22 February 1999 12:15 [Source: ICIS news]
LONDON (CNI)--A strong performance from its pharmaceutical and coatings businesses helped Akzo Nobel overcome weaker market conditions to record a 1% rise to Dfl 1.63bn ($821m/Euro740m) in 1998 net income before non-recurring items, the Dutch group announced on Monday. However, the cost of acquisitions increased financing charges by 66% to Dfl 456m and pushed net profits down 17% to Dfl 1.34bn.
Akzo Nobel chairman Cees van Lede also warned that first half earnings this year were unlikely to match the strong first six months of 1998, although he refrained from giving a 1999 income forecast, citing market uncertainties and the intended demerger of its fibres business Acordis.
Group sales last year, however, were up 14% to Dfl 27.5bn, boosted by the acquisition of Courtaulds and continued growth in pharmaceutical operations.
Akzo's pharmaceutical business expansion was also reflected in group operating profits which rose 11% to Dfl 2.74bn before non-recurring items. Pharmaceutical operations accounted for about 6% of the increase, with the balance coming from Courtaulds businesses.
In a review of its main business activities, Akzo described pharmaceuticals as its star performer. Operating income was up 14% to Dfl 1.06bn on sales 11% higher at Dfl 5.1bn.
Although prices were virtually unchanged on 1997, and currency fluctuations had a negative impact of 1%, sales volumes were up 12%. Akzo said the main growth driver was its healthcare business Organon, which registered a sales rise of 13%. Sales in the US leapt by 60% on continued success of the antidepressant Remeron, the fertility hormone Puregon and the introduction of the oral contraceptive Mircette.
Van Lede said the pharmaceutical division could be expected to contribute strongly to profits in 1999 and to leverage its products pipeline to the full.
In Japan, where Akzo expects gradual growth, the group is prepared for the expected licensing of the contraceptive pill next month together with other suppliers of the pill, he said.
The acquisition of Courtaulds helped Akzo's coatings division boost 1998 operating profits by 18% to Dfl 883m on sales up 25% at Dfl 10.5bn. Akzo said Courtaulds accounted for 14% of the rise in profits. It was also responsible for 17% of the sales increase. The group's other acquisitions (Marshall Boya in Turkey and the European decorative coatings business of BASF) accounted for 6%. Volumes and average selling prices were each up 1%.
Car refinishes, industrial products and resins enjoyed a strong year, while aerospace sealants and coatings were up due to solid volume growth. However, decorative coatings results were flat due in part to poor weather conditions, while the economic crisis in Russia was blamed for the failure of industrial coatings and printing inks to match the previous year's performance. Protective coatings activities were hit by the Asian crisis, and strong price pressure resulted in lower US earnings for coil coatings.
Cost cutting and an increasing emphasis on less cyclical businesses enabled the chemicals division to maintain operating profits at Dfl 705m, down 3% on 1997 but virtually on a par with the previous year after excluding the divestment of Salt America. Sales were down slightly at Dfl 7.5bn.
Akzo said chemicals sales achieved a volume growth of 3% while lower average selling prices and changes in exchange rates each had a negative effect of 1%. Acquisitions and divestments had a net negative impact of 2%.
Polymer chemicals and functional chemicals surpassed the previous year's record levels, due to higher sales volumes. Base chemicals also improved on 1997. Surface chemistry's earnings were unchanged from 1997 despite a weak market in Asia, while operating income from pulp and paper chemicals was down due to a depressed market for bleaching chemicals in the US. Plastics and processing additives (the businesses acquired from Akcros) weakened while salt earnings were lower.
Akzo said its catalysts business had decided to streamline some manufacturing units - particularly for intermediate products - in view of the continuing decline in its markets.
An improvement in the performance of its industrial and textile fibres operations plus the contribution from Courtaulds helped Akzo's Acordis fibres business boost operating profits by 52% to Dfl 141m. Acordis, which is being prepared for demerger, increased sales by 21% to Dfl 4.3bn of which Courtaulds accounted for Dfl 1bn. Excluding the Courtaulds related sales, however, revenues declined 6% due to divestments. Volumes and average selling prices were flat on 1997.
The group plans to float Acordis in the second half of the year, but was unable to give more precise information about the timing. If the business is floated at the bottom of the fibre market's cycle, shareholders will be pleased but it will be a poor transaction for Akzo, said van Lede. But if it is sold at the top of the cycle, shareholders will be critical, he said. "Whatever we do the timing will never be right."
Akzo explained that high capacity utilisation, cost reduction and improved productivity boosted industrial fibres earnings. A turnaround in the viscose filament business and an improvement in non-wovens boosted textile fibres. However, the Asian crisis hit results from Aramid Products and the cost of introducing new products meant that Membrana's results were down on 1997.
The Tencel fibre business remained depressed because of overcapacity. Margins in acrylic fibres were affected by a sharp drop in prices during the second half of 1998, and intensified competition depressed the results of acetate chemicals.
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