INSIGHT: Arkema has momentum from 2008

05 March 2008 17:15  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS news)--The Arkema story in 2007 and running into 2008 is all about the benefits of restructuring. Management has focused the company astutely since the spin-off in 2006 and continues to do so.

This will be a more difficult year though for this producer of plastics such as polyvinyl chloride (PVC) and polymethylmethacrylate (PMMA) and a wide variety of industrial and performance products, particularly as key industrial market are expected to come under pressure.

But the momentum of stronger profits performance can be maintained with the plans already in place to cut costs and overheads further.

“Our target was growth of 10-15% by 2008, so we are well ahead of where we thought we would be,” CEO Thierry Le Henaff said on Wednesday as he reported strong profits growth.

He called Arkema “a project creating value over the long term”.

Speaking in Paris, Le Henaff was bullish given the performance last year that generated profits and cash and enabled management to propose a first – which will cost the company about 37% of its 2007 net profit.

Management has made important savings over the past three years, prior to and after spin-off from Total, and tackled difficult efficiency issues head on. The headcount has fallen by 21%, to 15,194 since the end of 2004. Further cutbacks are in the pipeline.

But the Arkema story is not all about shrinking to produce stronger returns. This year’s expected performance may rely heavily on ongoing restructuring but Arkema needs help from the market.

Its push into Asia is vitally important as is for the longer term its drive to raise research and product application development spending. Some 19% of the performance products segment sales growth in 2007 was driven by products less than five years old.

Arkema’s fourth-quarter results were impressive and the generally positive outlook helped drive the shares higher.  

Arkema was helped greatly in 2007 by strong demand for PVC and restructuring in vinyls and PMMA. If demand growth slows across the portfolio as might be expected, then the fall back is on further progress on the €500m ($764.3m) cost containment programme which is planned to eventually eventually a €200m net EBITDA impact.

The aim is to raise the EBITDA (earnings before interest, tax, depreciation and amortisation) margin to 10% this year. It was 9.1% in 2007, up from 7.3%. The company’s industrial chemicals and performance products businesses reached above that margin target in 2007. The vinyl products EBITDA margin expanded to 6.3%, from 2.8%.

Arkema has shown also in recent months that the next step in the value creation process is to further optimise the portfolio and expand. Acquisition of the Repsol YPF PMMA business was completed last month. Arkema completed the acquisition of the Coatex specialty polymers and additives firm from Switzerland’s Omya in 2007.

Le Henaff said a number of acquisitions might be expected over the next three years in the industrial chemicals and performance products segments, sufficient to raise between €400m and €500m in revenues.

The company said on Wednesday that it would double hydrogen peroxide capacity at Leuna in Germany to 80,000 tonnes a year. It is doubling capacity in Shanghai and will have raised its global capability from 330,000 tonnes/year in 2004/05 to 440,000 tones/year by 2010.

Expansions like these, and the mood for modernisation in the company, are important driving forces. They will bolster top line and profits growth.

There is a new culture being created in Arkema. Employee remunerations are more closely linked to performance. Management said the organisation had been remodelled for greater responsiveness.

The company can benefit from further change in 2008 and modest expansion into important higher growth markets.

($1 = €0.66)

By: Nigel Davis
+44 20 8652 3214

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