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Top European Executives See Innovation as Key to Growth

The 2012 All-Europe Executive Team is not letting the euro zone crisis hold it back from pursuing growth opportunities in more promising parts of the globe, thanks to a new focus on innovation.

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European corporate executives can’t escape the “C” word. They have been grappling with the fallout from the euro zone’s debt problems for more than two years, watching in bewilderment as the seemingly containable problems of Greece spread across the 17-nation bloc, tipping much of the area into recession and threatening the very existence of the single currency itself. But leading companies aren’t dwelling on the debt crisis. Many of them exited weak businesses and clamped down on expenses well before trouble hit, as similar but earlier woes in the U.S. put them on alert. Now, having gleaned what value they could from improving margins, they are gearing up for greater top-line growth.

“Everybody’s focused on what’s going to happen to Greece today and to Spain and Italy tomorrow, even though European businesses, on the whole — particularly the larger global players — are in pretty good shape,” says Bart van Ark, chief economist at the Conference Board, a New York–based business membership and research group. “They’ve got the cost structure in order, and now they’re asking, ‘How can we grow organically within this global economy?’”

The answer, for many European concerns, lies with innovation. These companies are intensifying efforts to develop new products or improve existing ones to generate growth. Consider Henkel, the German maker of consumer products ranging from laundry detergent to superglue. The company generates about one third of its sales from products launched in the past three to five years. That fresh lineup helped Henkel to post a 5.9 percent increase in organic sales, which exclude the impact of currency moves and acquisitions or divestments, to €15.6 billion ($20.7 billion) last year.

“We consider volatility the new normal in our markets,” CEO Kasper Rorsted tells Institutional Investor. “We need to constantly adapt.”

Companies are also looking to increase their exposure to dynamic emerging-­markets economies and reduce their reliance on the sluggish European market. The U.K.-based mobile telephone operator ­Vodafone Group, long one of the industry’s most global players, with a presence in more than 30 countries across five continents, now boasts 250 million customers in emerging markets, almost twice the number it had only two years ago. The company has been investing heavily in new network capacity, especially for data, to fuel that growth. ­Vodafone has set aside £8 billion ($12.8 billion) to fund further acquisitions of spectrum capacity and related ventures with that in mind, says Vittorio Colao, the group’s chief executive. “Emerging markets are a significant source of value creation as our customer base continues to expand,” he says. Operations in Africa and Asia now represent 20 percent of Vodafone’s market value, Colao estimates.

Acquisitions are also coming back into favor for companies that are in a position to make deals. Unilever, the Anglo-Dutch consumer products giant, spent $3.7 billion last year to buy Alberto-­Culver Co., the U.S. maker of brands such as Nexxus and Noxzema, to bolster its fast-­growing personal care products division. “We’re into buying again,” says CFO Jean-Marc Huët, “although our main story is still organic growth.”

Above all, companies need to be flexible to respond to changing market conditions. That’s certainly the case at European Aeronautic Defence and Space Co., the parent of aircraft maker Airbus. Worried about the French group’s reliance on the civil aviation market, EADS in 2008 began targeting defense activities for growth, with the aim of reducing Airbus’s relative size within the group to 50 percent of revenue by 2020. The financial crisis, however, has hit military budgets hard, while commercial airlines have been quick to rebound. As a result, EADS executives are considering abandoning or modifying that 2020 target, says outgoing CFO Hans Peter Ring. “What we discovered was, Airbus was less cyclical after the financial crisis than anyone thought,” he says.

At a time when growth is at a greater premium than ever, investors appreciate such initiatives. All of these executives win top billing within their industries in the 2012 All-­Europe Executive Team, Institutional Investor’s exclusive annual ranking of the best European CEOs, CFOs, investor relations professionals and IR teams. II surveyed 825 buy-side and 1,470 sell-side analysts from nearly 600 firms and asked them to vote for the best executives in their sectors.

EADS and ASML Holding, a Dutch maker of equipment for producing semiconductors, top this year’s ranking. Their CEOs, CFOs, IR professionals and IR teams each win first-place honors from both buy- and sell-side analysts. Trailing only slightly behind, U.K. media giant Pearson and metals and mining company Xstrata of Switzerland come in first place in seven categories. British American Tobacco (BAT), French luxury group LVMH Moët Hennessy Louis Vuitton and German software provider SAP tie for fifth place by claiming first in six categories.

