Degussa cautious about growth in 2004

09 March 2004 17:25  [Source: ICIS news]

Degussa has joined the lengthy list of specialty chemical producers burned by the overcapacity-ridden fine chemicals markets.

Underperformance in fine chemicals helped push 2003 profits down sharply the company revealed on Tuesday (9 March) but lacklustre chemicals growth overall and negative currency effects also characterised the year.

The fourth quarter was difficult for the company which indicated in November that the second half of the year was proving to be tough. August was Degussa’s worst month since the company was re-created just over three years ago.

A Euro500m ($619m) write down in fine chemicals pushed the group into a net loss for the year and the company admitted that that it would not be able to do much better in the troubled segment until 2005-06. Extensive restructuring is a way forward in fine chemicals but real profitability increases await a market turnaround. Degussa has reorganised its activities and expects eventually to benefit from that move.

Degussa was not confident about 2004 last year. Given the state of the German economy that was not surprising. At the annual press conference today, chairman Utz-Hellmuth Felcht was a little more upbeat but his continued caution is noteworthy.

Degussa expects to grow in 2004 but much of that growth will come from its own efforts rather than be driven significantly by the market. The current year will be better than 2003 but by how much is questionable.

Critically, Degussa points out that chemicals does not seem to be a leading indicator of the business cycle this time and Felcht is concerned about the negative economic messages coming out of Germany as well as the impact of Chinese producers on some of its markets.

Utz-Hellmuth Felcht

Felcht said today that the Degussa 'setting up' stage was complete and he stressed that the company would focus now on organic growth rather than follow an acquisition-led strategy. That does not rule out targeted acquisitions but signals that the focus will be more on achieving the 5% organic growth target the company still has. Degussa retains earlier financial targets of returns more than 2% over the cost of capital and an EBITDA (earnings before interest., tax, depreciation and amortisation) margin of 20%. In 2003  the group return on capital employed was 8.3% against 8.5% in 2002.The EBITDA margin was 14.3% against 14.8%.

The company did a lot last year to try to counter the extended specialties downturn and performed reasonably well. The diversity of its portfolio certainly helped. Sales were down 3% at Euro11.4bn and earnings before interest and tax (EBIT) 6% lower at Euro878m. The fine chemicals asset impairment charge taken in the third quarter helped drive the company including discontinued operations into a net loss of Euro159m for the year (against a Euro227m net profit in 2002).

Degussa will be watched to see how it manoeuvres now given that the major portfolio re-shaping and divestment phase of its history is over. Felcht says the company can no longer rely on income from divestments to see it through and that working capital and spending generally have to be more tightly controlled.

Last year Degussa cut capital spending significantly from about Euro1bn in 2002 to Euro787m. It has budgeted capital spending of Euro825m in 2004 and a total of Euro2.4bn out to 2006. The company’s most significant project is its fourth methionine animal feed additive plant which will absorb Euro125m of the capital spending budget this year out of a total project cost of Euro350m. Regionally the focus of spending is moving to China and Eastern Europe.

China is a threat and an opportunity for the company but it puts the focus very much on the cost structure of established operations for businesses that have to compete with Chinese suppliers. Degussa will be restructuring in 2004 and trying to lift performance across the board but is saying little as yet about where further attention is needed other than in the water treatment business.

By: Nigel Davis
+44 20 8652 3214

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