the future of dyneema 2001

7/29/2019 The future of Dyneema 2001

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At its 2000 Chemical Analysts Conference DSMpresented the outlines of the leading multi-

specialty chemical company it wants to becomeover the next few years. This transformation hasalready started, but major steps still have to betaken. This strategic direction was the product ofan extensive corporate strategy dialogue, or CSD,as the process of rethinking the corporatestrategy is called within DSM. The CSD is heldroughly every three years.

In last years CSD two main issues emergedwhich DSM has to address:

First, the structural changes in the industry. Thenature of these changes differs greatly from onebusiness to another. In petrochemicals there is atrend towards global consolidation. AlthoughDSM currently enjoys a healthy and leadingposition in the West-European petrochemicalindustry, it is clear that in the long run themaximum value of this business can only beachieved if it participates in this globalconsolidation. In chemical specialties, bycontrast, there is a drive for size on the one hand

and a focusing trend on the other. Bothconsolidation and specialization are taking place,involving mergers, portfolio restructurings andIPOs. Which offers opportunities for DSM.

The second main issue of last years CSD wasthe persistently low valuation of DSM by the

stock markets. While it is flattering to beconsidered to be a value play with considerableupward potential by many analysts, DSM felt andstill feels the urge to realize that value.

In this respect it is noteworthy that the financialmarkets immediately responded positively toDSMs strategic plans. Before 11 September 2001DSMs share price was up some 25% comparedto the level of September 2000, when the newstrategy Vision 2005: Focus & Vision wasannounced. This is in sharp contrast to the

general climate on the stock markets in the sameperiod and it also means DSM is outperformingthe chemical stocks indexes. But DSM clearlyaims for more than 25%.

To address these issues of a changing industrystructure and the appreciation of the investorcommunity, DSM developed a coherent strategy,fully in accordance with the development of thechemical industry and the companys history.


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The trends in the chemical industry are leadingtowards a structure with three clusters of

chemical companies. At one end of the spectrumyou have the large conglomerates, with sales ofover 25 billion euro and a broad portfolio ofproducts. Companies such as DOW, Dupont,Bayer, and BASF fall into this category. Due tothe relative stability provided by their size, thebroad variety in their portfolio and the liquidityof their stocks, the investment communityaccepts that their portfolio encompassessubstantial volumes of cyclical commodities.

At the other end of the spectrum there is a

cluster of highly focused pure play specialists.Their size is limited, often not surpassing the 3 billion mark. Many of these pure playcompanies are the outcome of the ongoingreshuffling process. Companies such as Lonza,Givaudan and Novozymes are prime examples.

In between these two groups a cluster of globalmulti-specialty players is developing. This clusterincludes companies such as AKZO Nobel, CIBA,Clariant, Degussa, ICI, Rhodia, and Rohm & Haas

with a size of roughly

5 to

15 billion inannual sales and a portfolio consistingpredominantly of a set of chemical specialties.

In this arena a constant game of consolidationand specialization is going on, involving mergers,

acquisitions, assets swaps and IPOs.

Somewhat outside this chemical spectrum arethe large global oil companies, which are relevantfor chemicals as they increasingly dominate thepetrochemical business, and the group of largeglobal pharmaceutical and food processingcompanies, which are also consolidating.

With its strategy Vision 2005: Focus and ValueDSM embarked on a route to become a leader inthe cluster of global multi-specialty players by

readjusting its portfolio focus and size. In order toreach that goal DSM has to withdraw frompetrochemicals and simultaneously boost itspresence in chemical specialties.

It is difficult to define what makes a product achemical specialty. In DSMs opinion the mostimportant characteristic is the ability to generategood and preferably stable margins. This can bebased on a combination of several aspects, suchas the absence of supply driven cycles, the

resilience to GDP fluctuations, a high degree ofintimacy between producer and customer, theinnovative content of the product and so on.


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Firstand foremost, in order to be successful as amulti-specialty player a company has to aim for

leadership in every business segment it wants tooperate in. This drive for leadership was alreadypart of DSMs strategy before the start of Vision2005: Focus and Value, and it has remained anessential element for the future.