ADAPTING TO VOLATILITY IS NO EASY TASK. IT requires continual efforts to strengthen product and service offerings, spur innovation and inculcate a more entrepreneurial culture than is characteristic of many big European companies.

“What they are struggling with is integrating innovation into the fabric of their companies,” says the Conference Board’s van Ark. “The goal is to have the whole company think in an innovative way, rather than narrow that down to an R&D ­department.”

Many companies are leveraging new technology to improve their products and services. Vodafone, for instance, is working with Google to enable customers to pay for new applications via their phone bills without having to click through a series of prompts and checks. In February, Vodafone announced a partnership with Visa — the largest of its kind — to enable consumers worldwide to pay for goods and services using their mobile phones instead of coins and banknotes. Says Colao, who is ranked top CEO in the Telecommunications Services sector by both buy-side and sell-side analysts: “The mobile Internet is Vodafone’s main growth engine, fueled by the increasing penetration of innovative smartphones and tablets.”

Pearson, the London-based media conglomerate that owns Financial Times Group, publishing house Penguin Group and a host of educational imprints and learning programs, has also been riding the tech wave.

“For a long time now, we’ve believed that everything we do would go digital,” says Robin Freestone, CFO at Pearson. “We invested quite a lot before the market was there. Some of that probably didn’t make us a return, but what it did do was change the culture of the company.” In 2011, $3 billion of Pearson’s total $9.3 billion in revenue came from digital products, though Freestone says the digital share is still not high enough.

The buy side names Pearson CEO Marjorie Scardino tops in the Media sector, and both the sell side and the buy side said that CFO ­Freestone also deserves top honors. Investor relations professional Simon ­Mays-Smith is the best in the business, both groups say, and the two sides also agree Pearson’s overall IR is the sector’s best.

The Financial Times was one of the first newspapers to tackle the Internet, launching in 1995. (“We had paying subscribers from the start,” Freestone says. “We never thought that giving stuff away for free was a good idea.”) Penguin introduced its first electronic book in 1998. Last year e-books generated 12 percent of the publisher’s revenue, up from 6 percent in 2010.

This lessens the blow that Europe’s sovereign-­debt crisis has roundly delivered to Pearson. Much of the conglomerate’s revenue comes from the public sector, and governments across the continent are squeezing education budgets. The percentage of the company’s revenue originating in Europe has fallen from 26 percent in 2006 to 24 percent in 2011, and will likely continue to shrink.

“We don’t want to be so heavily weighted in the highly leveraged markets of the world,” Freestone says. “We’re saying, ‘This content is good enough to work in Asia-­Pacific and Latin America.’ Traditionally, most governments have believed that the way to educate their children is very specific to their population, but we believe that great products and education travel the world.”

Pearson has spent some $800 million in the past two years to acquire educational testing and tutoring businesses in Brazil, China and India. In July 2010 the company bought the learning systems division of Brazil’s Sistema Educacional Brasileiro for $497 million. Last year Pearson paid $127 million for a controlling stake in India’s TutorVista, an online tutoring business that connects Indian instructors with students in North America, and $155 million to acquire Global Education and Technology Group, a provider of test preparation for students in China who are learning English.

Business software maker SAP is coming off the best year in its 40-year history, with software revenue growth of 25 percent in 2011, says co-CEO William McDermott, who along with fellow chief executive James Hagemann Snabe is voted best in the Technology/Software segment by both buy-side and sell-side analysts. ­McDermott attributes much of SAP’s success last year to new or improved products. “New innovations are invigorating our core applications business,” he says. One of the products SAP introduced in 2011 was SAP HANA (high-­performance analytic appliance), a database platform that combines in-­memory software and SAP-­approved hardware and allows users to tap into high-speed analytics capabilities. SAP also unveiled a number of applications for HANA over the course of the year, including a new mobile app called the SAP Electronic Medical Record, which allows doctors to access lab results, images and other aspects of patients’ medical records while moving through hospital wards. The company is expanding its reach into Brazil, China, India, the Middle East, North Africa and Russia.

