http://www.icis.com/Articles/2011/11/14/9507669/NACD-Chemical-distributorsresilient-in-the-face-of-challenging-economic.html Chemical distributors have performed well in the US, despite the challenging economic climate.

Their resilience stems from product and geographic diversity Opportunities abound for distributors, despite the difficult economic environment. A diverse portfolio, in terms of geography and industry segmentation, has provided a resilience that has helped to generate better results for many in the past two years. Indeed, profitability has improved and chemical companies have done better in 2011 than in 2010 on sales and margin so far, says Andrew Walberer, a US-based vice president at global management consultancy A.T. Kearney. William Fidler, president and CEO of Reading, Philadelphia-based Brenntag North America, says that the first half of 2011 has been very good, with sales worldwide up by 18% and operating profit expressed as earnings before interest, tax, depreciations and amortization (EBIDTA) up by 15.5% both at a constant rate of exchange. The figures include full year-on-year results of EAC Industrial Ingredients in Thailand, which Brenntag acquired in quarter three 2010. CAUTIOUSLY OPTIMISTIC Seattle, Washington-basedUnivar executive vice president and president, emerging markets Terry Hill says that global sales were up by 23% for the first half of 2011, and adjusted EBITDA was up by 27% (both at constant rates of exchange), reflecting strong growth in the core business and recent acquisitions. In North America this year, Univar was "on plan and doing fairly well", with particularly strong demand in the oilfield services sector. In Europe, the first half saw strong sales growth, but volumes are continuing to slow, especially in markets serving the construction, automotive, and paints and coatings industries. Hill, like many, is cautious in his outlook for the fourth quarter, mainly because of the uncertainty regarding the global economy. Buyers are managing inventory carefully and, says Carol Piccaro, president and CEO of Darien, Connecticut-based U.S. Chemicals, even if there are price advantages to purchasing more, buyers are not interested and want to keep stock levels low. Piccaro says 2010 was the best-ever performing year for U.S. Chemicals. "We were hoping to better that in 2011, but are now predicting flat or lower growth because of weaker demand and increasing awareness of stock levels in the second half of the year," she says. She adds that U.S. Chemicals had strong sales in the first half and managed to maintain margins. Regarding M&A activity this year, Walberer says that the number of deals in 20102011 are expected to increase, with more this year than last. The average deal size is increasing in chemicals overall, but the multiple is smaller on commodities versus specialties, he notes. PRIVATE EQUITY EYES DISTRIBUTORS Walberer explains that the increased activity is caused by more money available to companies. There is ready access to cheap credit and many firms have cash on their balance sheets after good returns in 2010 and 2011. Private equity still finds distribution attractive as illustrated by Ashland's spin-off earlier this year. The US specialty chemicals producer sold its distribution assets in March to global private equity firm TPG Capital for $979m (695m). TPG renamed the business Nexeo Solutions, which launched as an independent company on April 1, based in Dublin, Ohio.

The global distribution industry is still extremely fragmented. The collective market share of the top three companies is about 15%, according to Walberer, who says that slower economic growth will not deter M&A activity. In North America, the top three companies have 40% market share. There remains significant consolidation with ongoing opportunities for distributors to grow and improve their network coverage. Major distributors Brenntag and Univar have continued to acquire companies in 2011. Highlights for Brenntag have been the purchase in North America of industrial chemicals distributor G.S. Robins as well as its first major entry into mainland China. Brenntag bought a 51% share in Zhong Yung (International) Chemical that it will hold for five years before acquiring the whole of the company in 2016. Zhong Yung distributes solvents in China and has annual sales of over 255m ($356m). Brenntag's most-recent buy was of UK-based Multisol, which has yearly sales of over 235m ($376m, 270m). Other purchases this year include Germany's Luwatec and Spanish distributor Productos Riba. Fidler says that the continued extension of its oil and gas business in North America has been a highlight and adds that "development and expansion of our global accounts has grown very nicely as well as our specialties penetration worldwide". He says that Brenntag's acquisition strategy consists of three main objectives: building up scale and improving efficiency; expanding geographical coverage and improving its industrial and specialty chemical portfolio; as well as targeted industry penetration. "You will continue to see acquisitions in high growth areas of Asia-Pacific and Latin America as well as selected acquisitions in Europe and North America. We are by no means finished in all the areas of the world. There is still significant consolidation and opportunities for us to improve our network," says Fidler. Univar has made some key acquisitions, namely Basic Chemical Solutions (BCS), Quaron and Eral-Protek. "These are very good indications of our strategy of geographic expansion," says Hill. Eral-Protek gave Univar entry into Turkey; the Quaron buy in Belgium and the Netherlands gave scale in certain markets; and US-based BCS was a mix of market expansion, industry and product scale as well as some geographic expansion, adding locations in Singapore, the Philippines and Malaysia. UNIVAR LEAPS INTO SOUTH AMERICA Univar's latest purchase of Arinos Quimica in Brazil marks the company's first major move into South America, where Hill says Univar wants to continue to build scale. "Arinos was a key acquisition for us and their approach and route to market was very similar to ours," says Hill. He adds that chemical producers are looking to Univar to bring its global sales and infrastructure to the Brazilian market. "We see the ability for our global sourcing to run out product lines that Arinos had trouble accessing." In the last two years, Univar has opened six warehouses in China and is continuing to look at opportunities there. Hill says that the company is interested in India and the Middle East, but has no plans in the short term. "Our long-term plan is to be a truly global company in all key markets. We want to invest both in organic growth and some of the markets that we think are more sustainable." Hill is enthusiastic about the sales model at ChemPoint, Univar's web-based marketing and outsourcing company for fine and specialty chemicals, which he says has really taken off in the last two years. "As we expand our footprint, it gives us the

