Review of 2nd ICIS World Surfactant Conference

NYC – April 25th and 26th, 2012

I was again very pleased to be able to co-produce and chair the third surfactant conference in our series with ICIS. This time, we upgraded and expanded our venue – at the Grand Hyatt, Jersey City, with a stunning view across the Hudson River of the Manhattan skyline.

200 friends and colleagues from all parts of the surfactant value chain spent one and a half days listening to outstanding speakers and networking with each other in the breaks and drinks reception. The proceedings were reported in ICIS Chemical Business and, of course, in Doris De Guzman’s outstanding Green Blog, which live-tweeted essentially the entire conference. A special mention should also go to our friend Sarah Gorback at Elsevier, who tweeted extensively and was instrumental in supporting our partnership with “Focus on Surfactants” newsletter to which all delegates received a free subscription.

Here, I make a point or two regarding each of the speakers and hopefully give you a flavor of the type of event that we will produce coming up in Budapest, September 13th and 14th at the First ICIS European Surfactants Conference. Some of the links in my notes below may require a subscription to ICIS in order to view.

Keynote speaker, Mark Miller of BASF, gave a wide-ranging overview of that company’s challenges and opportunities in the field, pointing out that a balanced portfolio of renewable and petrochemical feedstocks is essential to the BASF’s success. He noted that refined EO is tight in the USA and speculated on who would take the plunge to invest accordingly.

Our M&A Speaker this time was the well known investment banker, Peter Young of Young and Partners. M&A activity is slowing according to Peter. The shaping of our industry, however, by M&A is likely to continue as opportunities for M&A abound in the surfactant value chain.

Martin Herrington of IP Specialties gave a stimulating and thought provoking overview of the fatty alcohol market, pointing out that “natural ” products’ growth may be hard to sustain in the face of cheap shale gas and ethylene in North America.

Next up was the widely known expert on EO, Doug Rightler, who proceeded to give a beginner’s crash course and advanced level seminar on EO economics – all compressed into 40 minutes. A highly rated speaker and sought after consultant, we were fortunate to have him speak at our event.

In the tradition of breaking some news at our conferences, Harish Davey of Reliance came to the podium and announced Reliance’s entry into the surfactants market in India – in order to support their growing consumer products and retail business. This is a huge piece of news and we were honored that Reliance chose our conference to announce it first.

After lunch, Victor Zubb of WheatOleo (a Soliance company) reviewed some interesting new developments in I&I cleaning ingredients. Biomass from wheat used in sophorolipid surfactants for I&I.

Rhodia’s speaker, Chris Houston (new to the company and a veteran of the industry) delivered some novel insights the oil and gas field and its importance for surfactants. Overall the oilfield chemicals market is worth $53Billion (!)

L’Oreal’s Jeanne Chang gave us a look inside the raw material innovations at the major global personal care company. She referenced the company’s adoption of the 12 principles of green chemistry and the outstanding work in glycoside chemistry in the Proxylane range of anti-aging products.

Heliana Kola of the Battelle Memorial Institute generated substantial discussion and debate around her presentation on the ingredients in laundry detergents in North and South America. Quite astounding, the impact of enzymes on the level of surfactants used in detergents.

Our focus on Latin America was kicked off by Todd Nelmark of Oxiteno. His survey of the surfactants markets in Mexico and Latin America was simply unique for a market heretofore little analyzed deeper than the macro level.

Colombia’a emerging palm industry was the focus of our next presentation. Colombia is the fourth largest palm producing country in the world, behind Malaysia and Indonesia (natch) and Thailand. Monica Perez was a stand-in speaker at the last minute and really opened our delegates eyes to the potential right here in the Americas for palm derivatives. Colombia is clearly in the running to be the “next Malaysia” just a few hours flight from Houston.

Wrapping up the first day, was Jim Heaney of Colgate, who gave us an encouraging but realistic assessment of the political challenges in South America, especially in Argentina and Venezuela and the cost pressures of doing business in the region where customers appreciate renewability but will not pay extra for it.

Opening up day two of the conference, I set the stage for the “What it Takes” mini-conference which took its name from a book by Richard Ben Cramer about the 1988 US presidential race. The book looks at the then candidates, Bush Sr., Dole, Dukakis, Hart, Gephardt and Biden and tracks the campaign through the lens of who really has what it takes to become president of the USA. In the same way, on our second day, we focused in on the leading new technologies in the surfactant supply chain and invited the delegates to consider who, if any, among them really has what it takes to impact our industry and become the “third leg” of the supply chain stool alongside petrochemical and oleochemical feedstocks. To tee up the discussion, we invited P&G and Seventh Generation to relate from their perspective what it takes to get an ingredient into their consumer products and onto the supermarket shelf.

