Resilience Series Part 4: EMS-Chemie
Resilience Series Part 4: EMS-Chemie
Studying Edelweiss Holdings to learn more about resilience
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EMS-Chemie
For part four of our resilience series, let’s dive into the Swiss company, Ems-Chemie.
So far in this series, we’ve covered:
French barrel-maker, TFF Group
Biscoff famous, Lotus Bakeries
Faroe Island fisheries, Bakkafrost
The EMS Group makes high performance polymers and speciality chemicals. Under polymers, the company has two business units, Grivory and Eftec. Grivory makes polyamides (nylon and kevlar are two examples of polyamides) and Eftec makes sealants and coatings for the auto industry. Under chemicals, there is one business unit called Griltech that makes adhesives for the tire industry, among other things.
EMS has 25 production sites in 16 different countries. About 54% of production comes out of Switzerland, with another 30% evenly spread between Germany, the US, and China. These three countries are the biggest customers of EMS’s products too, accounting for 20%, 16%, and 13% of sales, respectively.
What’s really interesting about EMS is just how high and stable the company’s operating margins are. They are mid-20% like clockwork. So how are they able to maintain these margins when they just sell different form factors of plastic?
Well, before we get into that crucial question, let’s go through a little bit of the business’s history. It started in 1936 when Dr. Werner Oswald created a company called HOVAG to make ethyl alcohol out of wood. This was used as an alternative fuel for automobiles until 1956, when Swiss citizens voted against the subsidized purchase of ethyl alcohol. This completely changed the business so Oswald pivoted and used his petroleum knowledge to make plastics. The first brand was called Grilon.
In 1962, the company was renamed Chemie Holding EMS. Seven years later, a young Christopher Blocher was voted in as CEO and just a few years after that, Mr. Oswald, the founder, passed away. Blocher was tasked with selling the business but he didn’t have any quality offers so he decided to buy the business himself. Blocher’s oldest daughter ended up taking over in 2004 and is the current CEO. In a way, EMS-Chemie is a family run business, but it changed families once during the past 90 years.
Another interesting fact is that Christopher Blocher was voted in as a member of the Swiss federal cabinet in 2003, so he was forced to sell his shares to his four daughters. Currently, over 60% of the shares are held by the two daughters who haven’t sold their interests in the business. One of those is Magdalena, the current CEO, and Rahel, who continues to hold a passive stake.
Ok, back to our burning question! How is EMS-Chemie able to maintain such strong margins when it seems like all they’re doing is selling plastics (for those of you who have seen The Graduate, maybe Mr. Maguire was on to something after all).
One thing that sticks out is that the company has become a key supplier in the auto industry. EMS’s polymers are sold to almost all of the major car manufacturers and this vertical accounts for more than half of sales.
Apparently, these plastics can survive temperatures of up to 270 degrees Celsius so they are perfect for being used in engines. One risk is that electric vehicles only contain about 1/3rd of the plastic content that an internal combustion engine requires but EMS’s management says these fears are overblown because their polymers will be used differently in electric vehicles, for battery casings and insulating high voltage components.
Not too long ago, the company sold off its airbag igniter business, which was its small, fourth revenue segment. The polymers were used to make these tiny ignitors that would cause an airbag to explode upon impact. Though this was a small part of the overall business, the key lesson about this business remains: the polymers aren’t simply sold as a resin, they’re made into small products that have a very important purpose. Selling plastic to a car manufacturer sounds like an extremely low margin, commodity business. But selling a small, but crucial part of a car, sounds like a pretty decent business. There is reasonable pricing power too since something like an airbag igniter is important but it’s a very small piece of the overall cost. If the manufacturer switched to another brand and there was some recall for the airbags, that would be a huge headache compared to the cost savings from switching. Herein lies the differentiation of the company. They have embedded products into auto manufacturing workflows. They don’t just sell plastics; they sell important, tiny parts of the car that just happen to be made out of plastic.
I think the lesson here about resilience is to embed yourself into your customers' processes. Don’t just sell a commodity, sell a solution that has a high switching cost. This is obviously easier said than done but it usually shows up in the margins. Businesses without differentiation simply cannot grow and increase margins for an extended period of time. Either companies tend to keep margins in line, but then no one will want their products because capitalism will do its thing or they will have thinner margins to maintain volume growth.
One other thing to note about this company is that there is a fair amount of negative attention surrounding it. Apparently, EMS still has a couple sales offices that are open in Russia, it works extensively with Chinese companies, and of course, the family is heavily involved in conservative politics. These are likely more noise than signal but they are something to be aware of if you’re digging in.
Besides huge insider ownership by one family, one other resilience lesson I’ve noticed from every company we’ve looked at so far is that they aren’t afraid to invest in capital expenditures to lay a foundation for long-term growth. A couple of years ago, Ems-Chemie decided to invest nearly $350 million (almost one full year of free cash flow) to create a couple new production facilities. It also seems like these capex plans are very intentional and more like growth capex rather than maintaining the business. Ideally, maintenance capex is low but the company is reinvesting to become more relevant to more consumers.
All in all, here is yet another company with large insider ownership and strong growth capex. However, one new lesson from studying this company is the importance of embedding yourself into customer workflows. Sure, EMS-Chemie could’ve just sold its plastic to auto manufacturers, but the real value is in understanding the paint points of the manufacturers. By creating innovative new solutions for automakers, the company is able to grow reasonably with high margins and high returns on capital.
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