The second aspect that is of vital importance tobe a successful multi-specialty player is acoherent portfolio. It is especially through acoherent portfolio that a multi-specialty playercan outperform pure play companies andgenerate added value over a simple addition of

separate business entities. This coherence isreflected in for example a focus on specific endmarkets as well as in the technologies applied.

DSM keeps this coherence in mind when lookingfor acquisition candidates. Over the years DSMhas learned the value of growing the businessconcentrically, as the companys recent historyclearly shows. Which means DSM will only enternew business arenas on a large scale if it canbring in-house-developed knowledge and skills to

the table.

The third essential prerequisite for being asuccessful multi-specialty player is innovative

power.

DSM always has been highly dedicated toinnovation and R&D and annually spends about 250 million on R&D, mainly in the realms ofLife Science Products and Performance Materials.The past efforts in this respect have laid thefoundation for some fine and very profitablebusiness positions of today. To name just a fewexamples:

- Recently a new grade of Arnitel, which, like

Stanyl, is an in-house-developed engineeringplastic, was approved for the production ofairbag covers in cars. This grade outperformsthe competition in a combination of requiredfeatures such as temperature resistance, abilityto tear open at the required speed withoutfragmenting, and ease of production andapplication in different shapes and colours.Leading car manufacturers in Europe and theUSA are applying this product now.


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- Dyneema, the strongest fibre in the world,15 times stronger than steel and 40% strongerthan Kevlar, was developed in DSMslaboratories. At the moment markets as farapart as offshore towing & anchoring and

bullet resistant vests & armours are usingDyneema in rapidly increasing volumes.Demand is increasing so fast that despite firminvestments in new production facilities DSMcan hardly keep up with market growth.

- In the biotechnology part of its business DSMcan point to a successful product such asPhytase, an enzyme aimed at a better digestionof feed by livestock, reducing both feed costsand the amounts of phosphates excreted.

In the specialty business in particular, creativeinnovation is a key success factor. One of the bestprotections of the income stream is whenproducts are patent protected. DSM enjoys thisfavourable position in a large number of cases.From the present business portfolio that will staywith DSM in the execution of Vision 2005:Focus and Value around 50% of sales are coveredby patents on either the product itself or theproduction process.

Innovation is also an area in which a multi-specialty player has clear advantages. A largercompany not only has more critical mass tosupport the expensive R&D programmes but canalso bring into play the combination of varioustechnologies and skills.

More often than not, really creative innovationstems from a combination of disciplines. Purespecialists can take innovation a long way, butmost of the greater breakthroughs are the resultof bringing together different lines of thinking in

order to create something really new. For DSMthis is notably the case in the combination ofskills in biotechnology and materials science.

The fourth essential element for success is costcontrol. Due to its history, broad layers of DSMsmiddle and top line management have beenbrought up with a deep awareness thatcontrolling and reducing costs is essential for

survival. This attitude, which comes lessnaturally to specialty businesses, often gives DSMa competitive edge. Experiences with specialtybusinesses acquired over time have providedample proof of this. And given the fact that,sooner or later, many specialty businesses willshow signs of what could be calledcommoditization, this sense of urgency relatingto cost control that is an essential part of DSMsculture is becoming more and more important. Inthe next chapter by Henk van Dalen an update isgiven on the progress made with the OperationalExcellence programme, which was started a fewyears ago to reinforce cost consciousness at DSM.

The fifth point on the list of essentials for asuccessful multi-specialty player is stable earningsgrowth. At the moment DSMs earnings profile isstill heavily influenced by the cyclicalcontributions of the businesses forming part ofthe Polymers & Industrial Chemicals cluster. Acomparison between DSMs results for the firsthalf of this year with the H1 results of last year

clearly proves this. Which might blur the view onthe earnings growth achieved by the specialtybusinesses in DSMs portfolio.

On the following pages DSMs score on thepoints mentioned above will be discussed inmore detail.


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This chart gives an impression of DSMs presentleadership positions in relation to the existing

specialty portfolio. It is based on the 2000 salesfigures, adjusted for the acquisition of Catalyticaand the divestment of Engineering PlasticProducts (which were effectuated as of1 January 2001) and for the planned divestmentof Petrochemicals. So it zooms in on those partsof the present portfolio which are relevant to thenew DSM.

Most of the business groups that will make upthe multi-specialty DSM of the future are alreadyamong the top three in their markets.