After the challenge was laid down by P&G and 7th Generation, first into the lion’s den was Tim Dummer of Solazyme, a favorite of prior conferences, who reported on the continued solid progress of the company in commercializing engineered oil derived from sugars via the action of heterotrophic algae. THe company’s first plant in Brazil is slated for start-up in the second half of 2013.

Next up, Wei Huang of LS-9 described the company’s one-step conversion of sugars directly into oleochemicals, via enzymatic routes. A different approach to that of Solazme and very interesting to our delegates.

Another ICIS conference, regular, Elevance, then took the stage to update the group on their progress with their two announced bio-refineries, 180KMT/yr in Indonesia and 270 KMT/yr in the US. Ambiitious goals for their blend of commodity olefins and specialty building blocks derived via metathesis of vegetable oils.

BIll Rothwell of Codexis, a newcomer the ICIS conference speaker circuit, but with deep experience in the global surfactant supply chain, spoke next. They are entering the market for fatty alcohols with their Codexol brand product made from sugars via a microbial route.

My colleague, Patrick Foley, was next with a change of pace, getting in-depth with some novel, patented chemistry that has formed the basis of a brand new 6 month old company, P2 Science. P2 is commercializing a range of specialty ingredients, both novel and drop-in, for consumer products.

Last to enter the arena to convince the crowd that they had what it takes, was Amyris, ably represented by Frederik Ngatung. Amyris synthetic biology platform seeks to employ the versatile farnesene intermediate to enter the fatty alcohols market in the near future.

In summary, I can say that I have never enjoyed myself more at an industry event. It was again and honor to chair a meeting as content-rich and important as this and I hope the delegates got as much out of it as I did. Registration for Budapest , September 13 & 14th is open now. I am told the venue is outstanding and that we will sell it out. I hope to see more friends and colleagues there.

The First ICIS World Surfactants Conference

(May 12^th and 13^th Weehawken, NJ)

I was honored to chair the first ICIS World Surfactant Conference, which took place last week after about 7 months of planning between myself and the ICIS conference team. Based on the feedback I got from many people, whose counsel and opinion I value, the event was a success. The ICIS folks agreed and some preliminary planning has already been done around the next conference. Nothing has been finalized, but I can give you an early hint about one aspect. The venue will be much bigger! Why? Because last weeks conference actually sold out twice – even after getting more space – and the people on the waiting list are already vowing to register early next time.

To give you a flavor of what around 150 people experienced in the room over 1^1/2 days, I note below, the line-up of speakers and just one interesting point that I took away from each while chairing the conference. More comprehensive coverage of the event will no doubt appear in ICIS Chemical Business magazine over the coming weeks and in the ICIS Green Chemicals Blog, penned  by our good friend and colleague, Doris De Guzman who pretty much live-tweeted the entire proceedings (complete with “twitpics”) from the front row.

Neil Burns of Neil A Burns LLC: I tried to give an overview of the key issues that would be explored during the conference – which I summarized as Value Chain, Volatility, Sustainability, Globalization and M&A. Not as catchy as Tom Nelsons “VUCA” but set the tone for the rest of the event.

Pascal Juery of Rhodia : Company is focusing on sustainability and growing regions of the world. They have been in Brazil for 100 years. Still lot of room to grow and consolidate as the specialty surfactant market is still very fragmented.

Bill Tittle of Nexant: North America set to become a net exporter of EOD’s as advantaged ethylene is converted to purified EO for ethoxylation.

Mohammad Al-Bibi of Farabi Petrochemicals: Farabi will commission a second 120 KMT/yr LAB plant in 2012 helping ensure the middle east remains a net exporter of LAB going forward.

Kongkrapan Intarajan of Emery Oleochemical: Emery’s aggressive growth strategy is driven by vertical integration (Sime Darby and PTT parents), Global Presence and Technology Access (recent ventures with Aekyung in Korea and ERCA in the Netherlands). By 2015, the business mix is expected to be 50:50 base oleochemicals : specialty derivatives.

Janet Crawford of Akzo Nobel: Tallow now costs 60% more than crude oil on lb for lb basis. At this point, expect to see demand destruction in surfactant markets.

Gillian Morris of Kline and Co. : $800 Million market for specialty surfactants in personal care with still 45% of that in Europe!

Jochen Flucht of Henkel: Henkel will play at all stages of the supply chain; including, for example, hedging kerosene for their LAB/LAS purchases.

Brian Chung of Rhodia: 100% naturally derived SLES, uses ethylene oxide made from ethylene derived from ethanol made from molasses via fermentation.

Tom Nelson of P&G: P&G is working with LS-9, Amyris, Braskem and others to try to mitigate the volatility and price pressures from traditional petrol and oleo raw material supply chains.

Icilio Adami of Desmet Ballestra: The new enhanced loop ethoxylation technology represents a breakthrough in terms of efficiency, throughput and capital cost effectiveness for ethoxylation.

