First quarter figures do not tell the whole story

07 June 1996 00:00  [Source: ICIS news]

First quarter results from the major chemical producers illustrate the turn down in comparison with the buoyant first quarter of 1995 but do not tell the whole story. The profit falls for the bulk petrochemical producers are significant but the situation generally is better than it was in the dark days towards the end of last year. There has been a sharp recovery since then. It is reflected in the still strong margins from companies in the sector and comments which suggest more of an improvement towards the end of the quarter.

From the US company standpoint, the first quarter was probably as poor as from the European, although the weaknesses in European markets were as much if not more to blame. Union Carbide, for instance, talks of the weak pricing in polyethylene, despite strong demand, and the adverse effect on the European joint ventures and partnerships. Exxon notes that prime product sales, at 3.760 million tonnes were 10% higher than in the 1995 quarter. However, US profits were 33.5% lower and non-US profits were more than halved.

Higher volumes but lower margins

This picture of higher volumes and lower margins was repeated across companies, and although it was confined largely to commodity plastics, it was also true of some specialities, as Du Pont admits. Diversity proves its worth in such circumstances but cost-related programmes are also of critical importance. Dow Chemical points to productivity gains and cost-reduction goals when talking of its first quarter results. It saw profits fall sharply for plastics as would be expected, but performance plastics grew strongly and performance chemicals profits were relatively flat.

The Europeans, apart from the more pure play petrochemical producers such as DSM and BP Chemicals, have some way to go to catch the Americans. There are concerns, particularly that downstream demand will be hurt by increasing economic uncertainty, especially in Germany, but a degree of optimism which suggests that steady earnings growth will be achieved this year. BASF, for instance expects modest development of the European economies and those in South America and Japan.

Fall in prices for Bayer has slowed

The fall in prices has slowed and sales and earnings are expected to improve as the year progresses, a view reflected by comments from the other German majors. Bayer is confident of achieving the 10% growth in pre-tax profit planned for 1996. The company does not expect a lasting downturn in chemicals and looks to continued growth in North America and the Far East. Hoechst is expecting better operating profits in the second quarter, and particularly in the second half as basic chemicals, plastics and speciality chemicals start to recover.

Margins drop but remain at relatively high levels

Sales, pre-tax profits and margins of leading companies in the first quarter of 1996
Company	Sales $m	Change %	Profit2 $m	Change %	Margin %	Change %
Hoechst	8787	- 0.2	843	26.5	9.6	26.8
Bayer	8244	4.2	785	13.7	9.5	9.1
BASF	8011	- 1.9	758	27.3	9.5	29.8
Du Pont1	6112	- 2.2	7833	- 5.9	12.8	- 3.8
Dow Chemical	4982	- 4.3	883	-15.7	17.7	-12.0
Ciba	4493	- 2.0	na	-	-	-
Rhône-Poulenc	4196	- 2.2	305	-12.6	7.3	-10.6
ICI	3923	3.7	309	- 8.6	7.9	-11.8
Shell	3472	9.8	2523	-54.2	7.3	-58.2
Akzo Nobel	3412	1.0	2604	-11.3	7.6	-12.2
Sandoz	3338	1.7	na	-	-	-
Exxon1	3145	- 5.8	2873	-47.5	9.1	-44.3
Monsanto	2304	- 0.6	382	13.4	16.6	14.0
Norsk Hydro1	1682	4.0	152	-21.0	9.1	-24.0
DSM	1575	- 3.8	178	-41.4	11.3	-39.1
Union Carbide	1501	3.3	236	-26.7	15.7	-29.1
BP1	1369	-15.2	1965	-47.5	14.3	-38.2
Footnotes: 1 Chemicals only. 2 Pre-tax profit. 3 After tax operating profit. 4 Operating income less financing charges. 5 Replacement cost operating profit. Comparisons based on domestic currencies; dollar conversions reflect rates ruling on 29 March 1996

Sandoz figures for Q1 exclude Clariant

The sales rise of 2% shown for Sandoz in the first quarter performance table compares figures from continuing businesses. It excludes chemicals, spun-off as Clariant last year, and other operations such as environmental engineering, Gerber Children's wear and the master building technologies (MBT) service businesses. These divestments accounted for sales in the region of SFr 600 million ($534 million) in the first quarter of 1995.

