Ciba post 2Q07 results .......... profitability of paper business remains serious concern

Ciba Speciality Chemicals announced their second quarter results, with the following conclusions:

• Sales up 2 percent in Swiss francs
• Operating income up 5 percent, despite higher raw material costs
• Actions taken in Water & Paper Treatment showing results
• Operational Agenda on track

Looking at the detail, especially regarding the water and paper chemicals business, the following comments were made:

• measures taken to turnaround the paper business have resulted in an improved operating income margin of 4.7 percent in the second quarter (2.4 percent in the first quarter of 2007).
• Sales in Water & Paper Treatment were CHF 1,286 million for the first six months, up 4 percent in Swiss francs and 3 percent in local currencies. Volumes were 3 percent higher in the first half and sales prices were flat.
  
• A number of sales price increases were announced in the second quarter. Measures taken to restructure the Paper business into a new operating model are showing results as Segment profitability improved in the second quarter to 4.7 percent, from 2.4 percent in the first quarter.
  
• Two paper chemicals plants were closed during the first half.
• Profitability does however, remain a significant issue and therefore efforts are continuing to restore acceptable profitability levels. Overall, operating income margin was 3.6 percent in the first half (2006: 2.8 percent).

The view of the market is flat and much like it was for Clariant, as Ciba did not meet its profit forecasts (see ABC Money). There remains a concern on the ability of Ciba to integrate the Raisio paper chemical acquisition and turn around the business. Failure to make much impact on raising prices is an issue which will be difficult to overcome in the current competitive environment driven by competition from India, China and dollar-based suppliers (there was a recent price hike announcement). The changes in the senior management of the paper business does not seem to have had much impact so far.

It was interesting to see that Ciba has started to consider the climate change agenda in it PR.