19 March 2012 00:00 [Source: ICB]
Already the acknowledged global leader in chemical distribution, Brenntag has no intention of resting on its laurels. Steven Holland, who became CEO last June, is keeping the company strategy set on continued expansion.
This, he explains, will be achieved through a judicious mix of organic growth and acquisition of companies carefully selected to extend Brenntag's product offerings or geographic reach. Growth of its specialty chemicals businesses is a key priority, he adds.
Brenntag is expanding its geographical presence, especially in Asia
Holland joined Brenntag with the acquisition of the UK-based Albion Chemicals Group in 2006 and was made COO of Brenntag AG in 2009. He believes there is plenty of scope in the market to make value-accretive deals. "Over the long term, Brenntag has seen two-thirds of its growth [measured in terms of its key operating earnings before interest, tax, depreciation and amortization (EBITDA) metric] come from organic means and one-third from acquisition. We expect to spend €150m200m ($200m-260m) in 2012 on acquisitions, which is around our usual level of spend in recent years."
Brenntag has traditionally committed its free cash flow to mergers and acquisitions (M&A) as well as dividends, explains Holland. As free cash flow in 2011 was well over €500m (based on preliminary results), this means adequate funding will continue to be available. In 2010, free cash flow came in at €376m.
Brenntag has a constantly-renewed M&A pipeline and generally expects to make around five acquisitions a year. The sizes of the acquisitions differ. Since 2007, the deal size was, on average, €17m, but Brenntag is also willing to close larger deals, when the conditions are right. Last year, for instance, it sealed a €120m deal to acquire UK-based Multisol Group, a specialist in base oils and lubricant additives with expected annual sales for 2012 of £238m ($375m, €285m).
It also bought a majority stake in China's Zhong Yung (International) Chemical, focused on solvent distribution in three key economic regions of China, as well as G.S. Robins in North America, a distributor of industrial chemicals.
In 2011, Brenntag entered the flavours and fragrances distribution business in Latin America with the purchase of Amco Internacional in Mexico City, paying $18.5m (€14.0m) for the specialty chemical distributor focused on aroma chemicals, essential oils and food ingredients.
This deal sits firmly within Brenntag's overall strategy of increasing its focus on specialty chemicals distribution and expanding its geographic presence, especially in Asia - a relatively new arena of operation for a company with its main strength in Europe, as well as North and Latin America.
For 2012, says Holland, M&A activity will focus on Asia, Latin America and North America, with Europe taking a lower priority, given the more demanding macroeconomic environment. Also, he adds, Brenntag has a very significant asset base in Europe, and increased utilization will enable the desired growth level to be achieved organically.
Brenntag began to build a presence in the Asian region in 2008 with the purchase of Rhodia's Asia-Pacific specialty chemical distribution business, bringing access to markets in Australia, India, Thailand, Indonesia, Philippines, Singapore, Thailand and Vietnam. It increased this presence in 2010 with the purchase of Thailand-based EAC Industrial Ingredients from its Danish owner.
"The Zhong Yung deal represents our long-planned and well-prepared strategic entry into China," explains Holland. "We have been active in China as a purchasing operation for 10 years or so, but this is our first distribution presence in the country. We are very excited about it."
Brenntag has taken a 51% stake in the Chinese company, but will increase this to 100% in 2016. It brings more than €200m of sales to Brenntag. Holland says: "With this strategically important transaction, we strengthen our growth strategy in the Asia-Pacific region and demonstrate full commitment to build a solid distribution network in China. We intend to use the strong national sales organization covering north, east and south China to expand the product lines we distribute. We also will continue to look for further acquisition opportunities to support our growth in Asia-Pacific."
Holland views Asia as presenting significant future growth opportunities. "It is a large market and in terms of potential for growth is larger than the EU or North America. We will continue to grow our position in the region Our initial approach has been to develop specialty chemicals distribution followed by growth in industrial chemicals."
While M&A activity is often the most obvious sign of a company's growth ambition, organic growth is also a key part of the story. With the publication of the Group's preliminary 2011 results on February 21, 2012 Brenntag had another record year. Sales increased from €7.6bn in 2010 to €8.7bn 2011.
The main reasons were higher selling prices and stronger volumes, partly due to acquisitions. More importantly, Brenntag managed to increase gross profit to €1.8bn from €1.6bn in 2010. Increased efficiencies allowed for an even stronger growth in operating EBITDA, which grew to €661m from €603m in 2010. Holland says: "Our final quarter and year-end results 2011 reflect the underlying resilience of Brenntag supported by a highly diversified business model which continued to capture growth from the regions around the world whilst maintaining a robust performance in those areas with more serious macroeconomic challenges.
"Our principle of maintaining strong organic growth aligned with a highly focused acquisition strategy further consolidated our position as global market leader and supported us in achieving a record result in 2011."
"Our... year-end results 2011 reflect the underlying resilience of Brenntag supported by a highly diversified business model"
Given its scale, he adds, Brenntag can offer a wide range of service and technical support, plus it has a growing level of specialties in its portfolio. "We are not necessarily looking for volume growth to boost the top line. We will not chase volumes, rather we are driven by margin and EBITDA performance."
"Brenntag continues to evolve," says Holland. "There is plenty of cross-linking and cross-pollination in the company, and this is accelerating. In a way, it's the most exciting part of the business. We have our local focus and decentralized operations, but over time we have been centralising ideas and establishing harmonized standards for service and sales support. We then ensure these find local ownership in all our operating businesses."
Holland also says Brenntag has systems in place to ensure its sales and marketing teams meet regularly with suppliers and customers, to learn about their needs and the markets they serve. "It is essential our marketing managers understand the needs of suppliers," he points out, "so we organize training and customer days, as well as site visits to bring people together. This is an ideal tool to transfer knowledge around the business but it does require an organized approach."
In terms of performance, the twin-pronged approach seems to be achieving results. Despite the debt crisis and virtually non-existent growth in Europe and the still sluggish US economy, the company has continued to grow turnover and earnings. "In 2011," says Holland, "overall business has been buoyant in Latin America, North America and Asia, with only Europe proving challenging this year. Growth has come not only from acquisitions and increased market presence, but also from the overall quality of the business."
The value-added element of Brenntag's service offering - including packaging, blending, formulation and drum returns - is also being better recognized by customers, and this has enabled the company to further improve margins.
Since the middle of last November, Brenntag's share price on the Frankfurt stock exchange has risen steadily from around the €70/share level to a high of €85/share. These are levels well above the €50/share price for the initial public offering in March 2010. Since that date, Brenntag's former owner, Brachem Acquisition, has reduced its shareholding in stages from 71% to 13.6%, resulting in a current free float share of 86.3%.
Turning to the year ahead, Holland is optimistic for a continuing strong performance in 2012 in North America, Latin America and Asia-Pacific. Clearly Europe has a more demanding set of macroeconomic factors which affect the region as a whole including the recent Euro crisis and government austerity measures.
"In Europe we will be challenged to operate in a difficult situation," says Holland. "But we have an extremely resilient business - both the group as a whole and the European operation - and this provides us with a solidly defensible position." Also," he adds, "Brenntag is better positioned in growth markets, especially Asia, and recent acquisitions will soon begin to contribute to further growth. We expect the group to continue to perform well."
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