Chip specialist ASML lives and breathes tech, of course. The company focuses on developing technologies that enable its customers — makers of logic devices, DRAM chips and flash memory chips — to exploit Moore’s law, which posits that the capacity of a silicon chip doubles, on average, every two years. CEO Eric Meurice is named the best CEO in the Technology/Semiconductors sector by both buy- and sell-side analysts. ASML’s innovation here is centered on its advances in lithography. Employing larger lenses, smaller light source wavelengths, and better manufacturing processes and controls, the company has been able to write ever finer patterns on silicon wafers. ASML is currently working on a new wavelength of only 13.5 nanometers, which is less than one tenth as long as the current one. A nanometer equals one millionth of a millimeter.

As the world’s largest chemicals company, Germany’s BASF can only grow faster than the chemicals business if it comes up with new products (its goal is to exceed the industry by 2 percentage points per year for the next eight years). CEO Kurt Bock is ranked the best CEO in the Chemicals segment by buy-side and sell-side analysts, while BASF’s IR department takes top honors from both. By 2020 the company aims to generate sales of €30 billion with products that have been on the market for less than ten years. The company’s total revenue in 2011 was €73.5 billion.

In January it launched a Battery Materials unit to consolidate its various — and growing — efforts around batteries for electric vehicles. Bock says that over the next five years, BASF will invest “a three-­digit million euro sum” in research, development and production in the area of battery materials. A new production plant for advanced cathode materials in Elyria, Ohio, constitutes part of that investment, with the facility expected to begin supplying the market with materials for high-­performance lithium-­ion batteries starting by the end of this year.

Much the same may be said of consumer products companies’ need to deliver something new, even those making the addictive type. Tobacco products maker BAT’s most prestigious brand, Dunhill, is growing thanks in part to Reloc, a resealable pack that helps to keep the contents fresher, according to CEO Nicandro Durante, who is voted best chief executive in the Tobacco sector by both sets of analysts. Durante says innovations account for 12 percent of BAT’s total sales and more than one third of those of its four leading brands. Kent, which he describes as “our most innovative brand,” includes a version called Convertibles that contain a menthol-­flavored capsule that can be pinched at any time when smoking to release that taste. A feature called Click & Roll in Lucky Strike uses similar technology. Those innovations helped the three brands plus BAT’s other leader, Pall Mall, grow revenue by 9 percent in 2011. The four now account for roughly one third of the company’s total of £15.4 billion.

More-diversified companies are also placing a premium on innovation. Henkel CEO Rorsted, the buy side’s and sell side’s favorite CEO in Household & Personal Care Products, points to his company’s innovation rates — defined as the percentage of sales that come from products launched in the past three to five years — of 41 percent in its laundry and home care sector, 43 percent in cosmetics and toiletries and about 30 percent in adhesive technologies.

Henkel (whose IR team is also voted tops in its sector by the buy and sell sides) doesn’t just throw money at new product development, the executive says. Three such recent innovations, new entries in the company’s Persil detergent, Gliss Kur shampoo and Pattex adhesive brands, for example, have added anywhere from 7 to 16 percent to Henkel’s gross margins, in part because of higher pricing.

In addition to refreshing its product lineup, Henkel is also penetrating deeper into growth markets. In the past five years, the proportion of sales that the company makes in emerging markets has risen from 34 percent to 42 percent, thanks to consumer markets that are still growing faster than those in the saturated West.

Innovation may also be necessary when a company’s revenues are linked directly to its customers’ costs. For instance, Germany’s ­Fresenius Medical Care relies on third-­party payers — mainly governments and insurance companies — to compensate it for medical professionals’ use of its dialysis products and services. The company profits when it saves money for those payers by reducing the cost of patient care.

FMC is focused completely on one medical condition — kidney failure. But dialysis currently accounts for only about 35 percent of what the third parties pay to treat kidney failure ­(hospitalization and other costs account for the rest), so CEO Benjamin Lipps says his company must concentrate on “bending the curve” of the total cost of treating patients — that is, making sure the associated costs rise less rapidly than the total number of patients. The less hospitalization and other costs represent of the total, the bigger FMC’s share for dialysis. So FMC has little choice but to innovate to make dialysis more effective.

