BUSINESS ο ο α. ο α:
I N T E N S E Engelhard spends nearly 5% of technology-driven sales on R&D.
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PRECIOUS METTLE Engelhard's CEO says surface and materials science is key to the firm's growth MARC S. REISCH, C&EN NORTHEAST NEWS BUREAU
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OST PEOPLE THINK OF ENGEL-
I it can easily translate concepts and ap proaches from one line into another. Perry, who has a B.S. in plastics engi neering from the University ofMassachu setts, Lowell, notes that Engelhard has long been in the cosmetic ingredients business. The purchase of Collaborative "looks like a leap. To us, it's the next step. It just ac celerated our development in the person al care business. This was a very natural ex tension." What would not have been natural, Perry says, "is if we went out and bought a fine chemicals company. That would be a little out of our bag."
hard as a company that ex cels in all things inorganic. Engelhard is a pioneer in the field of precious-metal auto motive catalytic converters. It also man ufactures Ziegler-Natta catalysts for polypropylene production, and it devel ops alumina, silica, and zeolite-based flu id-cracking catalysts. But in July, Engelhard surprised ob servers by buying Stony Brook, N. Y-based Collaborative Laboratories, a supplier of natural and synthetic-organic-chemical based cosmetic ingredients with about 100 employees. Engelhard had a healthy busi ness supplying mica-based pigments and other inorganic materials to manufactur ers of cosmetics and personal care. Sud denly, it took a "new age" turn by acquir ing a company that boasts an extensive line ofbotanical extracts and antioxidants with antiaging and antiwrinkle effects. However, BarryW Perry 57, Engelhard's chairman and chiefexecutive officer, thinks this foray into organic materials will play to his firm's strength—or mettle. "Engelhard is a surface and materials science compa- · ny" he declares. Following that logic, En gelhard can growby boldly going into prod uct lines it has not gone into before. And I 24
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ENGELHARD'S "BAG" is a portfolio of technologies and services that had sales of $3.7 billion in 2003, down 3% from the year before. Net income, excluding unusual charges, was essentially unchanged from the year before, at $229 million. Emissions control catalysts, petroleum and chemical catalysts, pigments, and sorbents ac counted for a little more than $2 billion in sales and the largest share ofprofits. Aunit that purchases, refines, and stores the pre cious metals that go into many ofthe firm's catalysts accounted for the remaining $ 1.7 billion in sales. In addition to boosting sales in cosmetic actives, Perry says, the Collaborative pur-
chase "bought us an R&D group. Now we don't have to go out and recruit. Plus, they already have the certified test facilities that would take us years to set up. It made all the sense in the world." And with Collab orative, "we've boosted our organic capa bilities," Perry says with satisfaction. Unlike the Engelhard of yesterday, which concentrated on product lines like catalysts and pigments, the company is to day looking for opportunities outside tra ditional boundaries. Perry, who has been with the firm for 11 years and CEO for al most four, says surface and materials sci ence and technology is at the heart of the Collaborative purchase and the company's many other businesses. "We can manipu late materials. We can affect their size, shape, porosity, and a whole series of oth er characteristics. Then we can add func tionality using surface chemistry" Looking at the businesses that way, "in effect, a catalyst in a refinery and the pig ment in a lady's eye shadow are function ally the same, which is kind of scary ifyou ENGELHARD AT A GLANCE Headquarters: Iselin, N J .
Sales: $3 J billion Net income: $229 million R&D spending: $9anfiitlten Capital spending: $114 million Employe^; £ $ 8 t t \ --,, BUSINESS SEGMENTS (% of total sales): MAJOR PRODUCTS Materials Science (44%): purchases, sells, refines, and stores precious met als for technology businesses and their customers Environmental Technologies (22%): emission control catalysts to abate car bon monoxide, nitrogen oxide, and hy drocarbons from vehicle engines; cata lysts to remove odors, fumes, and pollutants associated with process in dustries and power generation; thermal spray coatings Appearance & Performance Technologies (18%): color pigments and dispersions, paper pigments and extenders, irides cent and specialty films, crop protectants Process Technologies (16%): petroleum cracking catalysts and additives; chemi cal, petrochemical, and pharmaceutical catalysts; Ziegler-Natta polypropylene catalysts; sorbents to purify fats and oils Website: http://www.engelhard.com NOTE: Figures based on 2003 results.
