LONDON (ICIS)--Despite its position as a specialty chemical producer, Solvay is not far-enough removed from the global economic storm to come away unscathed.
The company's results presentation for the first half of 2020 reads like a grim weather forecast as the severe headwinds presented by the macroeconomic environment have limited visibility for the rest of the year.
Solvay's CEO Ilham Kadri said on Wednesday that authorities had not forced production to stop at any of the company’s site as chemistry continues to be “essential”, but lack of demand did weigh on output.
“At 30 June, 13 sites were shut down, 36 sites were in partial shutdown, and 16 had limited activities in the workshops. The underactivity in Q2 2020 is linked to a decline in sales of approximately 20%,” the financial report read.
This was reflected in first half sales, which fell 11% year on year on the back of muted demand and shutdowns across Europe.
Coming into full effect from the end of March, this translated into an 18% decline in sales for the second quarter, compared to the same period in 2019.
Volumes were down across Solvay’s portfolio, with any resilience in downstream markets unable to completely offset decreases in both sales and earnings for its materials, chemicals or solutions business units.
Particular weakness in the automotive, aerospace, oil and gas and construction sectors eroded sales and earnings.
This followed weak 2019 results, when operating profit fell 3% and net profit marked a 1% contraction on the previous year’s levels.
Despite the largely gloomy picture presented, the Belgian specialty producer indicated to some bright spots in the first half results, and windows of opportunity going forward.
Although sales to the automotive sector were down 26% in the second quarter compared to a year prior, Kadri confirmed that Solvay had increased its market share despite the downturn, due to greater penetration of technologies.
Softening of commercial aircraft production rates weighed on Solvay’s composite material sales, but there was some support from demand for military aircraft.
There was some growth in sales for the aroma performance segment, which marked a 14.7% increase, attributed to higher volumes of natural vanillin on stronger demand from the food industry.
Going forward, sentiment has been buoyed by the EU’s economic recovery package , which could stimulate growth for the chemicals sector as focus shifts to finding sustainable solutions in the industry.
Solvay is not anticipating a quick recovery, with the third quarter on track to remain at a similar level to the second, with only modest recovery anticipated in the fourth quarter this year.
“Solvay’s comments point to no significant quarter on quarter improvement for the third quarter 2020 (in-line with BASF’s comments today),” Baader Bank said in a credit note.
“In addition, the €1.5bn impairments weakened the balance sheet significantly. We therefore reiterate our cautious stance on the stock for the time being.”
Solvay also mirrored BASF’s sentiment when talking about China, as the only region which has tracked a V-shaped economic recovery, as the producer marked a 20% increase in demand from the country since the first quarter.
“China depends on exports and if other economies are still struggling or under confinement, then it is not back to normal compared to 2019, but we see the automotive industry and consumer confidence picking up,” said Khadri.
“We don’t have a crystal ball and we can’t defy gravity, but this is what we see from the Chinese perspective.”
Khadri stated that conditions will vary for different regions and different end markets, but there is a strategy to support business on a global scale.
Meanwhile, Solvay continues to focus on self-help with anticipated savings of €300m from core production this year, with €150m of this coming from structural cost reduction, supported by consistent free cash flow.
“Focus in cash remains a priority; we plan to resume investment of value creating projects and the capex total €600m in 2020 and cashflow delivery is expected to be similar to 2019 level,” said Khadri.
Although the outlook remains murky and subject to a myriad of variables, Solvay looks set to trudge through the rough economic climate, with the cash to adapt its portfolio to suit its customer base.
Front page picture: Solvay's CEO Ilham
Kadri, in an archive image
Source: Thierry Roge/Belga Photo/Shutterstock
Focus article by Morgan Condon