opportunity to expand these models. We are bringing ChemPoint to Asia and South America next year," says Hill. ChemPoint will launch in China on January 1 2012, to cover markets in Asia-Pacific. Plans are to put a hub in Brazil by mid-2012 to cover South America. For U.S. Chemicals, investment efforts have focused on adding staff to pursue future growth opportunities. Piccaro has hired three new employees in 2011, two of whom were in business development, and she expects to hire one or two more next year as the company continues to look at new markets. "We are adding new customers and new supply channels," says Piccaro, who reveals that she is now more comfortable with sourcing from China, where quality has improved. Continuing trends in the distribution industry include the ongoing drive for better efficiency, outsourcing of services, managing volatility and the move to more sustainable products and industry practises. Walberer estimates that 25% of the raw material spend at chemical companies is through distributors. That share will increase, Walberer says, as chemical and similar -industrial companies try to improve efficiency of procurement, which is a big opportunity for distributors. After the recession, and with economic uncertainty dominating world markets, customers and suppliers have been cutting resources and running leaner operations, turning to distributors to fill the gap in services. Walberer says that many companies do not want to add staff and services again, and are more open to using a third-party company, particularly because it is much easier to stop a services contract than to reduce internal staff, if and when demand declines. This trend towards flexibility of capacity should be an opportunity for distributors to provide more third-party services, he says. Distributors have added laboratories and offer services such as mixing, blending, formulating and repacking, and technical support. Hill says that Univar looks to trends around two to three years ahead, which helps to provide solutions and value for its customers. Knowledge management is a key opportunity for distributors. "Whether it is providing market information for customers or solutions to more complex technical problems or giving suppliers access to a large number of customers as well as a vast database of application trends, it is distributors with well-developed management systems and real delivery capability that will have a distinct advantage in the quest for value-added growth," says Fidler. Another big trend, according to Walberer, is managing risk, whether it is volatility, disruption of supply or product quality, which can be a major issue when buying from suppliers all over the world. Distributors can help companies manage risk in two ways, he says. They can maintain relationships with producers and serve a quality validation role. They also can serve as a buffer. "Using a distributor to build a buffer stock reduces the risk of unavailability. As supply chains get longer, that is very important." says Walberer. He adds that distributors also can act as a gateway to new suppliers, providing access to low-cost producing markets such as Asia. Ongoing consolidation of customers combined with companies wanting to do more business with fewer suppliers is a trend that started in 2009 when the recession started and resource constraints took hold.

The impact on the distribution channel from customer consolidation is becoming apparent. One example is in the specialty chemicals sector following BASF's purchase of Cognis last year. A DISTINCT TREND Fidler says that this trend is distinct in North America, and to a lesser degree in Europe, but it is happening worldwide. He adds that another trend is the continued development of global customers that want consistent sources for multiple plants around the world. An emerging trend that Walberer identifies for the chemical distribution sector is customer segmentation. He sees customers falling into two groups: those that buy products such as commodities from a number of suppliers, with a primary focus on price and availability, and those in highly regulated products such as pharma or consumer products that are ruthlessly focused on quality and compliance and the reputation that comes with the things they buy. The relationship that these customers want with suppliers is more collaborative - they are not as worried about pricing. Distributors can bring a lot of value to chemical companies and help reduce complexity for their customers. Piccaro says: "US distributors' ability and agility to move quickly for their customers is where this industry shines." Perhaps, as Fidler says, the biggest challenge facing distributors is creating a meaningful value that customers and suppliers will pay for in this volatile economic climate. CONSOLIDATION CREATES CHANNEL CHANGE Consolidation among chemical suppliers is forcing the realignment of some -distribution channels, most notably in the specialty chemicals industry. One such example is German producer BASF's acquisition of compatriot specialty chemicals company Cognis in December 2010. As a result, BASF has restructured its North American distribution network in the personal care segment. Effective from January 1 2012, the network will be formed from the following companies: ChemTec, GMZ, FitzChem, McCullough & Associates, DeWolf, SeaLand, Brenntag Specialties, Brenntag Canada and Pachem. Frank Bergonzi, director of corporate distribution for BASF in North America, says: "After a thorough selection process, we formed a new distribution network that will enhance our market focus, sales excellence and industry expertise." He stresses that the realignment was purely related to the integration of the two businesses. "It is not a result of poor performance," he insists. He explains that the distribution companies BASF chose were familiar with the Cognis portfolio, and that most of them had a large percentage of their business in the personal care segment. Bergonzi says the new personal care network is a combination of regional niche partners and national distribution companies. BASF sees value in both national and regional models, depending on the business group and product portfolio, says Bergonzi. The chemical company major is carrying out similar assessments in other business sectors, namely dispersions and pigments, synthetic lubricants, nutrition and pharma.

"We are not looking for one size to fit all. Rather, we are reassessing our distribution networks in view of the addition of the Cognis specialty product portfolio," Bergonzi maintains. Bergonzi says that producers are always analyzing customer segments, and that there will be more opportunities for distributors with specialty products. "In certain businesses, suppliers want to know more regarding the application and market of the end-use customer. They view the network as a true extension of their direct selling effort. I see this trend continuing, and it's an opportunity for distributors who have aligned resources and expertise in the desired market," he says. By: Elaine Burridge +44 20 8652 3214