Chris Cerimele of Houlihan Lokey: The surfactant industry continues to eb shaped by M&A. Western companies tending to divest oleochemicals while Asian oleochemicals companies tending to seek technology driven investments.

Alessandra Lancellotti of Frost and Sullivan: There are 15,000 companies in personal care in Brazil and the country is the number three consumer of such products in the world.

Bob Moser of Brenntag: Distribution is a fragmented market with plenty of room to grow. Brenntag has a 6.9% market share followed by Univar at 6.0% and Nexeo (formerly Ashland) with 2.8%.

Walter Rakitsky of Solazyme: Walt opened up the “surfactant revolution” part of the conference with a vision of designer oils produced via genetically engineered algae from a variety of biomass feedstocks. Technology is proven and being scaled up by this company that has already filed for a $100 Million IPO after being funded by VC and strategic investors.

Andy Shafer of Elevance : Andy rounded out the surfactant revolution with his vision of the Elevance metathesis technology as implemented in a series of biorefineries (180 KMT/yr first unit to commission this year in Surabaya). These plants to provide surfactant feeds from sourced uncoupled with crude or palm oils.

In summary, I was very pleased with the quality of speakers and participation by the delegates. Given that, I regarded myself as very fortunate to be able to chair the event and to work with such a talented team at ICIS in putting it together. Next year – a bigger venue and a continued focus on high profile, interesting speakers.

The Green in Green Chemistry

March CM&E Lunch Report

The ACS York CM&E group hosted another outstanding lunch last Thursday at the award-winning Aureole restaurant in New York City. The theme was a panel discussion on green chemistry and we were honored to have as co-moderator the ICIS Green Blogger, herself, Doris de Guzman. I was the other moderator and the panel was a tremendous mix of banker, mature company and new company – i.e.

• Chris Cerimele, head of chemicals at Houlihan Lokey
• Bob Barclay, co-founder of Martek
• Jason Anderson, VP Business Development, Novomer

A remarkable feature of the session was – no powerpoint! It may be just me but I get the impression that people just simply pay more attention when there are no slides. We had a rapt audience of over 50 in the room and another 10 or so on the webcast.  Just a sample of some of the highlights of the discussion:

• The “green premium” – what will consumers pay for and how much will they pay to be green? – Answer: Zero. These businesses have to bring value to consumers in terms of product performance and cost – just like any other product. That was the unanimous conclusion of our pane.
• Europe – leading the way in green businesses? Not exactly – in many ways Europe is jealous of the robust capital and intellectual markets that allow new businesses to flourish in the USA.

If you missed this lunch, you have an opportunity every month – the first Thursday – to join us. On April 7^th, we have a presentation on Growth Opportunities in Specialty Pharma by Michael Higgins, Managing Director of Rodman & Renshaw. In May, we have the long awaited Latin American event, sponsored by CM&E’s own cachaça distiller, Sagatiba of Brazil (yes, that is free caipirinhas for all attendees  – and we haven’t yet figured out how to deliver those via the webcast). Senior executives from Blackrock Latin America and Petrobras will discuss opportunities in Brazil and Latin America in general.

A few notes to update you on our activities in private equity and advisory for the chemicals industry. If you have not had a chance to check our updated website, please do so and let me have your comments www.neilaburns.com

• Silicones: Our involvement with SiVance, carved out of Clariant, September ’09, continues to be a great pleasure. The business is doing very well. The carve-out could not have gone more smoothly and we are still hiring to support continued growth in the coming year.
• Other equity activity continues with a focus on specialties in North & South America and Europe. Compared to this time last year, the pipeline is packed very well. Our partnerships with GenNx360 and Linley continue to bear fruit across a fairly wide EV range up to $1Bn +.
• Our advisory practice focuses on surfactants, oleochemicals and related feedstocks. Our partnership with Desmet Ballestra Italy has been particularly active with the recent re-launch of their ethoxylation platform on new technology. We continue to limit other advisory work to a few long-term clients. However, we will expand our reach into Asia and Latin America with additional personnel in the coming year.
• Our support of the ACS, CM&E Group continues to be very fulfilling. In March, Tim Wilding of Oppenheimer gave an outstand review of chemicals M&A. Then, in October, a panel including GE Capital, Lanxess, Jones Day, GenNx360 and Houlihan Lokey sold out the venue with their “Anatomy of a Deal” discussion. If you are in New York City, January 6^th, please join us for lunch with the ACS Chief Economist for some unique, unedited analysis of the industry’s prospects for 2011. Register here.
• In partnership with ICIS, we are organizing and chairing the 1^st World Surfactant Conference in NYC area, May 12 – 13 2011. Preliminary details here. This is a business conference targeted at senior managers in the industry.

