Degussa Draws on High-Volume Products to Push Up Margins

25 March 2002 00:00  [Source: ICB Americas]

Degussa could have difficulties meeting its ambitious financial targets of becoming one of the world's most profitable specialty chemicals companies by 2004.

First, 2002 is unlikely to be a year of high growth, so the company could be under pressure to perform unusually well next year and throughout 2004. In addition, Degussa could be hampered by the relatively large number of bulk products within its portfolio.

However, the company will turn to many of its high-volume activities to help push up its overall margins and generate cash over the next few years to invest in new emerging businesses for long-term growth.

"Specialty chemicals are not necessarily about low-volumes," says Utz-Hellmuth Felcht, Degussa's chairman. "They can be high-volume products which are sold at high margins and have a high entrance barrier to any potential competitors.

"In most of the high-volume sectors in which we are involved, there are few other producers because of the amount of investment needed to enter them," he adds.

After its creation two years ago through the merger of Degussa-Hüls and SKW Trostberg, Degussa set its targets of a sales margin of 20 percent on earnings before interest, tax, depreciation and amortization (EBITDA) and a 14 percent return on capital employed (ROCE). Initially, those numbers were to be achieved by the end of 2003, but because of poor market conditions in 2001, the targets have been put back by one year.

The company announced last week a 4 percent increase in sales in core activities to á10.8 billion ($9.5 billion), with earnings before interest, tax and amortization (EBITDA) up 7 percent to á965 million. Consequently, although the overall EBITDA margin remained at around the same level of 16.8 percent, ROCE slipped from 9.9 percent to 9.2 percent.

Degussa's most profitable divisions continue to be specialty polymers, with an EBITDA margin of 21 percent and a ROCE of 17.8 percent, and coatings and advanced fillers, with an EBITDA margin of 21 percent and a ROCE which declined last year from 21 percent to 17 percent.

Specialty polymers' sales and EBITDA both dropped last year by 3 percent to á1.3 billion and á268 million, respectively.

Performance chemicals' sales went up 3 percent to á1.4 billion with EBITDA up 6 percent to á223 million. Its EBITDA margin rose slightly to almost 16 percent, while its ROCE increased nearly three percentage points to 11.4 percent.

Health and nutrition sales increased by 10 percent to á1.2 billion with EBITDA up 4 percent to á206 million. Hence, its ROCE climbed to 15 percent, but its sales margin declined to 17 percent.

Degussa's á2.3 billion takeover of Laporte, the UK-based fine chemicals company, in early 2001, helped depress the ROCE of the fine and industrial chemicals division by nearly two percentage points to 10 percent. But with divisional sales going up 12 percent to á2.2 billion and EBITDA 20 percent to á394 million, its sales margin improved to 18.5 percent.

Sales of construction chemicals went up 4 percent to á1.7 billion , but EBITDA fell 7 percent to á262 million. Its sales margin slipped to 15 percent, while ROCE dipped to 10.4 percent.

With around a third of its 23 business units comprising mainly mature bulk products, the company was expected to be handicapped last year by its disproportionate amount of high-volume activities. The company reported a "significant" drop in volumes of carbon black and hydrogen peroxide, but increased volumes for methionine, 1-butene and isononanol.

"Some of our high-volume products have been achieving some of the highest margins in the group," says Mr. Felcht.

Degussa plans to complete its divestment program by the end of this year when it will have disposed of operations with sales totaling close to á6.5 billion, many of them high-volume activities.

But it will retain extensive core businesses in bulk products ranging from persalts and hydrogen peroxide to super absorbents and methionine and other amino acids.

The company expects many of these to perform well this year, particularly in the second half when it hopes to benefit from a recovery in the global economy.

Degussa concedes, however, that next year could be crucial for its efforts to boost the company's returns and margins, particularly if the predicted economic revival is delayed.

"We should get at least a little closer to our targets this year, but a lot will depend on developments in the second half," says Heinz-Joachim Wagner, management board member responsible for finance. "Next year, we will have to make a lot of progress with our cost reduction program because by 2004 we are expecting to achieve á500 million in annualized cost savings."

Construction chemicals could be one division that will be hard pressed to meet its financial targets in three years, despite moves to raise margins by reorganizing itself into product-based as well as regional units.

"The construction industry is a poor one for margins, so the division could struggle to meet its margin target of 20 percent," says Mr. Felcht. "It is the number one worldwide in terms of market share in the sector, but it is also number one for margins. Its competitors have much lower margins."

A typical division of Degussa is fine and industrial chemicals, with a mixture of low and high volume products. This includes a custom manufacturing activity for which Laporte was acquired to give it a stronger position in the exclusive synthesis of pharmaceutical intermediates.

The division also comprises Degussa's C4 chemistry activity in which the main sales drivers are 1-butene, butadiene, isononanol and the plasticizer diisononyl phthalate (DINP). The division is more than doubling, to 340,000 metric tons per year, its isononanol capacity at Marl, Germany, an alternative to 2-ethylhexanol (2-EH) as a plasticizer raw material.

The isononanol operation has been excluded from the planned Germany-based joint venture between Degussa and Celanese in oxo alcohols.

"Isononanol is the next generation of alcohols for plastizers, which is a technology that Celanese does not have," says Mr. Felcht. "Apart from BASF, no other companies are working on this C4."

Carbon black remains one of Degussa's highest margin businesses, despite being a commodity in many of its markets with a relatively large number of producers. The company's strategy in this sector is to gradually shift a large proportion of its activities into specialties.

"We are already the market leader for specialty carbon blacks for inkjet inks and for toners for copiers," says Alfred Oberholz, a management board member. "We have also developed specialty black colorants for automobiles. These all require sophisticated technologies."

In methionine, the company expects to be fined as a result of investigations in the US and by the European Commission into alleged price fixing by producers. The possible fines are covered by provisions of á93 million embracing a number of other legal items as well.

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