Consumer confidence holds key to ICI robustness

27 July 2001 13:47  [Source: ICIS news]

Some early summer madness perhaps from ICI? Hardly, but ICI’s increasing reliance on top flight consumer brands, such as the soon-to-be-launched prestige perfumes, Madness, by Chopard and a new Fragile, by Jean-Paul Gaultier, shines through in its results for the second quarter.

As management has continued to tell us over the past four years, ICI is transforming - or rather, now, it has been transformed - into a company much more closely aligned to the consumer. This means it makes a lot of money from fragrances and the success of big-name brands. Its key businesses are in consumer-oriented decorative paints and the flavourings and starches used in everyday foods.

In this set of the results the robustness of the consumer-oriented businesses is clear. Paints and Quest did well, as did the food and personal care segment of National Starch and parts of the oleochemicals and surfactants business Uniqema. The company’s current difficulties lie with the US businesses selling into industrial markets like adhesives, in the case of National Starch, and lubricants and process intermediates, in the case of Uniqema. The steep downturn in electronics is hitting the company hard as it is so many others.

ICI’s chief executive officer, Brendan O’Neill, spoke in London on Thursday (26 July) about the importance of the consumer-orientation of the business, the company’s geographic diversity and, most importantly, the inherent specialty nature of the products ICI sells. ICI is cutting back and sharpening up in the face of the downturn like every other company but it has pockets of real strength in the portfolio which are holding up well.

This specialty nature and consumer-orientation is finally being recognised as the upward movement in the share price immediately after the second quarter profits announcement showed. At the top end of financial analysts estimates, the quarter produced sales growth of 4% and 1% in Asia and Europe respectively (paints sales were up 14% and adhesives sales up 5%). Group sales were up 4% at £1.68bn (Euro2.4bnm/$2.7bn). Trading profit was only 5% lower (at £157m) and 3% down for the half year. The pre-tax result was 7% down at £125m and earnings per share 7% lower for the quarter and the half year.

This is a reasonable performance, given the circumstances, and ICI looks as though it is coping with the much tougher operating conditions, particularly in the US. National Starch, the adhesives and food starches manufacturer, has had problems and ICI has had to cut workforce numbers and costs and reorganises the business. The cost reduction programme was not sufficient to offset the impact of the drop in sales in the second quarter and the operating result was down 23% against a good second quarter in 2000. At National Starch three of the company’s four business areas seem to be holding up well but products for the electronics industry are suffering badly.

ICI’s Quest flavours and fragrances business is also bucking the general trend and products are directed more towards industrial users. Quest sales grew by 4% in the quarter and trading profits were up 2%. Uniqema’s business in the health and personal care performed well but conditions in the US industrial markets deteriorated further. Synetix catalyst sales were up by 14%.

ICI has had to work hard on its paints business in recent years but the effort is paying off. Sales and profits were up across all regions apart from Latin America. In North America, ICI is having some success with its new Ralph Lauren business and in lifting Glidden brand sales through Home Depot stores. It is also making headway on the branding front with new business in Villagers Hardware up-market, small, local stores in the Home Depot chain.

O’Neill put the second quarter operating environment into perspective when he said that, overall, ICI saw little change in Asia but this was predominantly in markets where the company sold to customers who manufacture for export outside the region. In Europe the picture was mixed but in North America it was very much as it had been in the first quarter. Business is still tough and there are few signs that the bottom has been reached. Despite the difficulties in industrial markets, ICI’s US sales overall were up.

ICI has cut workforce numbers by almost a 1000, mostly in National Starch, since the beginning of the year. This and other moves will cut costs by about $20m this year and £50m on an annualised basis. The focus at National Starch has been on administration and manufacturing and not on research or sales and this is a critical point. ICI says it is doing a lot in the market as well as on the cost front to make sure that it can benefit from growth in the US economy when it occurs.

ICI is doing better than many of its chemical peers but then it is a very different company with key products lines in parts of the economy not yet hit hard by the downturn. ICI says it is confident that its robust relative performance will continue in the uncertain economic environment. Given its product base, that confidence is well placed.

By: Nigel Davis
+44 20 8652 3214

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