The fluid dispensing industry - Neoceram

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1 The fluid dispensing industry - Neoceram Consulting & Analysis Team LETIZIA ALBANESE DAVID KALASHNIKOV ALESSANDRO LEONARDI ALBERTO POLETTO

2 The aim of this report is to give an overview of the fluid dispensing market, with particular reference to Neoceram SA, whose Managing director, Cristina Scapparino, will be a guest to the event Family and Governance: a Woman's Challenge? held in Aula 2 - Bocconi - Via Sarfatti 25 on April 13th by the associations Bocconi Students for Family Business and Women in Business. INTRODUCTION AND NEOCERAM OVERVIEW Neoceram is a family owned company specialized in the production of advanced ceramic solutions in various areas, such as medicine, food and cosmetics. The company is diversified into 4 divisions with the name indicating the corresponding field of specialization: Neoceram Industry Neoceram Pharma Neoceram Cosmetics Neoceram Food The starting point of Neoceram s business is the year 1985, when the need to combine the rich ceramic-manufacturing heritage of Belgium made it possible to lay the foundations of a new company. In 1991, Neoceram was acquired by Vesuvius plc, an experienced global player operating since 1930 which provides a broad range of products in the ceramics and metal processing industries. Vesuvius has since been sharing the technological expertise and providing Neoceram with the necessary financial capital for continuous growth and prosperity. At the core of Neoceram s business lies the development and production of ceramic products for industrial applications, and this was the company s sole focus for the following ten years of its existence. Over time, however, the highly-growing industries expressed an urgent demand for the ceramic products, and in 1995 the company All rights reserved 2

3 responded with the establishment of two new units, namely Neoceram Pharma and Neoceram Cosmetics (and in Neoceram Food). Neoceram Pharma provides pharmaceutical manufacturers, medical institutions and laboratories with very precise filling and dosing appliances. Its products are used either to fit new machines or to replace chromium-plated, glass or low-purity ceramic pumps to raise their efficiency. Some of the products of Neoceram Pharma include vaccines, injectable, drops, syrups and creams is also the year when Pharmalox and, later in 2007, Pharmazirc, two ceramic compounds designed for dosing operations were patented, together forming the company s main drivers of differentiation and success. The company s management and board of directors is represented by CEO and Chairman Mr Roberto Carlo Grosso, Ms Letizia Grosso, Ms Olivia Francesca Grosso and Mr Michel Jean-Marie Lemaire, combining the posts of Managers and Board Directors and Mr Leopoldo Antonio Dapra, a non-executive Director, making it an ambitious family business. THE INDUSTRY A definition of this industry can depicted in the following manner Precision fluid dispensing is the application of a fluid to a substrate in a precise, controlled, repeatable, and consistent manner, day after day, month after month, and year after year (1) Fluid dispensing has numerous applications, ranging from the medical industry to the food industry and Neoceram SA divisions cover a big range of those. What makes the difference is the response of the material used and the technology applied with respect to the characteristics of the fluid used, in particular its viscosity, thickness, combination with other fluids and even the light curing needed. 1) All rights reserved 3

4 GROWTH IN INDUSTRY Here below we attempt to describe what the future of the industry in which Neoceram operates might have in store for its players. Consumer Demand Internationalization In terms of customer demand, expectations, and spending power, countries such as Brazil, India, and China, that were not even taken into account by medical device companies two decades ago, are now some of the fastest growing markets with enormous untapped potential. The already consistent technological base and the expertise of companies such as Neoceram give to the industry establishment a strong advantage in penetrating developing markets. Breaking in those countries would both boost industry growth and and allow for a path of increased reliability in those not-yet-trusted countries, which in turn would boost back growth again. As many have said before, the key to growth is realizing that the economy is not a zero sum game. Innovation To give a static snapshot of the precision in the fluid dispersion sector, it is enough to say that nowadays valves can dispense fluids in the amount of 0.2 nanoliters in volume and 50 microns in size. While precision has reached an astonishing level, size of valves has shrunk so to reach the measure of a hand s palm. Smaller valves imply that more of them can be installed in parallel machine, speeding up the work while improving reliability. This sector itself, as mentioned above, is full of process improvements opportunities within a firm s facility. Current devices are much smaller, yet more complex, than we have ever seen before. Sector innovation itself, despite being one of the greatest growth opportunities is also a threat that challenges players. All rights reserved 4

5 In facts innovation can be seen from two perspectives: Inner or Thought innovation and Forced innovation. Inner innovation is the beneficial side of innovation. It is the opportunity of every player to outsmart others with new materials, new and better engineered pumps. One of the major drivers of this type of innovation is surely the R&D department however also evolution in other industries, such as IT, materials, production processes has led to inner improvements. The other side of the innovation-medal is the one that presents challenges: Challenges Medical industry Accuracy and reliability, especially in the pharma/medical pumps, have been of paramount importance. Keeping up with the fast innovation and the ever more stringent standards of the demanding medical/pharma industry has called for an increased need for precision controlling for fluid dispensing, an even lower tolerance and an extremely compelling consistence. Working closely with medical institutions could result in a reduction of resources used to manufacture pumps leading to an advantage in terms of cost. Regulation In recent years, norms and regulatory standards have become much tighter, especially for the food industry to which people are most exposed to on an everyday basis. This has forced company to allocate resources in particular lines of business decided, in some sense, by lawmakers. All rights reserved 5