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wear eye shadow," Perry says. "But when you look at it, the technical competencies that facilitate both those products are the same. So moving into a market that might look odd from the outside is very simple." Perry, whose career includes 22 years in executive positions at General Electric, doesn't tout the advantages of Six Sigma or other new-fangled management tech niques. Instead, he's concerned with more fundamental organizational issues at En gelhard. Since he has been CEO, Perry says he has emphasized the need for the com pany's marketing and research people to harness technology in one business to cre ate breakthroughs in another. It's new thinking in a company where people typ ically worked in silos and x minded their own business. | "Historically, it was a lot α easier to get promoted up 1 through a business," Perry re- » calls. "But now we actually | force cross-business moves." It's a way to not only foster communication across the firm, but also "develop abet ter talent pool, because peo ple have a diversity of busi ness experiences." Such diversity has helped Engelhard scientists devel- Perry op several products with common features but serving a variety of markets. By managing particle pore size, Engelhard makes a product that absorbs impurities in chemical or gas streams. Such tight control means selective re moval of molecules and the ability, for instance, to remove nitrogen impurities from natural gas. Using the same control over pore size al so allows the firm to make adsorbents. En gelhard can manipulate a particle so that it has a chlorine dioxide molecule in its core, Perry explains. When the particle is exposed to the air, "a water molecule goes in and pushes the chlorine dioxide mole cule out. Now you have something that controls bacteria and mold, takes the scum office machines, and purifies drinking wa ter for soldiers in Iraq." Using a proprietary method developed in its pigments group to control particle morphology, Engelhard developed refin ing products that improve gasoline yield, capture sulfur, and increase refinery flexi bility The Distributed Matrix Structures platform on which these advances were based would never have been developed if Engelhard pigment scientists didn't talk to the catalysts group. Perry sees it as his mandate to foster the HTTP://WWW.CEN-ONLINE.ORG
collégial spirit that encourages disparate groups to work together. And to those who objected to sharing technology practices, "I said, 'Bullticky' Ifou both practice materials and surface sciences, and you do the same stuff. % u just supply it to different markets." THE FIRM, which employed 530 scientists and technicians at the end of 2003—and more now with the Collaborative purchase—depends on new product introductions to stay in business. In the firm's 2003 annual report, Perry wrote, "We assume that many of our products will be obsolete in three to five years." Thanks to an R&D budget of $93 million, equivalent to nearly 5% of the firm's technology business sales, 20 to 30% of annual revenues come from new products. But for Perry, sales derived from new technology are not so much a point of pride as they are a business necessity Because of regulatory changes, vehicle emissions catalysts change every three tofiveyears. By definition, that is a 25% technology turnover every year, he points out. Engelhard has a roughly 35% share of the world vehicle catalyst market, according to Buckingham Research Group analyst John E. Roberts, and it competes against firms such as Umicore, Johnson Matthey, and Delphi Corp. In petroleum or fixedbed-reactor processes, "it's very rare that we replace a catalyst with the same catalyst that was in there," Perry says. "The customer either wants higher reactivity, or better selectivity, or a lower price." Engelhard has about a 25% share of the fluid-cracking catalysts market, which includes competitors such as W.R. Grace, UOP, Albemarle, and Sinopec (China Petroleum & Chemical Corp.). In the pigments arena, changing fashions affect color trends in cosmetics and packaging. That means a nearly 30% annual product turnover, Perry says. Engelhard has about a 25% market share of auto, resin, and cosmetic pigments and competes against companies such as Germany's Merck and Clariant.
Perry expects that the hectic pace of regulatory change will figure into the company's long-term growth. New emissions regulations for medium- and heavy-duty diesel-fueled vehicles come into effect in 2007, meaning that "we'll see a rather attractive growth trajectory through about 2012. And that is just in the U.S.," he says. Off-road diesel engines will be regulated in 2008, and that means "a growth market for another five years beyond 2008." China, which built fewer than 2 million vehicles last year, Perry says, is projected to build 6 million to 7 million vehicles in 2008, when the country hosts the Olympics. Since the country has declared it will meet today's global environmental standards in time for the games, Engelhard and its competitors have a significant market opportunity "We've got a new facility in Shanghai that is helping the Chinese achieve their goal," Perry says. "The world is becoming more environmentally conscious. We are seeing Russia and countries in South America looking at regulations. We have a facility in India, because India has put in environmental regulations." And Engelhard expects to benefit from interest in gas-to-liquids projects that turn stranded natural gas into synthetic diesel and petrochemical feedstock. The firm built a $20 million cobalt catalyst facility in De Meern, the Netherlands, to supply the Sasol-developed catalyst for FischerTropsch-based gas-to-liquids projects expected to open in Qatar and Nigeria in the next few years. Then again, opportunities from outside the firm, like the Collaborative buy, could come along. While Perry won't say what sort of acquisitions he is eyeing, he does say that he has a list "that includes $200 million companies, $2 million companies, divisions of companies, and product lines within divisions of companies. The driver is the technology and the market; it is not the price alone." During the slow economic environment of the past few years, he says, "we got our debt-to-capitalization ratio down in the 20% range. It's not because we want to be down in that range. It's because we want to be prepared to take it back to the 4 0 % range or higher" should the right buying opportunity in surface and materials sciences come along. •
The hectic pace of regulatory changes will figure into the company's longterm growth opportunities.
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