Fine chemicals woes hit Rhodia and DSM

Both Rhodia and DSM have disappointed with poor second quarter results and their forecasts hardly inspire confidence for European chemicals in the second half.

Rhodia paints the bleaker picture and says it is likely to report a loss for the full year. DSM slipped badly in the second quarter and says the pressure on sales and volumes that began at the end of the quarter is even stronger in quarter three.

Rhodia, and its chief executive, Jean-Pierre Tirouflet, are in the more difficult position. Second quarter operating profits fell 87% to Euro13m ($15m) on sales 20% lower at Euro1.4bn. The net loss was Euro87m. Rhodia generated Euro183m of positive cash flow which helped to push down debt but the company admitted that it won’t be able to hit the debt-to-EBITDA (earnings before interest, tax, depreciation and amortisation) target of 2.5 that Tirouflet was talking about at the annual general meeting in April. At the time he held up that target as being a good reason for shareholders to give him their continued support. The medium-term debt ratio objective is now 2.0, the company said on Friday (25 July). Rhodia also indicated that the second half of 2003 is proving to be more difficult than anticipated.

Rhodia is being hit by the weaker euro as is the rest of European industry and the negative effect for in the first half was some 10% of sales. The pharmaceuticals and agrochemicals division is clearly under most pressure from overcapacity and the innovation slowdown in life sciences with a considerable proportion of the second quarter 31% sales shortfall due to lower volumes. Volumes were down in automotive, electronics and fibres by some 7% in the first half.

The pharmaceuticals and agrochcemicals business reported an operating loss in the quarter of Euro4m compared with a profit of Euro16m last time but EBITDA was positive (Euro18m against Euro39m). Automotive, electronics and fibres EBITDA was Euro30m, against Euro64m in the second quarter of 2002.

DSM says that its industry-facing segments  - the performance materials and industrial chemicals clusters - seem to be experiencing "a genuine summer lull", which has to be of concern.

The company’s life sciences operations are still under pressure due in part to the weak US dollar. The upshot is that DSM is holding out most hope for a clear recovery in quarter four. It says that operating profits in the third quarter will be well below the outcome in Q3 2002.

DSM has something of a cushion against continued poor operating conditions in that a positive contribution is expected later this year from the former Roche vitamins, carotenoids and fine chemicals businesses, although that depends on the date of completion. In the second quarter it faced weak demand and falling volumes and was hit by the unfavourable euro/dollar exchange rate and still high petrochemical raw materials prices. Profits on ordinary activities after tax (a number which excludes the gain on the sale of the petrochemicals activities to Sabic in 2002) fell 44% to Euro67m.

The most worrying trend has to be the impact of the depressed European economic environment on the company and its exposure to the fine chemical slowdown. Its second quarter life science products sales were 11% down at Euro491m while sales were essentially flat across the two other sectors. Volumes across the board were down 2%.

Second quarter operating profit was down 17% at Euro85m due, DSM says, to lower sales, lower margins, lower volumes and a weaker dollar. Life science products profits were hardest hit, dropping to Euro46m from Euro59m but performance materials profits were down at Euro27m (from Euro33m). The company’s industrial chemicals bucked the trend with sector sales up a healthy 8% at Euro373m and operating profits up a third at Euro20m.

The continued poor economic environment and pressure in life sciences has pushed the company to cut a further 500 jobs and idle plants at DSM Pharmaceuticals and DSM Elastomers.