“It’s a good business for us,” Lipps insists, “because we can innovate and figure out ways to save the payer money.” Although the company obviously has a big incentive “to invent things,” as he puts it, Lipps notes that the demands for innovation that it faces are manageable, because “we have a customer that we can talk to right away in terms of the value they’re getting, and we’re not necessarily asking them for more money.”

Among FMC’s recent advances is a new safety mechanism released in November for its dialysis patients called “Venous Access Monitoring,” designed to improve the dialysis system’s ability to recognize if and when a patient is suddenly losing blood, and alert caregivers. Another is its 2008T hemodialysis machine, which includes an integrated software platform that allows medical professionals to record and manage patient data directly at the treatment couch ­— the first Food and Drug Administration–approved hemodialysis machine in the U.S. market to do so.

Buy-side and sell-side analysts alike name Lipps top CEO in the Medical Technologies & Services sector. (Both groups also agree that FMC is the best overall provider of IR services, and the buy side calls IR professional Oliver Maier the best in his business.)

FMC is also unusual in having a vertically integrated approach to the business, offering products, services (it manages 3,000 clinics worldwide) and drugs across the dialysis spectrum. That helps it maintain enough control over patient care to ensure that it can keep costs down in other areas, such as hospitalization. “Vertical integration rarely works except for something like this, where you’re focusing on one specific disease,” Lipps says.

SOME EUROPEAN GIANTS HAVE needed to refashion their cultures to produce innovation­-fueled growth. Unilever’s transformation, for example, began in 2005, when then-CEO Patrick Cescau announced his intention to turn the supertanker of a consumer products holding company into a unified, agile concern with an entrepreneurial culture. Top management divested burdensome brands, slashed the number of vice presidents and senior vice presidents from 1,164 in January 2005 to roughly 600 in January 2012, and linked the survivors’ compensation, along with that of lower-­level employees, more closely to performance.

Cescau retired in 2008, leaving the rest of Unilever’s renovation to current CEO Paul ­Polman, who previously served as CFO at Nestlé and, before that, as Europe group president at Procter & Gamble Co. ­(Unilever’s two biggest competitors). ­Polman continued streamlining Unilever’s business and rejuvenating its culture, and within a year or so of assuming his new post, laid plans to double the company’s size. This will come not from a rash of acquisitions, insists Unilever CFO Huët, but as the byproduct of the past years’ emphasis on innovation, as the goliath focuses its efforts on organically growing its 500 brands in 14 product categories.

“We have historically been in a profitability/restructuring mode,” says Huët, who is ranked by sell- and buy-­siders alike as the best CFO in the Food Producers segment. Both groups also designate Polman the sector’s top CEO, and the sell side names Unilever’s IR operation the best in its class. “Now it’s about investing in the business. It’s about driving value out of our existing categories.”

One of the ways he says Unilever will do this is by tackling what he calls “white spaces” — markets or regions where an existing brand has not yet been introduced. Huët says brands such as Ben & Jerry’s ice cream, Lipton tea and Skippy peanut butter are good candidates for organic growth, “but because of our past, we haven’t really driven products through our organization this way.”

An example of what he has in mind here involves deodorant, which Huët says ­Unilever has successfully promoted in Latin America. The company credits humorous marketing for helping sell three such products: Axe, Dove and Rexona (known as Degree in the U.S. and Sure in the U.K.). “Deodorants didn’t exist ten years ago in Latin America,” he says. Indonesia is next on the company’s list for that product category. “A lot of this is market development,” Huët adds.

Many top European companies have been making acquisitions as well as seeking organic expansion. EADS, parent company of Airbus (the producer of over half the world’s jets), is a prime case in point.

“Acquisitions will be a big part of our growth story this year,” says CFO Ring. He cites a sizable net cash position of €11.4 billion and high sales targets for 2020 (€80 billion in total sales, compared with €49 billion today) — targets he says EADS won’t be able to reach without acquisitions.

