Clariant beats expectations and shows 3Q09 profit. Paper chemical business remains weak.

Clariant reported its third quarter 2009 results and overall the company showed better than expected performance, showing a profit driven by restructuring and a higher capacity utilisation. 3Q09 Sales were down 14% in local currencies and 19% in Swiss Francs. The high Euro high Swiss Franc situation had a negative impact on the results.

Details of Clariant's performance are given on their web site.

In the webcast, Patrick Jany stated, 'The paper business remains weak and shows no sign of improvement'.

Kemira's paper chemicals business struggles on

Kemira announced their first half 2009 results - as is the norm for this sector at the present time, sales decreased - Kemira's overall sales decreased by 5% for the period April-June, 2009 - as customer demand decreased.

For the paper business its seems to be a trend to using hyperbole (eg Clariant's use of the word MASSIVE) - For Kemira, 'The paper segment's revenue in April-June shrank by 8% to EUR221.6 million as demand in customer industries PLUMMETED.'

If interested in the detail, see the Kemira web site. What is refreshing about Kemira is that their business is transparent and unlike some companies (eg Clariant, BASF/Ciba, Ashland) it is possible to see exactly how their paper chemicals business is performing.

Clariant experience 'massive' decline in sales for 1H09

Clariant announced their first half 2009 sales with a degree of honesty which was unusual for the conservative Swiss company:

'Despite persistent poor business conditions resulting in a massive decline in sales, the Textile, Leather and Paper Chemicals Division returned to profitability at the operating level. Sales dropped 22% in local currencies and 25% in Swiss francs.'

The outlook? As we have stated before, this is a watershed year for the paper chemicals business which requires new vision and leadership.

Some recent reports (see bloomberg.com):

22-Jun-09: Clariant, the world’s largest maker of chemicals used in printing ink based in Muttenz, Switzerland, said on June 22 it plans to cut additional jobs on top of 1,350 reductions announced earlier this year.

02-Jul-09: Clariant AG dropped 8.6 percent to 6.36 Swiss francs for the biggest decline on the Stoxx 600. The world’s largest maker of chemicals plans to sell 225 million francs ($209 million) of convertible bonds.

13-Jul-09: Clariant, The world’s biggest maker of chemicals used in printing ink expects monthly profit of as much as 18 million Swiss francs ($16.6 million) in the “coming period,” Finanz & Wirtschaft said, citing an interview with Chief Executive Officer Hariolf Kottmann. Clariant will probably cut more jobs this year and in 2010 before restructuring is complete, he said.

30-Jul-09: Clariant, the world’s biggest maker of chemicals used in printing ink reports first-half earnings. The shares rose 2.1 percent to 6.96 francs.

BASF remain pessimistic about economy

BASF remain pessimistic and say that slump will continue for the chemicals industry. Sales volumes in some segments had fallen by as much as 30-40% and small to medium sized companies were still having difficulties securing loans.

These comments support the view of those active in the industry that the 'green shoots of recovery' are not being seen yet.

BASF Roadshow - 'The Chemical Company' pitch to investors

BASF has been on the road with a story to keep or entice future investors.  

Unde the title, 'Tackling the challeneges ahead", details of BASF's current performance and outlook are made.  In the last slide, the integration of the Ciba businesses into the BASF structure, effective 1 April, 2009,  is shown.

Clariant continue decline - paper business lacks direction

A familiar story at Clariant, as the first quarter results are announced - this time with an air of resignation and an acceptance of reality. It is best to spare the details, but they are available on the Clariant web site and there are many analyst reports on the web. Sales declined 19% in local currencies and 24% in Swiss francs.

The only comment regarding the paper business was 'lower demand, significantly affected by inventory devaluation'. The reality is that in Clariant's key markets:

• The OBA market has declined and, as predicted in this weblog, Clariant is becoming less competitive in the market where competent, lower cost suppliers based in China and India have made inroads.
  
• A similar story in paper dyes - Clariant is a high-cost supplier with a declining market share.
• Other segments? Clariant has had to face reality - efforts to enter the emulsion polymer market were doomed to failure from the start and rumour has it that they have now embarrasingly had to abandon their efforts. There continues to be a lack of strategy in the paper business - someone to lead the business with modicum of market knowledge would be a start.

A watershed year for Clariant ............

Kemira sales and profit down in 1Q09 - paper chemicals struggling

Kemira posted a first quarter pre-tax profit of EUR8 mio, down from EUR22 mio a year ago.  Sales fell from EUR684 million a year ago to EUR609 million.

Sales of pulp and paper chemicals declined from EUR247.7 mio a year ago to EUR225 mio and EBITDA fell 21% to EUR19.8 (8.8% of sales).  The reasons given for the poor performance were falling customer demand, especially in the 'traditional' markets of North America and Europe, linked to the global economic slow-down.  There was a positive currency effect of EUR2mio.

There was some mention of the cost saving projects which Kemira has undertaken such as temporary shout downs in production, closure of the AKD wax production in Vaasa, Finland (March 2009), in addition to the 6 production facilities which have been shut in North America in the last 6 years and the planned closure of the polymer production unit in Colombus, Ohio.

As the BASF acquisition of Ciba takes shape it will be interesting to see whether Kemira adapts its business model to gain an advantage - if Kemira wants to increase the size of its pulp and paper buiness to match that of the new BASF, there are some smaller specialist which could be acquired and help in the further, needed consolidation of the Europen paper chemicals industry.