Notable exceptions in this respect are parts of theengineering plastics business, some parts of the

coating resins business and to a lesser extentsome areas in food specialties, where DSM isonly leading in a limited number of nichesegments. That is one of the main reasons whyDSMs acquisition strategy is aimed in particulartowards reinforcing the market presence in theseareas.

In fertilizers and ACN, which are by-products ofcore businesses in caprolactam and melamine,DSM does not aim for leadership.


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DSMs present positions in businesses that willparticipate in the future portfolio already have a

high degree of coherence. This pie chart, which,like the chart on the previous page, zooms in onthose parts of the present portfolio which arerelevant to the new DSM, gives an impression ofthe present focus towards end-use markets.

70% of this portfolio is directed towards five endmarkets. Which is a fair amount of focus, and aclear proof that DSM has managed to create thenecessary coherence in its portfolio to be able tobenefit from the synergies derived from thiscoherence.

The single most important end market is Pharma,which represents almost 25% of DSMs portfolioas defined above. This market is growing around8% annually, has no supply driven cyclicality, andis moreover fairly recession proof.

The processed food market takes about 15% ofthis portfolio. This market, too, is characterizedby its immunity to cyclicality and recessions andshows a stable growth. Through acquisitions

DSM wants to step up its presence in this marketsignificantly. The businesses focusing on thepharma and processed food markets togethermake up 90% of the Life Science Productscluster. In the chapters by Feike Sijbesma andBob Hartmayer these businesses are highlightedin more detail.

The Automotive industry is the end market forabout 12% of DSMs current sales as defined

above, and Electrics & Electronics accounts forabout 9% of sales. DSMs sales to these two endmarkets are generated primarily by the businessgroups in the Performance Materials cluster.Together they represent about 60% of the presentsales in this cluster. The chapters by Jan Dopperand Bernard van Schaik picture in more detailwhere DSM stands and how DSM wants to takethis business further.

Building and construction is the fifth end marketfor DSM, representing about 11% of sales in this

diagram.This market is primarily served by thecaprolactam and melamine businesses that formpart of the Industrial Chemicals cluster, but a fairamount of Performance Materials also find theirway towards this market.

The remaining 30% of sales include for examplethe very interesting markets for Dyneema (thesuper strong fibre whose sales are rapidlyexpanding in applications varying from offshoretowing cables to bullet resistant vests, helmets

and armour plates) and the rapidly growing salesof a number of performance materials for theleisure and sports equipment markets.


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Besides coherence in end markets, DSM can alsoshow coherence in the field of technology.

In the following chapters DSMs technologicalcapabilities are discussed in more detail; theobservations in this chapter are restricted to theimportance of the combination of DSMs strongtechnological capabilities in both biotechnologyand more classical fields of expertise such asmaterials science.

Through the acquisition of Gist-brocades, DSMadded a leading position in biotechnology to itsalready existing strong technological position in

other fields. Biotechnological products todayrepresent 15% of DSMs total sales, which makesDSM one of the leaders in this respect in theEuropean chemical industry.

Furthermore, the combination of biotech andother DSM expertise provides the key to newinnovative successes. The potential value of thiscombination was recently highlighted by anunbiased source, namely in a publication byMcKinsey last year. The following diagram is

from this publication.


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McKinsey# used this diagram to picture howbiotechnology will transform the production of

chemicals. Commercial applications ofbiotechnology today are mainly restricted to theproduction of fine chemicals and food additives.And indeed within DSM current sales based onbiotech mainly relate to products intended forthe pharma and the processed food industry.But looking ahead to the not so distant future ofaround the year 2005 and beyond, McKinseyexpects biotech to enter the realms of amongother things plastic additives, polymers pigmentsand coatings. Biotech materials might eventuallytake over 50% of the polymer markets and 15%

of the market for base chemicals, says McKinsey.Although these figures may be too optimistic asfar as timing is concerned, DSM certainly agreeswith the direction indicated by McKinsey

The same report mentions that chemicalcompanies which already have strong operationalskills and customer relationships in these marketsare best positioned to achieve profitable growththrough biotech. According to McKinsey thereare clear advantages for first movers who can

develop the technical leadership and theintellectual property reserves that might keeplatecomers out.