Ring says the contractor is on the lookout for companies in the services sector or some area of defense, and for businesses that can help EADS expand its global footprint. The acquiring streak has already begun. EADS bought four companies last year: Canadian repair services provider Vector Aerospace Corp., for €450 ­million; Metron Aviation, a Dulles, ­Virginia–based air-­traffic management products and services provider, for an undisclosed sum; privately held, Paris-­based satellite communications concern Vizada, for $960 million; and Danish parts distributor Satair, for $500 million.

Both the buy and the sell sides name CEO Louis Gallois and CFO Ring the best in their sector, although both are leaving in May. EADS also boasts the top IR professional, Nathalie Errard, and department in the ­sector.

Acquisitions will help EADS go beyond its dependence on Airbus, which represents two thirds of the group’s business. Yet innovation plays a role at EADS as well. Airbus saw a record order intake of 1,608 commercial aircraft last year, thanks to the updating of the popular A320 family of aircraft in December 2010 with a new, more fuel-­efficient engine.

EADS also provides a good example of how European companies have cut costs. In 2006 the company initiated a program to take costs out of the entire supply chain for Airbus. “There were a lot of discussions with suppliers on how to streamline the process,” says Ring. The program has since been expanded beyond Airbus and has reduced the number of EADS suppliers from 3,000 to 500 and the number of EADS jobs in departments such as procurement, legal matters, human resources and communications by 7,900 — and is expected to result in roughly €2.85 billion in savings by the time it is completed this year.

Acquisitions have also been important for Unilever. In addition to its purchase last year of Alberto-Culver, in 2010 it bought the global body care and ­European detergents businesses of Downers Grove, ­Illinois–based Sara Lee Corp., for $1.6 billion, and in 2009 it paid $412 million for the TIGI line of hair products and ­academies.

Unilever isn’t done buying. The company is most interested in adding brands in the personal care category, where growth is moving at the fastest clip for the company. In 2011 one third of Unilever’s total revenue came from its personal care products (brands include Pond’s and Vaseline, as well as Axe and Dove), and underlying sales growth for the category was over 8 percent, compared with just 6.5 percent for ­Unilever as a whole. As long as the personal care products unit continues to offer this outsize boost, ­Unilever will keep expanding it.

Other leading European companies that have been in acquisition mode expect to focus more on organic growth.

In mid-2011, LVMH, the Paris-­based luxury goods conglomerate whose brands include Fendi, Marc Jacobs, Sephora and Veuve Clicquot, made a major acquisition — ­Italian jeweler Bulgari, for €3.7 billion — that helped provide a 16.4 percent boost to the year’s revenue, bringing total sales for 2011 to €23.7 billion. But CFO Jean-Jacques Guiony says LVMH was acting opportunistically because Bulgari was a perfect addition to its brand portfolio, which helps explain the 61 percent premium LVMH paid for the jeweler.

“We are a group of 60 brands, and our aim is to develop these brands,” he says. (Both Guiony and CEO Bernard Arnault are designated the winning executives in the Luxury Goods sector by voters on the buy and sell sides. Christopher Hollis, LVMH’s head of investor relations, earns top honors from the buy side, which also names LVMH as the best overall provider of IR services.)

Guiony all but rules out the possibility of more major acquisitions anytime soon. “Growing the group for the sake of growing it doesn’t make any sense,” he says. “Developing existing brands has proven to be more profitable than buying them.”

The company’s creative director, designer Marc Jacobs, is credited with expanding its Louis Vuitton line of ready-­to-wear clothing and leather goods, thanks to collaboration with a growing number of artists. Such efforts have produced double-­digit revenue growth for several years. With a similar objective in mind, one of LVMH’s other companies, Paris-­based men’s luxury footwear brand Berluti, recently expanded into menswear.

LVMH has driven much of its recent growth through its presence in emerging markets. It opened its first store in China in 1992, and the company now does approximately 23 percent of its business in Asia, and nearly one third in emerging markets generally.

For LVMH’s top managers, as for others on the 2012 All-­Europe Executive Team, the U.S. and euro zone financial crises are receding in their rearview mirrors, thanks in large part to their ability to innovate and to leverage the results in more-­dynamic markets around the world.  •  •

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