Analysis: Celanese sees tough times at launch

06 October 1999 15:46  [Source: ICIS news]

LONDON (CNI)--Celanese AG might be starting life slightly later than expected due to litigation problems affecting its parent, German group Hoechst which wants to merge with France's Rhone-Poulenc. But the year so far has been tough for the soon-to-be launched German chemicals operation as revealed in its proforma figures filed to the US Securities and Exchange Commission (SEC), and difficult times lie ahead.

Set to go independent on 25 October, the enlarged* chemicals operation said in its SEC submission that its first half performance delivered pre-tax losses of Euro263m ($281m) compared to profits of Euro53m in 1998. All five business areas turned in weaker H1 performances: acetyl products, acetate products, chemical intermediates, technical polymers and performance products.

Its H1 operating loss of Euro259m compared to profits of Euro101m last time on net sales down 14% to Euro2.37bn. After a difficult first six months, Celanese expects significant operating losses in H2, which will be partly due to high extraordinary costs. Except for Ticona technical polymers, no financial data was available before exceptional items. The exceptional items in H1 covered a host of costs - provisions against legal actions, restructuring and demerger expenses, and also closure and downsizings. Further exceptionals are expected in H2.

Also looking ahead to the future, Celanese has begun divestment talks related to its non-core inorganic chemicals operations and it also plans about 1000 job cuts by the end of 2000. The candidates for possible divestiture include Celgard separation products, the chlorine and chlorine derivatives business lines, and also its ethylene oxide and ethylene glycol businesses.

Celanese added that several of the businesses being considered for divestiture may need to be restructured to facilitate their disposal. Under the proposed terms of the agreement currently being negotiated with a prospective buyer for the chlorine and chlorine derivatives business lines, Celanese expect an H2 loss of between Euro80m-90m related to their disposition, it said. However, it is also internally considering other options for the business lines.

While addressing the future of its inorganics businesses, Celanese will also have major challenges improving the performance of its five core organics businesses in the face of slowly recovering markets.

In H1, Celanese's acetyl products business unit returned operating losses of Euro31m compared with profits of Euro67m last time. Sales dropped 13% to Euro727m from Euro834m primarily due to price decreases and negative exchange rate effects, which were partially offset by volume increases.

The poor operating result for acetyls was due mainly to the price and volume declines, which were compounded by the slow rate of raw material prices squeezing margins, although these factors were slightly offset by cost reduction efforts. The business unit's H1 performance also took a Euro17m restructuring charge against the closure of its acetaldehyde facilities in Lillebonne, France. There was also a goodwill amortisation charge of Euro10m from Hoechst acquiring substantially all the minority interest in Mexico-based Grupo Celanese and contributing this interest to the Celanese operation in December 1998.

Celanese's chemical intermediates business was revealed in the SEC filing to have delivered an H1 operating loss of Euro4m against profits of Euro22m last time. Sales were down 19% to Euro417m from Euro512m primarily due to price decreases and volume decreases plus unfavourable currency movements.

The reduction in prices in the chemical intermediates unit was due principally to continuing downward pricing pressure on acrylic acid, butanol and 2-ethylhexanol and lesser price declines in other oxo products caused by overcapacity. These pressures were only partly offset by a favourable price decline in propylene, the main raw material used by the unit. Acrylates price declines were largely offset by the decline in propylene costs, helping margins.

The acetate products business area was the only unit to make a profit, turning in H1 operating earnings of Euro11m although down substantially on last year's Euro51m performance. Sales fell 18% to Euro356m from Euro436m due to volume decreases, price reductions, and negative exchange rate effects.

Celanese's acetate unit saw its cellulose acetate filament operations suffer significantly lower volume sales and weak prices due to lower demand for acetate filament from the fashion industry. These factors were partly offset by an aggressive cost reduction program begun in 1996. However, the operating result for H2 will reflect the negative effects of market overcapacity, weak demand, and costs associated with production line shutdowns.

Ticona technical polymers delivered an operating loss of Euro102m compared with profits of Euro35m in H1 last year. Revenues fell by 3% to Euro384m from E394m mainly as a result of price declines due to pressure from Asian imports.

Operating profits were hit by a special charge of Euro128m relating to the 'plumbing' cases - US litigation related to alleged residential plastic pipework problems. Before the special charge, operating profits were down 26% to Euro26m as sales prices fell while raw material costs remained stable.

The performance products unit reported an H1 operating loss of Euro33m compared to profits of Euro15m last time. Revenues decreased 8% to Euro221m from Euro239m due mainly to lower sales for the oriented polypropylene (OPP) films and separation products businesses, although these weaker performances were partly offset by improved food ingredients sales.

The OPP films business, which represented 62% of segment sales, recorded a loss of Euro10m after a minimal profit last time primarily because of lower selling prices in all product lines due to overcapacity and passing on lower raw material prices to customers. In addition, the business had increased expenses, including depreciation, associated with the expansion of its Mexican OPP facility.

The food ingredients business recorded an operating loss of Euro28m from profits of Euro11m in 1998, which was caused chiefly by a Euro38m charge relating to US antitrust actions on its sorbates operations. Separation products posted operating profits of Euro5m compared to Euro4m as lower prices were offset by lower overall costs.

Special charges taken in H1 were: Euro128m on the 'plumbing' cases; Euro38m on sorbates antitrust actions; an additional Euro10m on US restructuring costs; some Euro17m on the closure of the French acetaldehyde plant; Euro6m in severance costs associated with downsizing in both the acetate products and Euro3m for the chemical intermediates business units; and about Euro3m in other demerger-related costs.

In preparing for the demerger from Hoechst, Celanese also revealed in its SEC listing that it has agreed to indemnify Hoechst for environmental liabilities that Hoechst may incur on Celanese's German production sites. It also agreed to indemnify Hoechst against liabilities for environmental contamination arising under 19 divestiture agreements regarding chemical participations, businesses or assets entered into by Hoechst prior to the demerger. Celanese's obligation to indemnify Hoechst is subject to the following thresholds:

• Celanese will indemnify Hoechst for the total amount of any liabilities up to Euro250m;
• Hoechst will bear the full amount of any liabilities costing more than Euro250m but less than Euro750m;
• Celanese will indemnify Hoechst for one third of any liabilities for amounts exceeding Euro750m.

Under the demerger agreement, Celanese also assumed 50% of the transaction costs incurred, estimated at Euro52m in total, and 50% of the applicable real estate transfer taxes, estimated at Euro21m in total. Hoechst has agreed to bear 80% of the financial obligations arising in connection with the government investigation and litigation associated with the sorbates industry for price fixing. 

* The chemicals operation Celanese AG will consist of the original Celanese business, the technical polymers unit Ticona, and the following Hoechst chemicals interests: the food ingredients firm Nutrovina; the polypropylene (PP) films business Trespaphan; Hoechst's 50% share in the Targor PP joint venture with BASF; the group's 46% stake in the Dyneon fluoropolymers joint venture with 3M; Hoechst's 50% stake in Vinnolit, the polyvinyl chloride (PVC) joint venture with Wacker; and its 50% stake in the DyStar textile dyes joint venture with Bayer.

By: Patrick Reynolds
+44 208 652 3214

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