Restructuring bolsters German majors' results

12 May 1994 00:00  [Source: ICB]

THE GERMAN chemical industry continues to show signs that it is recovering from the recent economic downturn. At the nine-month stage all three German majors have reported improved sales and profits, with restructuring measures going a long way to bolster these improvements.

Increased volumes drove up BASF's sales by 10.1% in Q3 1994, compared with the same period last year.

Sales of DM10.6bn ($6.23bn) during the quarter helped push up profit, by 324% compared with 1993, to DM526m. Group profits for the first nine months of the year reached DM1.21bn on sales of DM32.4bn, up 7.6% on the previous year. BASF chairman Dr Jürgen Strube warned that the improvement in performance must be set against the 'extremely poor figures of the previous year'.

Chemicals produced the biggest contribution to earnings with sales of DM4.7bn over the first nine months, up 17.4% in the previous year. Demand for industrial chemicals and intermediates improved significantly, although in some cases dramatic increases in the cost of raw materials had to be absorbed. Growth rates for fine chemicals flattened in the third quarter versus the previous year's high level.

Sales increased in all regions, apart from BASF's home market in Germany, where a slow revival did not begin until Q3. Falling sales in its oil and gas business also held back sales. Growth rates reached double digits in other west European countries, bringing sales in the region to DM20.3bn, up 8.5%.

The BASF group has set a target of at least 10% total return on capital, although the figure has only been achieved 11 times in the past 25 years. Strube insisted the target is 'not a pipedream', and this year's figure is likely to be around 5%. Strategies followed by the group to help meet the target include strengthening sectors which are less susceptible to cyclical trends, promoting R&D, focusing capital expenditure and reducing costs.

The Bayer group increased its pre-tax profits 32% in the first three quarters of 1994 to DM2.38bn. The gain against Q3 1993 was nearly 61%. And in Leverkusen last week, chairman Manfred Schneider estimated full year results at around DM3.2bn, adding that Bayer is close to the top of German industry's earnings scale.

For the sales side, he projected a total of around DM43bn. Turnover in Q1 to Q3 advanced 6% to DM32.8bn. Much of the improvement is attributed to better volume sales, which profited from heightened foreign demand. Selling prices declined by 1%.

Schneider said Bayer's business has improved continuously throughout 1994. He credited internal rationalisation and restructuring, but also demand which fuelled improved use of capacities. During 1994, capacity use has risen to 85-90%, better but still short of the 1989 peak figure of 90-95%.

All 20 product divisions have participated in the upturn this year and all operated in the black during the first three quarters, said Schneider. Polymers, which profited from the good economy for automobiles and new housing starts, posted the highest increase, with an 8% gain on 1993 Q1-Q3. Due to rising prices, petrochemicals and plastics affiliate Erdölchemie, a 50:50 jv with BP, pulled out of the red. Subsidiary Agfa's films sales grew by only 1% to DM5.08bn, due to intense competition.

Geographically, Bayer said, improvement in Europe was modest, while Asia and North America saw relatively strong growth.

German majors' results for first nine months 1994 (DMm)
Segment	Sales	Change,%
Bayer
Polymers	5557	8
Organic products	4387	7
Industrial products	5837	8
Healthcare	8349	5
Agrochemicals	3568	6
Agfa group	5076	1
Total	32 774	6
BASF
Plastics and fibres	8317	14
Consumer products	6620	3
Dyestuffs and finishing   products	6152	8
Chemicals	4749	17
Products for agriculture	2893	11
Oil and gas	2983	(10)
Total	32 400	8
Hoechst
Chemicals and colour	8453	8
Fibres	5339	8
Polymers	5809	6
Health	8534	7
Engineering and   technolgy	5151	(3)
Agriculture	3098	45
Total	36 384	8

In Europe, not only Germany lagged behind; Schneider said business in Spain, the Benelux countries, France, Italy, the UK and Scandinavia was slow.

In eastern Europe, Russian sales continued to fall; this contrasted with marked improvement in Hungary, Poland and the Czech Republic. Growth in Latin America was steady.

Strong economic growth in North America and Southeast Asia has coincided with a revival of economic activity in western Europe and a slow recovery in industrial production in Japan, according to Hoechst.

As a result, overall demand for the group's chemical products increased further and following more than a three-year decline in European selling prices, Hoechst was able to introduce price increases for both chemicals and bulk plastics in the summer. At the same time, petrochemical feedstock prices have risen.

Sales by the group totalled DM36.4bn in the first nine months of the year, up 8% from the year earlier period. Exports rose by 11%, business in Germany by 2%. Despite the weak US dollar, sales in the Americas were 5% higher than in the previous year.

Volume increases were registered in every field of activity. While the pressure on prices continued in fine chemicals and colour, price increases were implemented for organic chemicals in the US and Europe.

Pre-tax profit totalled DM1.6bn for the first nine months, an increase of 83% from the previous year. In contrast to the seasonal development of past years, profits were better in the third quarter than in the second. However, the company says with a return on sales of 4.6%, it is still operating at an unsatisfactory level.

It attributes this profit increase mainly to its subsidiaries and associated companies. At Hoechst Celanese, good results in technical fibres and chemicals were virtually eliminated by the losses in pharmaceuticals and provisions for product liability risks. Roussel Uclaf also expanded its drugs business in Japan, Latin America and several European countries.

For the third quarter, sales reached DM11.72bn against DM10.84bn for the year earlier period. Pre-tax profit reached DM384m against DM25m for the 1993 quarter.

Longer-term, Hoechst is foreseeing no fundamental changes in the 'good level of economic activity in the near future'. But despite price adjustments, its margins are still under pressure due to concurrent increases in raw material prices.

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