As always, please feel free to reach out if you think we can help with anything. Our equity capital program combines a patient outlook with good understanding of the chemical industry. We like to support management teams with a growth agenda and to enable owners realize their ambitions for their businesses.

Our best wishes for a happy and prosperous New Year.

Neil

Chemical Distribution – Why so Attractive to PE Funds?

The recent announcement that TPG will acquire Ashland’s chemical distribution business was no surprise to most of the North American distribution community. What is noteworthy however, is that, again, a major chemical distributor has found a home in a private equity fund’s portfolio. Ashland now joins Brenntag (BC Partners investment – recently IPO’d), Univar (Clayton, Dubilier and Rice recently joined CVC as investors) and Azelis (3i) as a PE owned chemical distributor.

In addition to these large (USD Billion +) deals there have been a number of recent smaller deals in which PE firms have invested in chemical distributors. These include Post Capital’s investment in BHS and AEA’s investment in Reladyne. Reladyne is a consortium of four regional lubricant distributors.

Other deals in the distribution space are rumored to be in the pipeline and we’ll comment on those as they are announced. Coincidence? No. So, what’s the attraction of distribution for PE firms? In our view, it’s three major of factors:

• The industry is fragmented and there is still significant room for consolidation. North America is the most mature market where the top 5 players have around half of the market. Europe is much less concentrated and Latin America and Asia, less so again.

• Distribution businesses enjoy economies of scale. The ability to manage larger networks with a relatively fixed investment in IT and management systems is one factor driving consolidations financed by PE funds.

• What was once primarily a relationship business now lends itself to quantitative management methods, well understood by private equity companies and their consultants.

The case for chemical distribution as an interesting investment is made fairly convincingly by the data in a paper by BCG, published earlier this year.

Looking forward, we see continued acquisitions by the North American big three, Ashland, Brenntag and Univar and by others. Consolidations driven by the scale related factors above will continue to be financed by these PE sponsored companies. Owners of small, regional and specialized chemical distributors may therefore find 2011 a good year in which to sell – or to compete in the interstices left between the ever larger market leaders.

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Carving out the “Trapped Asset”

My colleagues and friends at GenNx360 Capital Partners, get most of the credit for this weeks blog entry which looks at how a corporate owner can deal with a non-core business in a way that maximizes value for the shareholders and preserves long-term viability of the business for employees, management and other stakeholders.

In a recent white paper, Art Harper, Founding Partner and Chuck Castine, Operating partner at GenNx360 put forward a method for corporate owners of non-core businesses to work with an operations oriented private equity firm in freeing up the value of “trapped assets” as they term them. The white paper can be read directly from the home page at the GenNx website.

In summary, many businesses have one or more trapped assets, although they almost certainly will not refer to them as such. The trapped asset is a business that perhaps was once core to the strategy of the parent, but is no longer. It is delivering cash to the bottom line, so is not causing particular pain to anyone in the organization. However, as it is not core it is not receiving management attention and is getting maintenance levels of investment at best. As a result the business is losing ground to competition and not participating in the growth technologies or geographies that the market leaders are. There is, however, no great rush to sell the business as it is still cash positive and there is a concern that an adequate value will not be realized for the business, but neither capital not nor management time is going to be invested in “sprucing up the non-core business for sale”.

In the trapped asset play, a private equity investor will buy a majority share, 50% +, of the non-core business and then work with the units management to restructure the business, putting in additional capital as necessary to bring the unit up to a point where it becomes a much more attractive acquisition target for the other competitors in the market. At this point, the asset is off the parent’s balance sheet. After the restructuring period, the business is sold and both owners (i.e. The PE firm and the original parent) cash out together. In this way, the owner gets two bites at the apple and the business is preserved and grown to a much stronger position. Of course, not any PE firm is capable of doing this. Operational skills and experience are essential and much more important than the financial skills associated with the carveout itself.

Some of our work in identifying such trapped assets has found situations such as that described in the charts below. The trapped asset started life as the core business of  the company. Gradually, over a period, often of decades, but sometimes as little as 5 years, the focus of the parent changes and the once core business finds itself less and less important from an earnings perspective to the parent.

EBITDA Contribution to Parent:

As a result, the investment in the business slacks off and the performance of the business lags relative to the market in which stronger players are dominating. The chart below shows how a recent “trapped asset” failed to keep up with a market growth that its competitors were enjoying.

Trapped Asset “Growth”:

In light the of the above situation, the parent faces a dilemma, keep the asset (i.e. “do nothing”) or sell it. Neither option is appetizing for the reasons outlined above. Now, there is a third option which is made possible by working with an operationally adept private equity investor.

In summary, the trapped asset play is not for every parent and certainly not for every PE company. We encourage our readers to go to the original GenNx white paper and consider whether this may be of interest to them.
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