ICI proves resilience but needs growth

04 February 2002 17:30  [Source: ICIS news]

ICI has been forced into a tight corner yet again by its inability to make the disposals needed fast enough to transform itself into a specialty chemicals company. The transformation is all but complete, but at a terrible cost. It is more than unfortunate that against a relatively robust 2001 business performance the value of the company has fallen further as management has had to resort to a deeply discounted rights issue to help maintain worsening credit ratings.

ICI has not been alone in feeling the chemical sector squeeze tighten further in 2001. The high legacy costs of its disposal programme have also been caught up in the significantly more cautious global financial environment post 11 September.

The UK company needed the £400m ($566m/Euro657m) payment from Huntsman International expected from the winding up of the Huntsman ICI petrochemicals venture. It will have to wait for that money now until the second half of 2003. Following 11 September the global chemicals outlook worsened markedly and the major rating agencies stepped in to warn the ICI board that the company faced a downgrade. Rather than sail headlong into more difficult waters, the board decided to launch the fully underwritten rights issue – and to announce the disposal of the catalysts business, Synetix.

The announcement of the 7 for 11 rights issue has already eased the situation – the rating agencies have confirmed ICI’s previous debt ratings. The company has more breathing space and can look harder at what else might be done to drive cash generation up and the debt burden down. On its side, ICI had what it calls a ‘resilient’ fourth quarter and full year 2001 that clearly shows the benefits of restructuring and cost control at National Starch. A newer cost control programme, announced in November, focuses more on supply chain optimisation and logistics but also includes some plant closures and a headcount reduction.

ICI has done and is doing a great deal to push costs down and cashflow up but the so-called legacy costs are significant. Management has given some indication of how the costs associated with disposals will come down over the next two years so there is some sort of road map for analysts and others to follow. But will this be enough?

The company is caught in a trap partly of its own making but as new chairman Lord Trotman pointed out today (4 February) he would rather have the current group of businesses in this environment than the old ICI portfolio. As it stands, the portfolio has to prove its sustainability but it has to be remembered that the sector is at the bottom, hopefully, of the current chemicals business cycle. It all depends how long the industry bounces in this particular trough.

ICI has resilient businesses but some are better than others. The company has to do more to lift performance at Uniqema. It has already done a lot with National Starch and Paints. It is difficult to talk now about growth areas but even the company’s electronic and engineering materials business – which saw sales fall 18% in the fourth quarter - has managed to hold on to operating margins.

ICI wants to be recognised for having taken decisive action but everything depends now on how well the businesses do once the first impact of the upturn is felt. On the plus side, the company hasn’t cut back too hard but appears to have taken a realistic approach to capital, marketing and research and development investment. Tightening up supply chain performance will help greatly. The company now needs to extract maximum growth potential from the businesses. It simply doesn’t know how long this squeeze will last.

By: Nigel Davis
+44 20 8652 3214

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