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Seeds of Change

The CFO of Syngenta on his investor-friendly growth formula.
Janet Kersnar, CFO Europe Magazine
July 3, 2007

Business in America's corn belt hasn't looked this good in a long while. Demand is booming, and so are the farmers' incomes — at $4 a bushel, the price of corn recently hit a ten-year high, double the price of just a few years ago. It's not surprising that researchers at the University of Iowa just announced that American farmers planted some 4m more hectares of corn this spring than the previous year. And the good times are set to continue. Helped by President George Bush's recent proposal for a fourfold increase in alternative fuels — including bioethanol fuel made from corn — prices are expected to stay above $3 a bushel for the next three to five years. But even with prices at historical highs, there are questions over whether supply will be able to meet demand.

This is where a CFO thousands of kilometres away, in Basel, comes in. Swiss agricultural-chemicals company Syngenta generates annual sales of $8 billion by selling not only the seeds, but also the fungicides, pesticides and other products that help farmers grow even more corn, as well as wheat, soybean, rice and other field crops. (See "Cream of the Crop," below.)

And with the booming demand, "the 'agchem' theme is getting picked up by a number of investors," says a clearly pleased Domenico Scala, Syngenta's 42-year-old CFO. Shares in the number one crop-protection company (according to global sales) have been rising steadily, and lately comfortably outperforming its peers in the chemicals sector. As the US corn market booms, business has also been boosted by divisional restructurings, an expanding product portfolio, strong cash flows and a string of cost-reduction programmes.

But in an industry whose fortunes are ruled by unpredictable weather, global politics, billion-dollar subsidy packages and fickle consumers, Scala can't rest easy. He needs to make sure those good times last well after today's corn bubble bursts. After all, he says, isn't that every CFO's mission?

Indeed it is. In preliminary results from a survey of more than 350 senior executives conducted last month by CFO Research Services, 60% of respondents felt that CFOs need to spend more time and attention on group-wide strategy development. At the moment, there are few better examples of a CFO diving head-first into a strategy overhaul than Scala at Syngenta.

The View from Outside
Ever since Scala left his job as treasurer at Swiss pharma Roche to become Syngenta's finance chief in 2003, the hallmark of his work has been a wholehearted embrace of value-based management. First and foremost, this has meant overhauling how strategy is developed across the group, making it much more shareholder-focused while also directly addressing how Syngenta competes against Monsanto, DuPont, BASF, Bayer and other rivals.

It's a tall order. According to Richard Kibble, a managing partner at strategy consultant Marakon Associates in London, companies that have succeeded in value-based-management programmes such as Syngenta's are few and far between. "Only an extremely small group of high-performing companies have delivered the unusual combination of simultaneous returns and growth," he says. BMW, Heineken and Tesco are among the handful of companies cited by Kibble's fellow Marakon consultants, Ken Favaro and Dominic Dodd, in their book The Three Tensions (Wiley, 2007). These companies, they write, are among the elite which balance profitability and growth, long-term and short-term performance, and business unit performance and group performance, all of which leads to better decision-making.

One of the biggest decisions in Syngenta's history was taken well before Scala's arrival, when pharma firms Novartis and AstraZeneca spun off and then merged their agchem businesses in 1999, followed by a flotation the next year. But with falling sales and margins and debates raging around the world about genetically modified crops, the Basel-based firm was not in an enviable position as it made debuts in late 2000 on exchanges in London, New York, Stockholm and Zurich. On the first day of trading in Zurich on November 13th, shares in Syngenta fell below their offering price of SFr85 (€55.5), and struggled to gain momentum for months afterwards. Revenues fell by 4% in 2001.

The new company clearly had its work cut out. Not only was it racing against the clock to deliver on the synergies and cost savings it had promised, there were some parts of the business that had to be built from scratch, including many back-office functions such as treasury.