At this stage, financial information from the two Swiss companies involved in the Novartis venture, Sandoz and Ciba, is limited but the figures show that Sandoz core pharmaceuticals, seeds and the Agro sectors all grew relatively strongly in Swiss franc and local currency terms. Ciba faced up to generic competition in pharmaceuticals and in its healthcare sector did not see as strong growth in local currencies which translated to a decline in the Swiss francs figures.

Decline stemmed in Ciba's industry sector

A feature of the Ciba sales results is the encouraging sign that the textile dyes and chemicals divisions were able to curtail the downward sales trend for the quarter. The results are set against relatively strong first quarter 1995 figures but the fall in sales (in Swiss francs) for dyes was held at 7% (SFr273 million - $230 million) and for chemicals at 1% (SFr267 million). The decline elsewhere in the industry sector - which is likely to be spun-off when the Novartis merger proceeds - was 10% in additives, 8% in pigments and 2% in polymers.

The pressure that can be brought to bear on costs and on setting the strategic direction among such a diverse range of businesses is illustrated by the first set of annual results from the former Sandoz chemicals division, demerged last year as Clariant. Demerger has breathed new life into the division as press reports describing possible growth targets illustrate. The company is in the midst of a period of considerable change and an internal reorientation that reflects events in the wider business environment.

Three market-oriented divisions

It was decided earlier last year that Clariant would have three divisions: textiles; leather and paper; and pigments, additives and masterbatches. Chairman and president, Dr Rolf W Schweizer, says that this market-oriented arrangement gives the divisions and their business sectors greater entrepreneurial scope to enter into alliances. It also gives the executive board a stronger influence, at all levels, through more direct contact with the business managers, to forge stronger customer relationships, while focusing Clariant itself on new opportunities.

Reorienting the activities, in an environment of mergers, investments, divestments and alliances, is the major project. There are five distinct elements but each is designed to go some way towards strengthening the corporate portfolio so that it can deliver in terms of profits and returns to shareholders. Cost containment has been a feature of the first months of operation and it will be fascinating to see how far this process can go while decisions are made regarding the future of businesses within the portfolio and where the areas of growth are.

Expanding successful activities

The company looks first to expansion of currently successful activities, provided it strengthens the portfolio and increases cash flow. The second element on Dr Schweizer's list is the search for greater breadth to encompass related areas of business for Clariant which have better than average growth potential. He and his management team expect Clariant to develop into new segments with promise which have synergies with existing activities.

On the cost side, Clariant is seeking optimum usage of the existing manufacturing sites and whether it can outsource production effectively. Production centres are moving, from Basel, Switzerland to China, for instance, in the case of textiles dyes. Some leather operations may follow. This is part of the streamlining process, the fifth element on the reorientation list, but also a case of following end-user markets. Operating productivity will rise as a result.

Productivity is improving

The first set of annual results for the company indicate that productivity is improving. Markets did help last year as the figures show - there was a 3% sales gain in local currencies but sales in Swiss francs slipped by 8% to SFr2145 million ($1860 million). Cost cutting measures helped lift the operating margin to 9.8% from 9.2% with the operating profit of SFr211 million only slightly adrift from the SFr214 million of the year earlier.

Continuing structural review and early retirement plans

Net profits were 3% higher, at SFr106 million, due to higher financial revenues as well as the solid operating performance. Personnel costs were 9% lower, with the number of employees 3% down at 8410. This was mainly due to the continuing structural review and the implementation of an early retirement programme especially in the US and in Switzerland. The early retirement programme is still working its way through the company but the transfer of operations to Asia will also have a significant impact in future in terms of personnel costs.

Capital spending fell significantly, by 25% to SFr89 million or 4.2% of sales, due, the company says, to the substantial level of investment in previous years, so much of it to do with environmental protection. Many of these investments having been made the level of spending is likely to settle. Write-downs totalled SFr119 million in 1995, considerably higher than the level of investment, a trend which management says will continue.

Cash flow will be used to improve balance sheet

High cash flow of SFr225 million will be used to improve the balance sheet in the coming years but when it comes to allocating resources, the directors say that priority will be given to growth through acquisition. That having been said, Clariant spent 3% of sales, or SFr68 million, on research and development in 1995 with a focus on 'genuine innovations' in areas with significant growth potential.

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