INSIGHT: Solvay can grow strongly but has to deal with cyclicality

24 April 2012 16:35  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS)--“The integration of Rhodia into Solvay should be a strong catalyst for change,” Jean-Pierre Clamadieu, who takes over as Solvay CEO on 11 May, said on Tuesday.

The combined businesses present the management team with some real opportunities but, as with most things, not without a couple of tricky problems.

Solvay’s bosses want the company’s profits to grow on average by 10% a year for the next five years – to reach €3bn ($4bn). Three businesses are likely to provide about two thirds of that growth. They are specialty polymers, consumer chemicals and advanced materials. Currently, they are doing rather well.

And Solvay says that businesses such as essential chemicals – which include hydrogen peroxide and soda ash – and acetow & eco services, are resilient enough to be sustainable cash generators. The cyclical vinyls and polyamide operations, however, are another matter.

Clamadieu, the former Rhodia CEO, says that, seven months after the merger, management has a clear view of each part of the portfolio. That means that growth opportunities have been identified and also that synergies have been spotted which can be built upon.

This works both ways. Considerable cost savings will accrue from the merger of the two specialty firms – more than €400m by 2014 in projects tackling purchasing, logistics and general streamlining.

“In addition, Solvay's industrial and supply chain teams are currently developing action plans to improve the competitiveness of our sites and reduce capital intensity of our businesses. Marketing and sales excellence will mainly stem from pricing power and cross-selling opportunities across markets and geographies,” the company said on Tuesday.

Solvay will grow by making the most of the geographical and new product opportunities presented by the merger.

Rhodia added new products and technologies and new geographic markets so there is a lot of cross-selling to do. At the same time, significantly enhanced research and development (R&D) firepower will be the sum of the former Solvay and Rhodia parts.

The new Solvay has 12 major R&D centres around the world and 1,700 researchers (combined spending last year was €218m).

A lot of research work will continue to be done in Europe but there are also research centres in some of the higher growth chemical markets.

Solvay says that its innovation capabilities are aligned with the megatrends that are driving the chemical industry, such as climate change, the scarcity of resources, rapid consumption growth in fast-developing economies and increasing expectations for better health and well-being.

It is not surprising, therefore, that the combined company’s growth engines are specialty polymers – the types of material used in consumer applications such as mobile phones as well as industrial equipment – consumer chemicals – including personal care products – and advanced materials – including rare earths and the silica used as a binder in tyres.

These businesses alone provided almost 50% of recurring earnings before interest, tax, depreciation and amortisation (REBITDA) last year and will be the platform for growth over the next five years. Clamadieu sees a mixture of organic growth, based to some extent on enhanced research, and bolt-on acquisitions driving the company forward, in the medium-term at least. Larger acquisitions might have to wait.

Clamadieu says he sees a very good dynamic at work within Solvay. “We have a portfolio that fits well with what we want to achieve”.

Some 90% of its businesses are among the top three global players - a position that he believes is essential for success. He expects little other than tinkering with the portfolio.

Geographically, the company has a good presence in important emerging markets. Solvay already makes close to 15% of its sales in Brazil, so that is a key market. China is important because of the size of the opportunity, but Clamadieu says the company has a very good dynamic there. “All the fast-growing markets are quite well covered,” he adds. A challenge, however, he admits, is India, where Solvay has only a relatively small position and few production plants.

Possibly Solvay’s greatest longer-term problems lie with its cyclical vinyls and polyamide or businesses.

Both suffered in the fourth quarter of last year from the downturn with vinyls in Europe primarily being responsible for the 23% drop in quarterly REBITDA on a year-on-year basis.

Vinyls is a €2.4bn turnover business and, while money was lost in the fourth quarter, full year 2011 REBITDA was down just 4% at €281m.

Polyamide sales in 2011 were €1.8bn, but full year profits were down 23% at €196m. Fourth quarter 2011 REBITDA for the business was down 78% at €114m.

Solvay will have to pursue greater competitiveness in both businesses as it battles with important market changes and the growth of competitors in Asia, yet both operations supply materials that are sorely needed in developing as well as developed world markets. The company is looking to its Rusvinyl venture with Sibur to address the fast growing Russian PVC market.

"After an in-depth analysis of our portfolio, we have developed a clear strategic intent for our different businesses in the light of their intrinsic strengths, their positioning and market dynamics," Clamadieu said on Tuesday.

“The group's strong fundamentals combined with its ongoing major transformation should allow us to generate - at constant scope - a recurring EBITDA of €3bn in 2016."

($1 = €0.76)

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By: Nigel Davis
+44 20 8652 3214

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