INSIGHT: Solvay in the right place to weather difficult second half

31 July 2012 15:51  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS)--In acquiring the French specialties player Rhodia, Solvay’s aim was to focus further on specialties and to broaden its industrial and geographic reach.

The acquisition appeared to be delivering early results this month as the company reported a reasonable sales and profit performance in the second quarter and reiterated its cost- and integration- underpinned outlook.

“Business dynamics should remain healthy for our growth engines and challenging for our cycle sensitive businesses,” Solvay said. It added that merger integration and costs savings would help it hold full year recurring earnings before interest, tax, depreciation and amortisation (REBITDA) at the “strong 2011 pro forma level”.

The combined company’s growth engines were seen at the time of the acquisition as speciality polymers, with both consumer and industrial applications; consumer chemicals, including personal care products; and advanced materials, including rare earths and the silica used as a binder in tyres.

Balanced against these are solid businesses, including hydrogen peroxide, soda ash and the former Rhodia’s acetow & eco services; and cyclical vinyls and polyamide.

“Our growth engines continued to deliver strongly, mostly compensating for challenged cycle-sensitive businesses,” CEO Jean-Pierre Clamadieu said on 27 July on the release of second quarter and half-year 2012 financial results.

The Belgium-headquartered firm also reassured investors with the unchanged outlook, despite the poor and uncertain macroeconomic environment which has become the focus of this earnings season.

Solvay admitted that demand in some of its business segments had slowed in June as it added its second half reassurance.

That slowdown, apparent across so much of the chemical industry in the quarter, was driven by poor global economic growth and the continued threat from the eurozone crisis.

Not surprisingly, the Solvay vinyls business struggled in the quarter, as did the Rhodia segments’ polyamide operations. Products sold into the construction industry on the one hand, and into autos and electronics on the other, were hit hard by weakened markets.

Solvay benefited, as all companies did that reported in euros, from the currency’s weakness but the volume and price figures for the group speak for themselves.

Solvay’s vinyls volumes were down 9% in the quarter compared with the strong period in 2011 and there were even signs of some volume slowdown in northeast Asia towards the end of the quarter in the otherwise strong performing Vinythai business.

“In Europe, demand in PVC [polyvinyl chloride] weakened and stood comparable to the rock-bottom levels reached in Q2’09 [the second quarter of 2009],” Solvay said.

“The anticipation of price variations led to volatility. At the same time, demand remained low in Argentina but recovered slightly in Brazil supported by Brazilian government’s economic measures and the Real devaluation. In Thailand the production unit of Vinythai runs at full capacity,” it added.

Rhodia’s polyamide volumes were down 7% compared with the year earlier period although flat quarter to quarter in 2012 because of slowing demand in Europe and Brazil, Solvay said.

The company’s essential chemicals segment, which includes some basic chemicals such a soda ash, hydrogen peroxide, and epichlorohydrin, gained higher volumes and prices in the quarter. Record results in speciality polymers and consumer chemicals were driven, Solvay said, by strong pricing power.

The Rhodia advanced materials business, essential rare earth elements used in electronics and automobile catalysts, saw profits fall by close to a third on weaker volumes and prices well down on last year’s second quarter.

Solvay said, however, that the decline was mainly to do with the exceptional demand and price environment in the second quarter of 2011. Pricing power for its products in the quarter remained positive, it added.

It is not so much the diversity of the new Solvay portfolio that is important now, rather the breadth of focus on businesses that can most times be expected to perform reasonably well, because they are so closely tied to GDP; and more consumer-oriented specialty polymers and home and personal care chemicals.

Each can be expected to do better in the weakened global economic environment than vinyls tined to construction or polyamide tied to automotive.

Solvay can be expected to drive growth in its speciality and essential chemical businesses, even when times are tough. It can be expected to drive further merger-related streamlining and cost savings across the group.

Read Paul Hodges’ Chemicals and the Economy blog
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By: Nigel Davis
+44 20 8652 3214



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