Managing expectations at ICI

05 November 2001 19:31  [Source: ICIS news]

It is, perhaps, a reflection of the extremely low expectations generated by major chemical companies these days that ICI's third quarter results were greeted last week with such relative enthusiasm in the City.

Analysts and shareholders alike had been bracing themselves for more bad news amid expectations that faltering economic growth in the US would hit ICI hard. National Starch and the Paints businesses, in particular, were seen as especially vulnerable to a slowdown in North American demand.

Yet when the results were announced, both divisions exceeded expectations and helped ICI achieve pre-tax profits before exceptional items of £108m ($155m/Euro173m). Although this was 11.5% down on July to September last year, it was comfortably ahead of the £102m consensus forecast by analysts.

National Starch trading profits were down only 9% - a considerable improvement on Q2 - at £56m. Analysts at Credit Suisse First Boston, among the more optimistic of ICI watchers, had been expecting profits of £50m. ICI explained that accelerated cost reduction initiatives helped boost margins to more than 12% against 11% in Q2.

The benefits of lower costs were reflected particularly strongly in the specialty synthetic polymers business where easing raw materials prices also helped deliver higher profits.

Starch profits were slightly lower as a result of increased raw material costs in Asia and sales of adhesives were down 5%, with shortfalls in North America offsetting growth in Europe and Latin America.

As expected, the electronic and engineering materials business was affected by continuing weakness in the semiconductor market and a further slowing in the cathode-ray tube (CRT) and automotive sectors. Sales overall were down 20% and profits were way below last year, although ICI reckoned the business generated good profit margins.

The Paints division also exceeded City expectations with Q3 trading profits in line with last year at £57m and sales up 1% at £596m. Profits in Europe were ahead and earnings in Asia well up on last year. However, although sales in North America grew during July and August, they slowed markedly in September, especially in the US consumer sector. Consequently, North American profits were down for the quarter overall and are likely to be significantly lower in Q4.

ICI's Quest flavours and fragrances business was, nevertheless, the biggest source of disappointment. Comparable profits were down 10% at £24m, substantially below expectations of closer to £30m. Slower sales in Europe and North America were blamed for the 2% fall in revenues to £179m.

In performance specialties, lower profits and sales from the Uniqema business outweighed a good performance from the catalysts operation Synetix. Overall profits from performance specialties slumped 24% to £13m on sales down 2% at £201m.

The regional and industrial businesses, which ICI is still seeking to offload, suffered lower profits, with the Pakistan purified terephthalic acid (PTA) operations slipping back into a loss after making a small profit in the comparable period last year.

Overall, though, it was a creditable Q3 performance and one which showed ICI may now be more capable of weathering the global economic downturn than many observers had appreciated. By combining its results with another round of job cuts with the promise of annual savings of some £60m, ICI showed the City it remains prepared to take tough measures to keep costs down.

The latest cutbacks, which will reduce the approximately 40 000-strong labour force by around 1300, come at a cost, however. ICI will have to spend some £120m on the two-year restructuring programme and won't begin to see a return on its money for some two and a half years.

ICI is still unable to shake off the millstone of debt that has hung around its neck since acquiring Unilever's specialty chemicals businesses in mid 1997 for what, with hindsight at least, was a vastly over-inflated £4.9bn. More than four years later, and despite eventually shedding most of its under-performing industrial chemicals businesses, ICI is still saddled with more than £3bn of debt. Interest charges in the first nine months totalled £190m including just over £40m for associate companies.

Interest rates are declining fast but the debt burden promises to hobble ICI for the foreseeable future. 

By Neil Sinclair of CNI

For the latest chemical news, data and analysis that directly impacts your business sign up for a free trial to ICIS news - the breaking online news service for the global chemical industry.

Get the facts and analysis behind the headlines from our market leading weekly magazine: sign up to a free trial to ICIS Chemical Business.

Printer Friendly