A Vision Realized

Peter Elverding, chairman of the Dutch chemical maker DSM, says his company's five-year program to get out of commodities and into specialties was guided by a few simple rules, including this one: Sell businesses before you buy them.

The portfolio transformation program, called Vision 2005, is beginning to wrap up. And thanks to adherence to the rules, DSM seems to have pulled it off without any of the financial woes that plagued similar revamp efforts at other European chemical companies.

Last month, DSM completed the purchase of Avecia's NeoResins coating resins business for about $670 million, with Elverding calling it "exactly the kind of acquisition DSM was looking for" to finalize Vision 2005. Two weeks later, the company reported healthy 2004 results: Operating profit was up 66% over 2003, and organic sales volume increased 8%.

DSM was a different company when it embarked on the restructuring in late 2000. The corporate descendant of a state-owned company called Dutch State Mines, DSM was in the Dutch energy business and had a European petrochemical unit that accounted for almost a third of sales. But Elverding and the company's board wanted to be free of the cyclicality of petrochemicals and instead be in more stable, faster growing businesses.

The company got out of energy in 2001 and sold its petrochemical business to Saudi Basic Industries in 2002. With the combined $3 billion-plus in proceeds, it bought Roche's vitamins and fine chemicals business in 2003 and the Avecia resins operation early this year. DSM says it has now reached its Vision 2005 goal of obtaining 80% of sales from specialties, although it has come up short of its target of 10 billion euros in annual sales.

With the restructuring almost complete, stock analysts at Germany's Commerzbank are ranking DSM as one of their top picks in Europe's chemical industry. In a recent 2005 outlook report, they wrote that the NeoResins purchase seems like a "safe, steady bet" and that the company is "in the process of delivering on several strategic fronts."

In addition to "sell before you buy"--a rule that restructuring firms like ICI and Rhodia ignored at a high cost--Elverding says DSM succeeded at its revamp by adhering to a second basic rule: Clearly communicate objectives and targets both inside and outside the company. By consistently doing what it said it was going to do, he says, the company "created clarity inside the organization and credibility outside."

"Also," he admits, "you need a bit of luck in divesting and acquiring, because you can't always find the right targets and the right partners. I think that has been done quite well."

Elverding is quick to point out that completion of the big deals doesn't mean DSM's work is done. The focus for 2005, he says, will be profit improvement and the completion of several ongoing streamlining efforts.

The most wrenching of these is in antibiotics. DSM's anti-infectives unit is the world's largest antibiotics maker, but growing competition from Chinese and Indian producers has savaged the business. Sales of anti-infectives plummeted almost 30% last year to about $500 million, and profits fell $130 million, pushing the business into the red.

In December, the company announced a restructuring program that will result in the loss of around 400 jobs and the closure of some anti-infectives plants in the Netherlands. Meanwhile, DSM is increasing production at affiliates in India and China and is forming a penicillin joint venture with North China Pharmaceutical Corp. (NCPC), a leading Chinese maker of antibiotics and vitamins.

ELVERDING IS confident that DSM's moves will return profitability to the business within two years, even in the current pricing environment. Moreover, he is counting on prices to improve. "We expect that current price levels are not sustainable--even the Chinese are making a loss," he says.

Leo Hepner, head of the U.K. biotechnology consulting firm L. Hepner & Associates, is not so sanguine about the pricing outlook, noting that Chinese producers don't operate by free-market principles. He's also cautious about deals like DSM's with NCPC. "Joint ventures with Chinese companies are like riding the back of a tiger," Hepner says. "You never know when you will fall off."

The vitamins business acquired from Roche is being revamped under its own improvement program, Vital, that was launched in 2003. Operations are being streamlined over the next two years at sites across Europe, and more than 420 jobs are being cut.

The program was undertaken mostly to integrate the business with DSM but also, Elverding acknowledges, in response to competition from low-cost countries--similar to that experienced in antibiotics. He says DSM will also explore shifting more of its vitamin C production to China via the NCPC venture.

At the same time, vitamins can be less a commodity than products like penicillin and its intermediates. "For example, half of our vitamin C is sold as straight vitamin C, but the other half is used in all kinds of specific, sometimes patented applications," Elverding points out. "There you see much higher prices."

Even before Vision 2005, DSM had made a big push into pharmaceutical active ingredients with the acquisition of Catalytica Pharmaceuticals in the summer of 2000 for about $800 million.

Elverding admits that pharmaceutical chemicals saw tough times in 2002 and 2003, but he says 2004 was a substantially better year. He attributes this partly to capacity cutbacks last year in Greenville, N.C., and Venlo, the Netherlands, and partly to an agreement tied to the vitamins purchase under which DSM is a preferred supplier for the drug ingredients that Roche buys.

In the biologics portion of its pharmaceutical business, DSM is dropping an earlier goal of becoming a large-scale manufacturer like Lonza or Boehringer Ingelheim. In announcing 2004 earnings last month, the company disclosed a charge of almost $40 million to account for the postponement of a big mammalian cell culture plant in Montreal. Instead, it will focus on novel technologies such as the PER.C6 human cell line it markets.

Elverding calls the shift a move from the "hardware" to the "software" side of the biopharmaceutical business. In addition to the PER.C6 technology, licensed from the biotech firm Crucell, he is bullish on DSM's perfusion technology, a unique method of cell culture manufacturing on a continuous, rather than batch, basis.

The big moves have been made, but Elverding continues to tinker with DSM's portfolio. The company is looking to sell its yeast business, although he maintains that it is not following Rhodia and ICI in an overall exit from food ingredients, a business that he finds quite attractive. "The only reason that Rhodia, for example, sold their food ingredients was that they badly needed the money and not so much for strategic reasons," he claims.

Interestingly, despite the push into specialties, DSM continues to operate a sizable industrial chemicals business that makes commodities such as fertilizers, caprolactam, and melamine.

Elverding defends the firm's role in these fields, noting that caprolactam and melamine were DSM's first chemical products and that it continues to enjoy strong market and technology positions. Caprolactam had a good 2004, he says, and melamine is a surprisingly stable product with high growth. Besides, Elverding says, "with all the changes we have realized, we like to have things that don't change."