The main building blocks of DSM in Vision 2005are the Performance Materials cluster and the

Life Science Products cluster. At present theyseem unrelated from an end market point ofview. But in the combination of these twomainstays lies the opportunity to be a first moverin the development of biomaterials andbiologically driven processes. Indeed, McKinseynames DSM as one of the few companies whichtoday are already well positioned for thedevelopment and subsequent production of thesenew classes of biomaterials and the developmentof biotechnological processes.

# Using plantsas plants; an article by RolfBachman, principal in McKinseys Zurich office, EnricoBastianelli, consultant in

the Brussels office, JenaRiese, consultant in the Munich office, and WiebkeSchlenzka, consultant in the Hamburg office;

The full article can be found at www.mckinseyquarterly.com/basic/usp100.asp.


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Over the last few years, DSM has managed toachieve an impressive earnings growth in the

businesses comprised in the specialty clustersLife Science Products and Performance Materials.Total EBITDA annually increased by 28% onaverage.

Over the same period the EBITDA margin oversales of these two clusters improved by some35%, bringing these ratios to 16% for Life ScienceProducts and to 11.5% for Performance Materialsin H1 of this year.

A nice improvement, but the targets are higher

and DSM will continue to work hard to furtherincrease overall margins in these businesses.

DSM aims to achieve an overall EBITDA of morethan 18% of sales by 2005. Which means there isstill a lot of room for improvement. In thechapter by Henk van Dalen some of theinstruments that have been or are being put inplace to accomplish this margin increase arepresented.


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DSM is not unique in its ambition to transforminto a leading global multi-specialty player. Many

analysts reports mention the risks of a corporatetransformation of the kind DSM has planned.DSM studied and charted those risks carefully inthe CSD executed last year before it embarkedon this route.

In the first place it is important to note that thetransformation envisaged within Vision 2005:Focus & Value is a natural next step in a longtrack record of continuously adapting DSM to thenew challenges of the market.The transformation process embarked upon is not

a radical break with DSMs past, but a naturalcontinuation of DSMs historical development.

In 2002 DSM will celebrate its centenary.Sustainable development is often mentionednowadays as an essential characteristic of thedevelopment of any company. DSMs impressivetrack record of the last 100 years shows that ithas performed very well in this respect.

In the 100 years of its existence DSM has alwaysmanaged to adapt swiftly and pro-actively to

changing market demands. In the course of thisevolution DSM developed an impressive range ofcompetences and technologies.

DSM also developed the managerial expertiseand skills to execute the envisaged corporateactions in a responsible way. DSM has a solidmanagerial structure embedded in itsorganization. Now, in 2001, DSM is wellequipped to transform itself into a leading multi-specialty company in the coming years, as it hasthe right capabilities built into its genes.

Although the impatient among the financialcommunity may not like it, DSM prefers to focusstrategically on the long term. More than theresults of next quarter, the viability of DSMsbusinesses over the next 3 to 5 years is the maindriver of our strategic moves.


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In the period from 1995 through 2000 DSMmanaged to roughly double its sales, from

4.5 billion to the present 8 billion plus.This expansion was achieved first of all viaaggressive autonomous volume growth. In theseyears autonomous volume growth averaged over6% per annum and accounted for roughly half ofthe increase in DSMs top line figures. On top ofthat came targeted acquisitions, notably toreinforce the companys positions in Life ScienceProducts. In Performance Materials DSMdivested several businesses, in order to focus thiscluster and improve its overall financialperformance.

These divestments on balance roughly equalledsales growth due to price increases.

The portfolio transformation envisaged in Vision2005: Focus and Value will require the samemomentum of doubling the business in a timespan of roughly 5 years, but this time the growthwill be focused mainly on the two clusters LifeScience Products and Performance Materials.Last year these two clusters generated sales of

more than 4 billion. In 2005 DSM wants thesespecialty businesses to generate 8 billion in

sales, or 80% of the targeted overall sales figureof 10 billion.

This expansion will first of all be achieved viastrong autonomous volume growth of at least 6%per year on average. Autonomous volume growthwill thus account for about half of the targetedincrease. Just as in the last five years, the otherhalf will be realized via acquisitions.

