North American distributors adapt to tighter economy

Uncertain times

25 November 2008 00:00  [Source: ICB]

Well-positioned companies will continue to make specialty acquisitions to enhance their portfolios, and regulations will present both challenges and opportunities

Cynthia Challener/Vermont

CHEMICAL DISTRIBUTORS in North America are ramping up efforts to increase efficiencies and reduce costs, even as they try to expand services. The global economic slowdown and turmoil in the financial sector are not helping, but chemical distributors are generally in good shape.

"Most of our member companies have strong balance sheets and are well positioned to survive the current economic uncertainty," says Christopher Jahn, president of the National Association of Chemical Distributors (NACD).

But companies looking for cash to expand will have trouble finding it in the short term and the large-scale merger and acquisition (M&A) activity of the recent past is unlikely to be equaled anytime soon.

High-profile deals have included global firm Univar's purchase of US-based CHEMCENTRAL, and German-based Brenntag's acquisitions of LA Chemical and Ulrich Chemical, both US.

"These transactions seem to be driven by the desire of these large companies to gain more leverage with both suppliers and customers," remarks John Hulsey, director-supplier relations and purchasing for the US' Mays Chemical.

M&A Not expected

Both Brenntag and Univar, now owned by private equity companies, are unlikely to pursue major acquisitions at this point, while US-based Ashland Distribution is currently focused on the completion of parent company Ashland's acquisition of Hercules. Little additional M&A activity is expected from these three leaders any time soon.

Strategic buyers with available cash and little debt on their books could make some good deals, though, and niche acquisitions seem likely.

"In the current environment, it is difficult to anticipate M&A activity. But the drivers remain the same," says William Fidler, president & CEO of Brenntag North America.

Global reach

"Industrial and specialty chemical producers continue to maintain the goal of doing more business through fewer distributors," Fidler adds.

"Succession issues and investment requirements in family-owned companies are also a factor, as is the need by some companies to fill geographic white spots, product line gaps and technical skill sets to satisfy the increasing requirements of local, regional, national and global customers."

The impetus to build scale is another ­primary driver for consolidation, according to Ted Harris, vice president of Ashland and president of Ashland Distribution. Economies of scale can provide significant advantages, especially given the cost pressures facing distributors today.

Smaller players seem to be intent on increasing their global reach and broadening their product portfolios. Mays Chemical, with 2008 sales of $200m (€158m), acquired Ochoa Chemical in Puerto Rico in early 2008.

The firm has also been strengthening a joint venture (JV), ChemicoMays, which was formed in 2007 to expand its footprint in the pharmaceutical industry in Mexico and the US, including Puerto Rico.

Mays Chemical plans to continue exploring partnerships, JVs and acquisitions that will add to its service capabilities or bring new talent and ideas into the organization, says Hulsey.

US-based Aceto, with fiscal 2008 net sales of $359.6m, has made several key deals in recent years. In 2001, the company established itself as a global player with the acquisition of Swiss pharma and chemicals company Schweizerhall Pharma, and it created a strong position in biopharmaceuticals by acquiring Pharma Waldhof from global pharma giant Roche in 2004.

Leonard Schwartz, chairman, CEO and president of Aceto, has $50m set aside to make another acquisition. "We are eager to find a company that will be complementary or parallel to our core business and that has a culture that will mesh with ours," he says.

"In addition, it must be structured to be accretive in a short time."

Aside from acquisitions, distributors have also been making strategic investments to improve their competitive position.

Aceto, for example, has targeted further globalization, growth of organic pigments, crop protection, nutraceutical and pharmaceutical operations, and expansion into Central Europe and Japan. Much of its investment is directed at developing a strong position in intellectual property or product development, rather than hard assets.

Soft power

The physical infrastructure of the North American distribution sector is for the most part well established, so many investments are related to nonphysical items.

Aceto is conducting tests for new animal vaccines that it will import into the US. It is also developing dosage forms for two generic drugs that require particular delivery systems. In the agrochemical area, the company is buying the rights to Environmental Protection Agency labels for compounds it will be offering.

"In distribution, the focus is much more on people and their expertise in specialty product application areas," says Univar president and CEO Gary Pruitt.

The need for information and efficient operations drives these investments, according to Harris.

"Customers look for Ashland to bring solutions in the form of product and service offerings to help them be more cost effective in their supply chain," he says.

Ashland has implemented an SAP enterprise system across all businesses globally. In its distribution business, the firm has put in place a comprehensive, integrated planning model to enhance the level of ­customer service and improve working capital performance.

