market is "challenging" at present, says Thibaut, with very low volume growth and little pricing growth. Eastern Europe has, in the past, shown stronger growth, but even this is beginning to slow, he adds, as economies here see lower GDP growth. "The explosive phase in key areas has certainly gone."

The strategy for decorative coatings, says Thibaut, is to gain market share on the competitors, especially in the trade side of the business. "We are not looking for explosive growth, but a repeatable performance."

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