Ciba announce half year results - paper chemicals not seen in future recovery plans

Ciba announced their half-year financial results and after a series of poor results for speciality chemicals businesses it was expected that Ciba would not bring much cheer to investors (Share price immediately dropped 15%). The group highlights were:

• Sales of CHF 3,088 million (2007: CHF 3,308 million) were flat in local currencies and 7 percent lower in Swiss francs.
• Gross profit margin was 26.8 percent (2007: 29.0 percent) - significant impact of high raw material and energy costs
• Good sales growth in Asia in first half year, some slowdown in Europe
• Significant sales price increases taking effect from mid June - time will tell!
  
• Goodwill impairment of CHF 595 million in Water & Paper Treatment
• Strategic options under evaluation for paper and publication inks businesses
• Acquisitions and JV planned for Q3 to strengthen Plastic Additives and Coating Effects
• New industry focused operating model to be effective early 2009

After earlier pronouncements that Ciba had lost patience with its paper chemicals business and in an attempt to prepare the media before the announcement of their first-half results Ciba is now clearly prepared to participate in the much needed consolidation of the paper chemicals industry. This is especially needed in Europe.

Ciba's statements relating to their paper chemicals business are:

• A number of options are being evaluated for the paper business - it is not performing in line with expectations and requires additional strategic action to improve their market position.
  
• Decisions will be taken on an appropriate course of action in the next few months. Ciba state that, 'The market dynamics of the paper industry have changed considerably in the last three years, (the timescale has been far longer!) and the structural shift of growth to Asia, along with dramatically increased raw material costs have further compounded an already difficult business environment. Although a new business model was successfully implemented in 2007, it was not sufficient to counter balance the difficult market conditions and it has not been possible to achieve satisfactory profitability levels. The Board of Directors of Ciba has decided to evaluate a number of strategic options to ensure a sustainable future for the business.'
  
• In accordance with accounting requirements, goodwill levels have been adjusted for the Water & Paper Treatment segment, which brings Ciba into a loss for the second quarter. Their statement was, 'In the first half, the Company conducted a strategic review of the paper business and concluded that further strategic options needed to be evaluated for this business, as market dynamics had changed considerably over the last few years and previously forecast profitability levels would not be met.' There has therefore been an adjustment of goodwill, resulting in a non‑cash impairment of CHF 595 million.

The changes in the paper chemicals industry which Ciba highlight have not happened 'in the last 3 years' (eg move of the business to Asia) and it is their slow strategic thinking which has lead to the situation which they find themselves in today. The big questions are just how much of the Asia market does a company like Ciba expect to get in Asia? Will Ciba actually be able to compete with Asian (Chinese) companies of the future? I have my doubts. Ciba has also struggled to effectively integrate their acquisitions, especially Raisio, and to structure their organisation world-wide, despite many changes in their senior management.

Recently there have been a number of moves to further consolidate the paper chemicals industry and more is needed to counter the shifts and consolidations in the customer base (pulp and paper industry):

• Ashland acquire Hercules
• Dow acquire Rohm and Haas
• Ciba loose patience with paper chemicals and announce strategic review
  
• Clariant, a dye and FWA (OBA) specialist, continue to struggle to find a sustainable paper chemical strategy as corporate decisions appear to compromise their paper business (eg site closures; Swiss-centric approach) - the company's share price continues to lack any sparkle and they have recently been removed from the Swiss blue-chip index (SMI). However, today has seen a jump as acquisition speculation continues.
  
• Nalco is looking at options for its paper chemicals business

In addition there are three other major players:

• Kemira (Market leader) - looking at cost savings and re-structuring but stll want to be in this business in the long-term
• BASF - in the strongest position financially and probably waiting to see what it can pick off
• EKA Chemicals - part of the bigger Akzo Nobel but so far there have not been any comments in the media that it expects to get out of the paper chemicals business. Again they may be waiting to acquire additional market share.

There are also a number of smaller suppliers such as Buckman Laboratories and a growing group of Asian manufaturers and suppliers.

One could envisage a number of effective consolidations, but will the strategic thinkers be able to carve out a sustainable business or businesses - it will need an independent look at this business (eg private equity company) with a forward looking approach to match how the paper and paper chemicals industries will develop in the future. The USA has seen some consolidation; Europe is in need of consolidation; and Asia is developing its own industry.

Two points to consider:

• China will be the biggest consumer of paper chemicals in the next 10 years!
  
• China has its own thriving paper chemicals business!