6 Sub-Market Niches Firms competing in this sectors are usually part of larger groups (horizontally integrated) or are involved in end to end business lines (vertically integrated). As fluid dispensing products have multiples applications (we can see this in the divisions of Neoceram), the industry has a great potential in terms of sub-market niches. A closer look to the industry shows that applications to different sectors can be thought as different industry themselves, with very different dynamics. Discovering new applications and uncover fresh new sectors to serve would not merely expand demand, but also give a first mover advantage and a sort of monopolistic state. HOW DOES NEOCERAM FIT IN THE INDUSTRY? Neoceram is a family owned company whose core business is manufacturing advanced ceramic technologies for precision fluid dispensing. As per the company s core business description, its operations are involved and affected by dynamics of the ceramic sector and the high-tech manufacturing one. Those two areas are for some aspects similar, in the sense that they are very sensitive to market dynamics, but for many others at opposites poles. The ceramic environment has not shown breakthrough disruptive innovations in recent history and is characterized by a core product, ceramic, which has been virtually unchanged since decades. On the other hand, we have the high-tech sector in which firms practically always seek ways to disrupt and be in a monopolistic position. In order to keep and grow their market share, players need therefore to invest heavily in quality production processes to ensure a high degree cost efficiency and reliability, in R&D to always find new solutions for demanding customers and also in logistics systems that guarantee a fast delivery. All rights reserved 6

7 The Material Neoceram uses high grade ceramic oxides to make fluid dispensing pumps. Pumps made in ceramic can be used in the dispensing of all types of liquid, in facts this material releases less particles and impurities compared to metals. This makes the pumps suitable for food industry, cosmetic industry and pharmaceutical industry. What is unique in Neoceram products is the type of materials used, specially designed for their products. The company has developed and patented two particular high purity ceramics. The first one is Pharmalox, an alumina ceramic that comes in very clean grains and low porosity while the other is called Pharmazirc and it is a zirconia ceramic with high wear resistance and a low friction coefficient. Both the ceramics have an excellent resistance to corrosion, smooth surfaces, are very easy to clean and are non-cytotoxic. Applications of these two materials lead to superior outcomes in terms of precision and reliability. Using a material that is only accessible for the company is a driver of competitive advantage. The Worldwide spread As stated above, the underlying material is standardized. This condition has one main advantage and one main disadvantage affecting market share and growth of all competitors. The disadvantage is that differentiating from other players in terms of superior raw material is extremely hard whereas the advantage is that growing internationally faces less obstacles. In facts, Neoceram has branches across several parts of the world and in particular Japan and Southeast Asia, Western Europe and North America. This allows the company to take advantage of the technological variations in the different countries where it operates, and make use of these innovations for the better product characteristics. All rights reserved 7

8 Neoceram pumps are used in Cosmetics, Food and Pharmaceutical industries, so there is no surprise about the sales distribution. 26% of the total revenues comes from Italy, France and Germany are following with 14% each. Even though Neoceram headquarter is in Belgium, only 5% of the total revenues distribution is coming from Benelux. Thanks to the standardization of the product, the company has a good potential on the global market. The level of internationalization, on the whole is discrete, but improving the variety of products could open new markets and make the already penetrated ones more efficient. Below we will have a glimpse on innovations, and aperture to new markets. CONCLUSION As the history of this industry showed us, this market, like many others, is not a zero sum game. Players have been able to untangle business lines that untapped opportunities and gave rise to brighter future and we expect this to happen in the future through the framework given above. All rights reserved 8

9 APPENDIX A QUANTITATIVE ANALYSIS The first graph shows the liquidity indexes trends, those are quite flat during all the five years except for a slight decrease in 2012; It is probably caused by heavier investments, necessary to obtain a new firm s strategic position to face market s dynamics and variable trend. This suggestion is further supported by the second graph which shows how in 2012 shareholders increased their funds and also how the firm has used in 2013 the gearing ratio to collect disposable money for investments. By contrast in 2014 the gearing ratio decreased to a milder level although this did not affect shareholder s funds. The net capital employed is coherent with the new guideline, in facts, in the two-year period , the capital is characterized by a sensitive growth. During the following year capital has decreased a little, probably due to a strategic choice to focus more on the core businesses. All rights reserved 9

10 Roe and Rona s trends are similar, meaning that the firm s profitability is obtained mainly by managerial decisions and real asset operations and not merely by outside events. Before 2013 the trend was negative, but at the end of this period it changed radically. This is likely the results of investments made years earlier, allowed by an exploitation of the gearing ratio and the shareholders funds. Successively the trend characterized by an effective growth. The only blur fact is the divergence in the last year between the two trends. It could mean that NEOCERAM is relying more on financial operations. In the last decade the market has surely became more competitive, reducing the mark up in the whole industry. After the strategic renovation, the verdict is definitely positive however to prove that changes are well balanced between short and long term more time is needed. The final part of this analysis is focused on the ROS and Turnover s graphs as they show how the management has improved substantially successful one. Until 2013, ROS has decreased substantially, hitting the zero bound. Suddenly thereafter the trend violently changed and is now back on the positive side of the graph. We believe that this swing well represents the new NEOCERAM strategy: a value-driven one. As explicated above, in order to improve revenues, the firm will reach emergent markets and at the same time strengthen its position in developed and advanced markets (Europe and USA). In nutshell the overall view is surely positive. Neoceram is a forward-looking company with a strong management and great potential. Shadows still remain in the present All rights reserved 10

11 but NEOCERAM has done great investments, strategic realignment, decreased the gearing ratio, kept good liquidity and profitability thus yielding stable growth in every main index. We believe that the capital divested (the decrease in 2014 s CIN) will be wisely reinvested in the business cores providing longevity and profitability for the years ahead. All rights reserved 11