In 2003, with market prospects looking "a bit better," Scala arrived as CFO and surveyed the effects of the company's rocky launch, or "the crisis events" of the past few years, as he describes it. In particular, there were two issues — one internal, the other external — that needed urgent addressing, in his opinion.

The first was Syngenta's share price. Scala felt that the markets weren't valuing the company's shares fairly. That in itself isn't unusual. In a survey published earlier this year, accounting firm RSM International found that more than three-quarters of European finance executives polled said that their companies' financial performance wasn't fully reflected by the share price. But nearly 60% felt it was out of their boards' control. Scala would beg to differ, and so he got to work.


Scala's hunch about the valuation "mismatch" was borne out by an internal exercise. Running calculations based on their own financial projections, future discounted free cash flows and net debt, Syngenta's managers came up with a net worth far different from what was out in the market.

Scala reckons that the misvaluation could be partly explained by the positioning of the company around the time of the IPO, when "expectations were too high, so there was bound to be disappointment." With the disappointment still lingering, he says, "the analysts were also reacting to the decreasing revenue that had resulted from a rationalisation of production [following the merger], but overlooked the cash flow that the company was generating despite tough market conditions, and the synergies we were achieving."

Syngenta's solution was simple, yet bold: Scala, along with the other seven executive-committee members, announced publicly their intention to hit a three-year EPS target of double-digit annual growth. "It was unusual but we wanted to say that our development is better than our revenue growth or the market conditions would suggest," says Scala, noting that in 2006, EPS was up 14% (excluding restructuring and impairment) and that the company is aiming for growth of between 10% and 15% this year and next.

So are Syngenta's shares fairly valued today? Scala won't say — "that's the market's and the analyst's job." His job, he asserts, is to address the other issue that he identified back in 2003: the gap between Syngenta's strategic planning and the market's expectations.

In an internal presentation made shortly after his arrival — entitled "Enhancing shareholder value: Linking internal aspirations with external expectations" — Scala set out his vision for change. First of all, he announced how five-year planning — and by extension, budgeting — "would be turned on its head" and become a highly focused, top-down process, based much more on external market data while "putting the strategy at the centre of the discussions."

It would be a big change. Planning at Syngenta had been largely bottom-up and was driven by the business units. The process was time-consuming and inefficient. In addition, "one planned only what one could deliver, and for the most part it was never very aggressive and almost always incremental," Scala explains. He also questioned whether managers had learned to game the system in order to hit targets. "I really started to wonder when a five-year plan from one of our business unit heads landed on my desk that said, 'Next year, my sales are going to be 5%, and the next 4.9% and the next 5.1%.' I know the world doesn't work like that...you can't attack the future in increments."

Having focus from the top is important, says Marakon's Kibble. He cites research by the consultancy that analysed more than 1,000 companies between 1983 and 2003, which found that managers had a good understanding of the key issues facing their companies; they struggled, however, when it came to prioritising those issues and acting accordingly. To address that at Syngenta, Scala pushed back on managers preparing their plans: "Now you know what the goal is, tell me how you're going to reach it. Cost reduction? More effective use of capital? Each business unit should find its own answer."

Along with the top-down process, Scala also said in his 2003 presentation that markets-centric performance metrics would be introduced — the main one a comparison with rivals on a total shareholder return basis (share price appreciation plus dividends divided by a daily average of share prices). At the same time, the company would begin using what Scala refers to as an internal value model, "a variation on the models used by shareholders and sell-side analysts when making their investment decisions" for assessing the economic value (that is, the amount of invested capital that is delivering returns exceeding its cost) generated by individual plans or investments, which would be given prominence equal to traditional metrics such as Ebitda.

The project is still a work in progress and "we're learning as we go," Scala concedes. Still, he's pleased with the early results. "The focus on the actual content of the strategy has grown," he says. And that's cascaded down into various parts of the organisation, including its product portfolio, which is now more aligned to group strategy. Revenue from new products — those launched since 2000 — has been increasing, growing by $200m last year to nearly $1 billion.

