Belgium’s Solvay swings to Q1 net profit on strong margin

(adds divisional performance, outlook from paragraph 7)

LONDON (ICIS)–Solvay has posted a first-quarter net profit of €15m, reversing a €12m loss recorded in the same period last year, helped by strong margins, the Belgian chemical producer said on Tuesday.

Sales for the three months ending March 2016 declined 5.6% year on year to €2.93bn, but earnings before interest, tax, depreciation and amortisation (EBITDA) increased 12.1% to €492m, the company said in a statement.

Operating profit increased 4.2% to €105m.

“Our earnings grew against strong comparables in 2015, supported by a ninth straight quarter of solid pricing power which contributed to a record margin of 21%,” Solvay CEO Jean-Pierre Clamadieu.

Solvay’s underlying first-quarter net profit, meanwhile, declined 5.0% to €192m.

For the whole of 2016, Solvay expects a “high-single digit underlying EBITDA growth” from the €2.34bn pro forma numbers last year.

Solvay’s Advanced Materials division posted a decline in sales during the first quarter of 2.3%, year on year, to €1.08bn, although EBITDA rose 1.4% to €267m during the period.

Revenue was weighed down by a decline in sales of 6% at the Composite Materials business unit, a fall of 4.8% at Special Chem and an 11% decline in sales at the Silica unit, although the largest, Specialty Polymers posted growth of 4% year on year in revenue.

The Belgium chemical major said combined sales from the acquired Cytec’s businesses of Aerospace Materials and Industrial Materials had achieved “a more moderate [growth] pace in EBITDA” than in previous quarters.

“New capacity additions in Specialty Polymers (FKM [fluoroelastomers] in China) weighed on fixed costs, while these plants are gradually ramping up,” said Solvay.

“Scope effects and currency fluctuations impacts on conversion had a negative impact on the segment’s [division] EBITDA. The underlying EBITDA margin widened by 0.9 pp [percentage points] from 24% to 25% year on year, thanks to the increased net pricing.”

At the Performance Chemicals division, a sharp fall in revenue of 25% during the first quarter, year on year, at the business unit Coatis, producing phenol and derivatives for the construction industry, weighed down the overall division’s sales, which were down 4.8% to €719m. EBITDA, however, rose strongly to €199m, up 6.8% year on year during the quarter.

However, Coatis’ in Brazil continued struggling as the country’s economic crisis deepened during the first quarter. Equally, business unit Soda Ash & Derivatives posted 2.5% declining revenue, while Acetow – mostly serving the cigarette-filter, textile and packaging markets – followed suit with a decline of 0.8%. Pulp- and water-chemicals serving Peroxides posted 1.3% higher sales year on year.

“While sales prices were stable, lower energy and raw material costs as well as efficiency gains more than offset the dip in volumes, and higher fixed costs linked to new investments. All business units saw results stable or up. As a result of the competitiveness improvements, the underlying EBITDA margin grew 3.0 pp to 28%.”

The company’s CEO Jean-Pierre Clamadieu said in January the political crisis in Brazil was making the economic recovery even more difficult, arguing Brazil’s current government did not have “the strength and the momentum to take back control” of the situation.

Solvay’s Advanced Formulations suffered the most severe hit among all divisions, with revenue for the first quarter down 11% to €662m, while EBITDA fell 9.8% to €122m.

The company attributed the negative performance during the quarter to the headwinds in the conventional oil and gas markets in North America, which made sales at the unit Novecare fall by 16%, while Aroma Performance sales were 1.7% lower for the period, as competition increased in the vanillin formulations, putting pressure on selling prices. Revenue at Technology Solutions rose by 0.8%.

“Against a dropping and volatile [crude] oil price, the rig count in North America fell further by some 20% versus the last quarter of 2015, or some 60% year on year, when business conditions started to turn down,” said the company.

The division Functional Polymers also posted declining sales during the first quarter – down 6.6% year on year to €462m – but EBITDA jumped 54% to €65m on the back of an increase in both volumes and pricing power.

“[Overall] The lower prices resulted from a decrease in raw material prices, which were partially passed through to customers, both in Polyamide, with the lower butadiene price, and in chlorovinyls,” said Solvay.

“Volumes were up 4% with strong polyamide polymers (PA 6.6) and compounds sales in Europe and Asia, especially for automotive applications. The yarn market in Latin America deteriorated further. In the Thai chlorovinyls activity, higher PVC [polyvinyl chloride] and epichlorohydrin [ECH] sales volumes were offset by limited caustic soda production.”

Looking ahead, the company said growth in 2016 will be “back-ended” compared to the “strong” first half of 2015 and said all segments would increase underlying EBITDA during the whole year.

“This 2016 outlook is based on a number of assumptions, which remain unchanged, namely, anticipated world GDP growth of ~3%, an oil price of $30/bbl and no recovery in the US oil and gas exploration activities, and on a 1.10 $/€ exchange rate.”

Additional reporting by Pearl Bantillo