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Vertellus keeps its eye on the prize Pyridines key to meeting growth targets

Preziotti: Brings management expertise.Vertellus (Indianapolis), the world’s largest maker of pyridine and picolines,is keeping an eye on its profitability targets while serving a diverse array of end markets. The privately held company projects about $600 million in revenues this year, and revenue growth has averaged 5–6%/year recently, says president and CEO Rich Preziotti. Market demand for pyridine, Vertellus’s largest-volume and most important product, has grown by 7–10% over the past several years, Preziotti says.

Vertellus was formed in 2006, when private equity firm Arsenal Capital (New York)merged Rutherford Chemical, the former fine chemicals business of Cambrex, with family-owned pyridine manufacturer Reilly Chemical. Wind Point Partners (Chicago), another private equity firm and Vertellus’s current owner, purchased the company for an undisclosed sum in late 2007. Preziotti, after almost 20 years with Honeywell AlliedSignal, became CEO when Wind Point bought the company. “They established the model of putting in a senior executive who had run a sizeable business into any deal,” Preziotti says of Wind Point. “If you take the management expertise of a larger company and apply it to a smaller company, you can get superior results.”

Like any merger, the union of Reilly and Rutherford was not without its challenges. Arsenal sold the business quickly, and so the task of uniting two very different corporate cultures fell to Preziotti and Wind Point. Reilly—which had been family owned since its founding, in 1896—“was a very paternalistic organization,” Preziotti says. “Everyone grew from within. The person in the corner office made every decision.” Rutherford, meanwhile, “was very entrepreneurial,” he says. “Each of its plants had been purchased separately, so it was very scrappy. It was just do what you have to do to make the plant successful.” Vertellus instituted formalized procedures for functions, such as sales, inventory, and operational planning, as well as uniting the sales force organization and establishing a stage-gate R&D process. “We did lots of larger company types of things and have gotten some mileage out of that,” Preziotti says. “We’ve tried to manage it in a way that we didn’t put in a ton of bureaucracy. I’m sure the people who have experienced it would say there’s more than they were used to, but it’s a balancing act.”

Core product: Vertellus makes pyridine and derivatives at its plant in Indianapolis.Other early challenges include the worldwide recession in 2009, which impacted Vertellus as it did most chemical companies, and overcapacity in the market for vitamin B3, a key product. “In 2011 and 2012, we saw lots of capacity come onstream for vitamin B3,” particularly in China, Preziotti says. The market was already weak largely because of the recession, and, as a result, prices plummeted. Vertellus has cut costs and streamlined production, including closing a plant in Belgium and moving that plant’s B3 production to China, but B3 prices have not recovered, Preziotti says. “It’s going to take a while for that market to come back,” he adds.

Many of the company’s other markets, however, have generated solid growth. The healthy market for agricultural chemicals and biocides drive pyridine’s high single-digit percentage growth—which Wind Point did not expect when it bought Vertellus. Vertellus’s agriculture and nutrition business, which encompasses about half of the company’s revenues, makes a number of products based on pyridine and derivatives that are aimed at the ag market. Its primary product is crop protection chemicals, especially paraquat, a non-selective herbicide derived from pyridine. The market for crop protection chemicals has generally been robust, and Vertellus has benefited from that, according to Preziotti.

Vertellus’s other business, specialty materials, includes a variety of products, some of which are derived from pyridine. The business serves a variety of end markets, including industrial specialties, personal care, coatings, adhesives,plastics, and pharmaceuticals. Most of its products use batch manufacturing processes, whereas the ag segment’s products are continuously manufactured. Key growth drivers for this business include polyol-based low-volatile-organic compound coating additives, and an additive for nylons, Preziotti says.

Vertellus is looking to improve productivity by, for example, rolling out new catalysts to increase the yield in pyridine production. The company is aiming to grow at least 5%/year over the next several years, and Preziotti believes the company can reach $800–900 million in annual revenues and mid-to-upper teens Ebitda margins within five years.

The revenue target includes room for acquisitions; the company’s deals have thus far been small and focused around product lines or buying out joint venture partners in plants in China and India. Vertellus has evaluated larger deals but opted to not pay the high multiples that strong chemicals assets can command. “At the end of the day, we’ve got to get a return for our investors,” Preziotti says. “We’ve looked at stuff that would be a really good fit, but we weren’t going to pay the multiple that it went for.”

The need for a return also drives Vertellus’s mid-to-high teens Ebitda margin target. The company’s current Ebitda margin is in the lower-middle teens, Preziotti says. Windpoint has owned Vertellus for seven years, but the firm is relatively patient and has held companies for well over a decade in the past, according to Preziotti. Vertellus is “probably still a couple of years away” from meeting its Ebitda and revenue targets, he adds. The company, meanwhile, is focused on growth programs and improving productivity. “You can’t do one without the other,” Preziotti says.