INSIGHT: Arkema drives products and productivity

08 August 2008 17:15  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS news)--Arkema is feeling the pinch in vinyls, and acrylics are at the bottom of their cycle, but the French specialties company is doing well elsewhere.

The weak dollar also potentially provides opportunities for acquisition-led growth according to a report in the French press this week.

The bottom line second-quarter improvement - to €60m from €23m in group share net income - reflects the ongoing benefits at the operating level of continuous internal transformation.

This "self-help” programme is a key driving force for the company alongside its ability to keep passing on higher input costs while retaining volumes - it saw 1% volume growth in the second quarter.

Restructuring continues in fluorochemicals, functional additives and technical polymers. New product developments or line-extensions in fluorochemicals, thiochemicals, molecular sieves and fluoropolymers are adding to growth.

Second-quarter earnings before interest, tax, depreciation and amortisation (EBITDA) were up 5.3% at €158m ($243m) on 1.3% higher sales at €1.51bn.

The outlook is for a more challenging operating environment in the second half.

Raw material prices have been high and are likely to continue to be volatile. The US economic slowdown is likely to continue to bite. The dollar's weakness against the euro is mostly a burden for the broad-based and largely specialty products maker.

CEO Thierry Le Henaff has promised more action in the second half to adapt the business to the changing operating environment and it is encouraging that the 2008 EBITDA margin target for the year has been kept unchanged at 10%.

Arkema benefits from the diversity of its portfolio but more importantly now on the opportunities management has for further restructuring.

A great deal of work has been done and margins in the industrial chemicals and performance products segments in the quarter exceeded 14%, which means, as Le Henaff says, that they are moving closer towards the best players in the sector.

Industrial products' EBITDA was up 19% due to restructuring, price increases and increased capacities for fluoro- and thio- chemicals.

The integration of specialty acrylic polymers maker Coatex also helped lift the quarterly results although the acrylics business generally has continued to be depressed.

The 22% increase in EBITDA from performance products was based on higher prices and restructuring but also on new product development in fast-growing markets.

The squeeze came from construction industry demand, high tin prices and the negative impact from movements in the US dollar/euro exchange rate.

Arkema took the brunt of the ethylene cost increase in its vinyls business where year-on-year EBITDA in the quarter dropped 58% and the EBITDA margin slumped to 3.5% from 8.8%, despite decent volumes for PVC (polyvinyl chloride) in Europe.

Caustic soda demand and prices are high. The vinyls story, therefore, continues to be one very much about costs but also one about the pattern of third-quarter and second-half European demand growth.

Vinyls is important to Arkema but industrial chemicals and performance products together account for 75% of the portfolio and 82% of EBITDA, Arkema says. Vinyls raw material costs were up 10% in the second quarter compared with last year.

Le Henaff thinks the bottom has been reached but acknowledges that more needs to be done to cope with expectedly high raw material costs and the lack of real visibility as regards demand.

The vinyls situation will take time to improve, he suggests, with further restructuring being part of the mix. Arkema is currently two thirds of the way through a five-year group-wide restructuring programme so there is clearly more to be done.

Le Henaff reportedly made his remarks on the potential for acquisitions in North America in an interview with the French newspaper Le Figaro.

The weakness of the dollar may be a drag on reported performance but it may also provide a greater opportunity for some value-driven growth.

($1 = €0.65)

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By: Nigel Davis
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