Another important element of Vision 2005:Focus and Value is the divestment of

Petrochemicals. DSM is confident that thisdivestment will be a success, for the followingreasons.

Firstly, there will be just one major transaction,without the handicap of dilution of managementattention. The entity to be divested consists ofone coherent set of businesses, not a vast array ofseveral unrelated business units.


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Secondly, DSM took ample time to prepare thisdivestment case carefully, before entering intoany negotiations with third parties.The ringfencing of the petrochemical businesstook about six months from start to finish. But as

a result a very clearly defined package could beput on the negotiation table. All aspects relatingto the many ties between Petrochemicals and thesurrounding DSM businesses are clearly definedin arms length, long term contracts.These contracts will provide the basis for a soundrelationship with the new owner of the assets,which will remain intensely interwoven with theother activities at the Geleen site.

Thirdly, DSM consistently refuses to besqueezed into a public time frame; DSM willrefrain from any comment on the negotiationprocess until a deal can be announced.

And last but not least, given the inherentquality of the business DSM has to offer, thecompany is confident that it will be able to getgood money in return for this valuable set ofassets and market positions.

The last point to be highlighted in this respect isDSMs financial strength. Financial strength is anessential prerequisite for successfullyaccomplishing the transition envisaged in Vision2005: Focus & Value. An overstretched balance

sheet not only directly affects the interest bill, italso hampers the possibilities of adapting theportfolio by innovation based on in-house R&D orvia targeted acquisitions.

DSMs current balance sheet ratios, shownbelow, are relatively strong even after the fullydebt financed acquisition of Catalytica. It is fair toconclude DSM has the financial muscle to realizethe goals of Vision 2005: Focus & Value.

Ratios at end of H1 2001

Solvency 38%Gearing 71%Interest cover 5.7


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The implementation of Vision 2005: Focus andValue started with the acquisition of Catalytica

Pharmaceuticals and the divestment ofEngineering Plastic Products. However,autonomous volume growth will continue to be amajor driver of the desired growth of DSMs corebusinesses. Against this background, thefollowing projects have been started.

Around the end of the year DSM expects toannounce a new expansion ofDSM Biologics inthe form a new large scale fermentation facilityfor biopharmaceuticals and will also invest in theexpansion of its therapeutic proteins position.

The reason for the expansions is that the newcapacity added in February is already sold out.DSM Food Specialties has successfully startedthe commercialization of LC PUFAs (Long ChainPoly Unsaturated Fatty Acids), which will serveas an additive to baby milk formula enhancingthe development of babies nerve system.

The markets for super strongDyneema fibreare expanding very rapidly. Production capacity

of the Heerlen (Netherlands) plant will beincreased by 70% in 2001 and the capacity of theUS site will be doubled.

Desotechwill expand existing capacities in UVcurable coatings for optical fibres by another 30%this year by building a new plant in Stanley(North Carolina), in addition to new plants builtin The Netherlands and Japan recently.

DSM Melamine is investing in a new melamineplant with a capacity of 30,000 tons and in a

highly efficient, 100 kt plant based on a newtechnology which is scheduled to come onstream towards the end of 2002.

The divestment of the Petrochemical business iswell on track.


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To support the transformation into a leadingmulti-specialty company DSM has also started a

branding campaign: Unlimited.

DSM.

For DSM such a branding campaign aimed at thegeneral public is quite a new phenomenon. Beinga strictly business to business company, with nofinal consumer products in our portfolio, theneed for broad public advertisement campaignswas never felt before. But studies undertaken aspart of the CSD clearly showed a discrepancybetween DSMs public image and reality.Although this did not affect DSMs attraction tocustomers, the need was felt to address this

discrepancy. One reason was that a favourablepublic image will improve the companys abilityto attract young graduates. Another was thatDSM felt the retail stock markets appreciation ofDSM would benefit from a better understandingof what DSM really stands for: a company thatwill not accept limits to its performance. DSMproducts can improve many consumer products,make them safer, healthier, stronger, moredurable, and more environmentally friendly.


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In conclusion: last year DSM embarked on a newphase in its ongoing transformation. From the

commodity player of the eighties, via the hybridchemical company of the nineties it is nowtransforming into a global leading multi-specialtyplayer.

the future of dyneema 2001

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