Univar also places high value on state-of-the-art technologies that can lower costs and improve capabilities, says John Sammons, Univar's senior vice president and chief administrative officer. Such investments have included more productive logistics systems, the replacement of older products with newer, more efficient and effective ones, and the implementation of new IT systems.

"We continually invest in our IT systems to ensure that we can meet the changing needs of our customers," he explains. "As the distribution chain gets more complex, the value of highly functioning IT systems grows."

Many of Brenntag's recent investments are designed to meet critical supplier and customer needs, in addition to meeting the company's own requirements for continuous improvement in operating efficiencies and knowledge management capabilities. Two examples from 2007 include the launch of Brenntag Specialties and the Solutions Group. The company has also made improvements in its mixing, blending, storing and packaging capabilities, transportation services and container tracking capabilities.

In July 2008, Brenntag dedicated a new personal care applications laboratory, and it is planning to develop a coatings, adhesives, sealants and elastomers ­applications laboratory to provide ­formulation assistance. In 2009, the company will expand its portfolio of specialty chemical offerings.

Mays Chemical recently opened its third site in Indiana, US, for custom blending and packaging of liquid and dry food-grade and electronic-grade products. It also added cold-storage capabilities at several locations, purchased a dedicated tank truck for USP-grade propylene glycol and expanded its sales team nationwide.

Members of the NACD have been actively evaluating potential opportunities provided by growing interest in "green" products and processes.

"I expect distributors to continue to invest in sustainability-related initiatives regardless of the economic climate," says Jahn.

The slowing economy is a concern, though. "A general economic slowdown in the major manufacturing industries, primarily automotive and construction, has reduced the overall demand for chemical products and services, impacting the distribution sector as well," observes Harris. Although he is hopeful that business will improve once credit markets recover, he expects the slowdown to last for six months or more.

GROWING CHALLENGES

Rising feedstock and energy prices will only compound the challenges brought on by the worsening economic conditions.

"Fuel costs have become a real issue, particularly for commodity products," notes Schwartz. "For these materials, a surcharge is necessary. But we are always competing on price, so it is imperative to maximize efficiencies throughout our distribution network."

Keeping up with the fluid situation has been difficult. "The size and frequency of price changes have made it challenging for businesses to plan for future needs and price their goods and services at sustainable levels," Harris notes.

"Commodity inflation has been a real concern," notes Jahn. "We have seen huge increases for phosphate-based fertilizers, for example, and despite lower oil prices, values for these downstream products remain very high. As a result, pricing will remain an issue for the foreseeable future."

Softening prices

Hulsey worries about softening of prices for many items in 2009. "Demand has exceeded supply for many key products in 2008, leading to price inflation," he says.

"These trends are seen as relatively short-term events, and therefore prices will likely fall in coming months as demand declines. Inventory management will be critical, as will finding new programs, products and solutions for our customers so that we can not only remain profitable but continue to grow."

Many erratic short-term trends arising from the current market conditions should be expected, Fidler believes. In the long term, he says, consolidation and the pursuit of supply chain efficiencies will continue.

Hiring and retaining qualified personnel will also be a long-term challenge, as will regulation. Legislation during the new democratic administration could range from Reach-like programs to new chemical ­security regulations and stricter transportation requirements.

"It is a real challenge for the industry to make the necessary investments and manage the changing business environment," asserts Pruitt.

Access to lower-cost, quality products manufactured in China and India continues to play a growing role.

"We are set apart from other distributors because of our strong presence in China and India and the sourcing services we provide," says Schwartz.

"Demand for products from these emerging countries is growing rapidly because our customers know we place heavy emphasis on quality assurance and spend a lot of resources ensuring that the products we offer meet the required standards."

Globalization in general is a major issue on both the supply and demand sides. Chemical manufacturers are moving from the US and Europe to Asia, Latin America and the Middle East.

"As the channel to market gets longer and longer, producers are looking to distributors to handle sales, logistics, and other activities because the distribution community has the infrastructure in place already," Pruitt explains.

Producers don't want to deal with many different distributors, however, so they are looking for companies with uniform qualifications that can meet their standards around the globe. They are also looking for regulatory compliance assistance and economies of scale.

"Many of our suppliers are looking to develop partnerships and relationships with us so that we can examine costs within the channel and identify opportunities for reducing them and compensating both parties," Pruitt adds.

Opportunities do exist for distributors that can afford to expand their services to manufacturers. And the international companies with global networks will be best positioned to take advantage of them.

ICIS Copyright © Reed Business Information 2009

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