What's more, internal feedback has been positive. Although Scala's programme has reduced the overall annual planning process by a few weeks he has tightened up the planning process with a range of small measures, such as cutting down on the amount of data required to draw up plans, observes Hermann Stern, the CEO of Zurich-based consultancy Obermatt, who profiled Scala's work in his recent book Market-oriented Value Management (Wiley VCH, 2007). More important, however, is the "outside in" perspective Scala has brought to planning, quantifying the strategy and defining what the market expects. "And now the aim is to beat competitors, not the budget," he says. "Most companies I know don't do that."

As Stern sees it, resistance from the lower ranks often derails attempts to set top-down targets in the way that Scala has at Syngenta. But as a former treasurer, Scala's experience in competing against external benchmarks is where he "derives his authority," notes Stern. "Managers might protest, but have little choice when he points out that the competition is able to achieve those results."


On the Horizon
One thing that Scala is hoping that the planning revamp will do is downgrade the role of the annual budget in developing strategy — "it really should just be the numeric expression of the strategy," he says. That, he hopes, ought to help managers plan over longer-term horizons, "five, ten, 15 years ahead."

At the moment, however, many of Syngenta's managers — and investors — can't help but focus on the short term. As a Citigroup report notes, 2006 sales were flat across the group, and "with a bit of artistic licence on the financing line [of its accounts]" — it chides — "Syngenta hit consensus EPS numbers for a very challenging year."

Why challenging? One reason was a disastrous attempt in the early part of 2006 to integrate IT for three of its main seed brands in the US, leaving orders coming in from farmers unfilled. As there is a window of opportunity of just a few weeks when farmers order their seeds, Syngenta missed out on a lot of business, as much as $50m, according to Citigroup's estimates. It also watched its market share in the US drop from 14% to 12%. Syngenta managers "turned it around, but they lost a lot of market share — and credibility," says Andrew Benson, a Citigroup analyst. "They've had to fight back for it."

So far this year, the planting season in the US has gone more smoothly. Now what's needed, says Syngenta's investor community, is a big ramp up in topline growth. More new products and business lines, joint ventures, acquisitions and perhaps even a merger with one of its rivals are all in play — and all, no doubt, being run through Scala's new value model. "It involves making tough choices so that we really focus on the value propositions of the future, not just the value propositions today," Scala concludes. After all, investors expect nothing less.


Cream of the Crop: What's All the Fuss About Corn?
The turning point in the history of zea mays, the tropical grass native to Central America that we now know as corn, "can be dated with some precision" to a day in 1947 when a huge munitions plant in Alabama switched over to making chemical fertiliser, writes Michael Pollan in The Omnivore's Dilemma (Bloomsbury, 2006). It was just after the second world war, he notes, that the US government found itself with a surplus of ammonium nitrate, the principal ingredient for making bombs, which also happens to be a good source of nitrogen for plants. Thanks to that, and the bioengeering developed over recent years by companies such as Syngenta, we owe the rise of corn, and it's colonisation — as Pollan puts it — of the modern daily diet.

Nowhere is the mass production of corn more evident than in the US, which grows more than half of the world's output. Thanks to new, more robust types of corn seed, farms there are producing at least 20% more corn on 25% fewer acres than some 80 years ago, when hybrid, or inbred, corn was introduced.

It's this market — "our most important crop in our largest country," as Syngenta COO John Atkin calls it — that will be getting a lot of attention at the $8 billion agchem company over the next few years.

The Swiss company currently trails seed giant Monsanto in the US, but by replenishing its portfolio of proprietary genetically engineered corn "traits," it's aiming to capture a bigger piece of the market, increasing proprietary corn traits' contribution to gross profit to more than 50% in 2011, from 5% in 2006. One of its most widely anticipated product launches is scheduled for 2008, when it unveils a genetically modified corn that will increase ethanol yields.




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