Spring signals recovery for German majors

28 March 1994 00:00  [Source: ICB]

SUGGESTIONS OF 'modest' growth in profits this year and 'hopes of better results in 1995' could mean that the German chemical majors can once again breathe more easily.

As the companies gave their usual round of spring financial news conferences the signals pointed to a recovery for the industry.

Expectations of an end to the slump which has restrained the German industry in the past few years were given a new boost a week ago when Bayer released better than expected figures and ceo Manfred Schneider offered a bullish forecast for the rest of this year.

After four years of decreasing results, Schneider has his fingers crossed that Bayer 'would not only continue to have a sound balance sheet but would also improve its operating result'.

Despite the company's sales and earnings for 1993 (ECN 21 March) being affected by the difficult situation in Europe and the German recession, a cyclical recovery overseas 'cushioned the impact on the company's results, and an upward trend became apparent towards the end of the year'.

Speaking at a news conference in Leverkusen, Schneider's confident message was that the 'fourth quarter of 1993 was better than anticipated, and sales in January and February 1994 rose by more than 6% to nearly DM7bn ($4.1m).'

Sales increased by 6% between October and the end of the year, and pre-tax income for the same period rose 18%. According to Schneider the main reasons for this were the economic upturn in North America and more favourable exchange rates.

But above all, Schneider spoke of the steps which Bayer had taken to enhance its own competitiveness. Analysts pointed to the successful strategy of consolidation and globalisation which the group has embarked on.

This process included the sale of both marginal and unprofitable businesses and earned Bayer the reputation of 'a company which concentrates its resources on those areas where it either has or can gain a global leadership position,' stressed Schneider.

Meanwhile, group sales for 1993 almost equalled the previous year's level, slipping just DM188m, 0.5%, to DM41bn. The operating result dropped 15.5% to DM2.3bn because of the unfavourable economic climate in Europe.

Bayer's Schneider believes the decline would have been far greater if steps had not been taken to improve productivity and to restructure various operations. After-tax income came to DM1.4bn, 12.2% less than for 1992.

During 1993 the business for group companies around the world was marked by weaknesses in European and overseas growth. Sales for the European companies declined 8.5% to DM24.3bn, and the European operating result dropped by 31% to DM1.1bn.

'Divergent trends' are clear if one compares the performance of the business groups.

As far as the healthcare business is concerned Schneider's opinion is that 'in view of the increasingly difficult political environment for the business in some countries, the return on sales of 11% is considered satisfactory.'

Bayer's largest sector, pharmaceuticals, saw sales increase by 4%, although this trend slowed up in Q4 as a direct influence of government drug price reductions.

By contrast, the three chemicals segments posted an operating result of DM48m on sales of DM19.5bn, giving a return on sales of less than 1%. This alarming situation is a reflection of cyclical trends and structural problems which are evident in Germany.

Also worth noting was the agricultural division, where the crop protection and veterinary businesses increased by 26% and 25% respectively.

The 'overall financial picture for the Bayer group now remains favourable despite another decline in earnings,' said board member Helmut Loehr. The positive cash flow increased by 3% to DM4.85bn and net interest was reduced by DM129m to DM51m, apparently the lowest figure in the group's history.

Now Schneider is anticipating that 'earnings will rise substantially in 1994'. He is going for an increase of between 15-20% in income before taxes, predicting that volume sales would 'be stable or slightly higher in 1994'.

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Just one day earlier chairman of neighbouring BASF, Jürgen Strube, spoke of 'cautious optimism' in Germany (ECN 21 March) and signs of a slight revival in economic activity for the west European chemicals sector.

So far a regional review of businesses in the first two months of this year, with the exception of Japan, shows an increase in the sales performance in all regions over 1993.

Sales for this period reached DM6.7bn, an upturn of 4%. All divisions excluding plastics and fibres are looking healthier with operating profits rising.

1993 was viewed as a 'turbulent year, which confronted us with many challenges'. Compared to the poor 1992 figures, sales dropped by a further 3% and pre-tax profit by almost 15% (ECN 14 March). But because of the reduction on the tax expense and the proportions of losses borne by third parties, earnings post-taxes and minority interests were DM858m, an increase of 40% on the previous year.

Yet 'encouraging signs are evident' and Strube stressed that 'poor figures during the first half of the year contrasted with stabilisation during the second half, the dramatic collapse of west European business contrasted with a highly gratifying increase in sales in North America, Latin America and Southeast Asia, with the exception of Japan.'

Now Strube says the company is in a position 'to reap the first benefits of our efforts to concentrate on our strengths, optimise our regional portfolio and increase our organisational efficiency.'

He highlights the group's cost-cutting programmes have softened the impact of the recession on earnings. Some DM260m was spent on restructuring and reorganisation in 1993.

During 1993 BASF earned over 70% of its sales revenue with products from European sites, German output alone accounting for more than 50%. Strube explained that this has meant that the European portion of group sales declined by 4% in Europe and 3% in Germany compared to 1992 figures.

He attributes the reduction to weaker business with European customers, particularly the Germans and to reduced exports to Asia.

However, other regional business had a more prosperous year. Increased sales in North America were a result of the PS operations purchased from Mobil and an upturn in the automotive industry.

Also reporting improved sales in the US were plastics, and paints and coatings, although fibres and pharmaceuticals suffered.

In Latin America, the opening up of the markets following political liberalisation boosted sales by 14%, but Glasurit do Brasil suffered a decline in earnings because of price erosion in the consumer sector.

For the Asia, Australia and Africa region, the bag was mixed. Sales increased to customers in Southeast Asia but there was a sharp decline in Africa/West Asia. In Japan sales increased 3.6% in DM terms.

In a separate press conference BASF France gave details of the company's third most important market after Germany and the US. And although sales dropped 6.5% to FF5.014bn ($878m), pulled down by fertilisers and plastics, crop protection grew 14% boosted by the new cereal fungicide Opus.

Fine chemicals grew 15%. Laboratories Knoll France posted a 10% sales hike to FF265m thanks to the new cardiovascular Gopten, while BASF Horticulture et Jardin reported a modest 3.3% growth to FF313m.

For the first two months of 1994, general manager of France-Benelux, Nortbert Martin says sales seemed to confirm that demand has been bolstered in several sectors and prices are on an upward trend. In the agrochemicals and fertilisers sectors he believes that the CAP effect is beginning to be absorbed.

Hoechst was more cautious in its outlook. Chairman Wolfgang Hilger predicted that a 3% growth in group sales volumes in 1994 'seems realistic' but, unlike his counterparts at BASF and Bayer, he declined to mention any figures with respect to revenue and profit expectations for the current financial year. Hilger expects a slight increase in demand in 1994 though prices in Germany are still below year earlier levels.

Hoechst 1993 full-year results by division (DMm)
Division	Sales	Change,%	Op Profit	Change,%
Chemicals & colour	10666	0.8	162	(49.5)
Fibres	6840	(1.5)	220	(47.9)
Polymers	7260	(9.5)	(248)	*
Health	11262	4.1	1136	(9.8)
Engineering & tech	7259	6.5	85	672.7
Agriculture	2760	2.6	121	188
Total	46 047	0.4	1476	(31)
* Comparative figure for 1992 was DM97m profit

The company's earnings situation in the US and East Asia is expected to remain good. Hoechst has forecast a slight improvement in earnings in the German subsidiaries following the structural changes of the last few years. Hilger said restructuring charges will continue to affect the operating profit at Hoechst AG but the company 'is on the right track to face the challenges ahead'.

He was optimistic that the overall figures for 1995 'probably will be better' than for the current year.

The Hoechst chairman believes the economic recovery in the US is set to continue while in Germany and western Europe as a whole the recession seems to have bottomed out. He could see a 'light at the end of the tunnel'.

Hilger said Hoechst will continue its restructuring measures this year though at a reduced rate. He noted that the company has earmarked a total of some 8000 job cuts in 1994 and 1995 (ECN 28 March p8).

Of the high expenditure on restructuring measures in the last three years, DM1.5bn was spent on reducing the size of the workforce. This includes both the 12 000 job cuts to date and those planned over the next two years.

The company has spent a total of almost DM2bn on structural improvements in the last three years. According to Hilger Hoechst spent or set aside DM999m for restructuring last year, two thirds within Germany. Spending the previous two years was DM771m and DM224m respectively.

Hilger said developments in the first two months of 1994 were promising with incoming orders higher for the first time in two years. Domestic demand was unchanged but exports increased about 9%. Sales volumes were on the increase but no upper movement is yet discernible in prices.

He noted that prices in Germany were still 5% lower than the previous year's level. He said the price situation was more favourable in the export business due to the rise in value of the dollar and yen.

Hoechst said growth in volumes in Jan and Feb was good in fine chemicals and colour and continues to be favourable in surfactants and auxiliaries. The good demand for technical polymers at the end of last year has been sustained but the company is still experiencing considerable difficulties in bulk plastics.

In 1993, group turnover rose 0.4% or DM177m to DM46.05bn despite marked sales declines in Germany and the other European Union countries. These were partly due to the strong devaluation of the pound sterling, lira and peseta.

Sales in Germany fell 9%, while outside Germany Hoechst registered a rise of 3%. Sales in North and Latin America grew 7% as a result of the dollar's strength. In Africa, Asia and Australasia sales were 3% higher on a comparable basis.

Hoechst said business generally was affected by the pressure on prices, and demand in western Europe was very slack. This was compensated for by a moderate growth in sales volumes on overseas markets.

Operating profit fell 31% to DM1.48bn attributable mainly to the slump in Europe. The European Union which produces about 60% of output only contributed about 20% of operating profit in 1993.

Hoechst said economic factors were decisive in this regard. It described as 'wholly unsatisfactory' the decline in margins in western Europe and especially Germany as a result of pressure on prices and costs.

The chemicals and colour segment suffered the biggest decline in profits though surfactants and auxiliaries markedly increased their profit.

In fibres, a high level of profits earned by Hoechst Celanese was largely offset by the losses made by parent company Hoechst AG and the German fibre subsidiaries.

Polymers proved another troublesome area for Hoechst which has had to contend with losses in the polypropylene field for some time now.

It said the decline in profits in pharmaceuticals is a reflection of the developments at Hoechst AG. Price reductions mandated by government healthcare reforms and the restrained prescribing practices of physicians led to lost sales of around DM150m. Behringwerke was not affected to the same extent and increased its profits. Roussel Uclaf also had a good year.

In the engineering and technology segment, Sigri Great Lakes Carbon experienced a true turnaround in profits following a period of losses.

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