Deatils of the Kemira performance in the first quarter of 2009 are available on their web site.

BASF pay a dividend - is there any change left in their Euro pockets?

BASF decides not to put its dividend into its own pocket!  After reporting its first quarterly loss for 7 years, 'The Chemical Company' made a commitment to keep paying a dividend, despite plant closures, job cuts etc.  This is unlike rivals such as the Dow Chemical company which cut its payout for the first time in 112 years.

Shareholders will receive EUR1.95 which is similar to pay-outs in previous years.  

Some facts - BASF will eliminate 1,500 jobs, idle factories, reduce working hours for 2,500 employees ............  the slump in chemical demand coincides with BASF's decision to buy Ciba Specialty Chemicals.  The integration of Ciba will have an additional impact on earnings.

In reality the dividend payment is a 'nice thing' but BASF, like many chemical companies has a tough year ahead.  At least BASF are better positioned than many of the other chemical companies which have not joined the essential consolidation of the European chemical industry.

Kemira Pulp&Paper - business slows in 2008

The Kemira pulp and paper chemicals business slowed towards the end of the year, but the results were not as bad as expected.  

Revenue in the last quarter of 2008 increased by 2% (EUR 258.3 million) and by 1.4% for the whole year (EUR1,057.7).  

There was a decrease in operating profit as a result of lower sales volumes and higher raw material, freight and energy costs - not to mention the 'one-off' cost of their cost-savings programme!  The operating profit (excluding non-recurring items) in the last quarter of 2008 decreased to EUR9.4 million from EUR12.3 million in the same period of 2007.  For the year, profit decreased to EUR50.4 million (4.8% of sales) from EUR79.8 (7.7% of sales) in 2007.

The full results and details are available on Kemira's web site.

Standard & Poor's and Moody's Negative on Clariant's Initiatives

Standard & Poor's have cut the credit outlook for Clariant to 'negative' from 'stable' and almost in the same breath, Moody's Investors Service has cut its rating to non-investment grade or 'junk'.

For details, go to the Bloomberg site.

Nalco struggling - 4th quarter very poor

Nalco announced its 2008 year end results with the rhetoric not joined up with the reality of the financial figures.  The devil is in the detail, so to say.

The news for Paper Services was not great.  Revenues declined by 2.3% (organic) with the 4th quarter very poor and forcing Nalco to write off goodwill in this segment.  Only Latin America showed any spark.  In management speak, 'Nominally, direct contribution dollars declined 23.5% to $93 million, with direct contribution margins falling from 15.7% in 2007 to 12% in 2008'.  When will companies learn to write in plain english!  We know you had a very bad result, we can look at the numbers - say it in simple english!!

3Q08 Results: Ciba report 8% drop in profit.

With the acquisition of Ciba by BASF seemingly on track with only the regulators now in the way, Ciba's results now become of little interest.  They posted a drop in profits of 8% which was better than the 15% they predicted.  

Sales of the Water & Paper Treatment Division were CHF 1,829 mio (-5% but +2% in local currencies).  Local currency growth was mainly driven by Asia and the USA as Europe continued to decline.  Profitability was lower than the same period last year, with EBIT at CHF 64 mio compared to CHF 80 mio in 2007.  Raw materials and the lag in increasing prices was blamed.

Ciba's shares rose slightly to CHF 49.30 which is not far from BASF's offer of CHF 50.00.

3Q08 Results: Clariant show glimmers of improvement - paper chemicals still a problem.

Clariant announced its third quarter results for 2008 and there is a glimmer of improvement in the company performance, although the textile, leather and paper (TLP) business continues to be a problem.  The shares which had crashed to all-time lows showed some recovery.  Speculation continues that Clariant is preparing to be split up and that something will have to be done with the uncompetitive TLP business.

Clariant posted third-quarter net profits of CHF 78 mio compared to a loss of CHF 51 mio in the same period last year.  Sales decreased slightly to CHF 2.o9 bn and EBITDA increased from CHF 132 mio to CHF 198 mio.  So, some glimmer of improvement.

What of the paper business?  Buried in the TLP division, which continues to decline, there is little sign of a new strategy and leadership.  The only solution seems to be 'cost leadership' which is OK if you are a big volume producer.  The core business of OBAs and Dyes continues to face stiff competition and although the closures of Horsforth and Selby sites in the UK may help the TLP Division it does little to help the competitiveness of the paper chemicals business - moving production to high-cost Switzerland and loosing key personnel is not a recipe for a successful future.  There is little mentioned in the 3Q08 report about the paper business except for a statement, 'The bottom line of the Paper Business suffered from an unprecedented hike in raw material costs.'  Yes, there has been a big hike in raw material prices, but Clariant's 'unprecedented' position regarding dye and OBA raw materials is of their own making (see earlier blogs).

This next year will be the making or breaking of Clariant's paper business.

For another view: Yahoo Finance - Clariant Downgraded to "Sell"

No surprises - Kemira report 33% decline in net profit for the third quarter 2008.

The 3Q08 financial results reported by Kemira were as predicted with no real surprises.  Pre-tax profits fell to EUR 48.8 mio from EUR 68.3 mio in the same period last year (net profit declined 33% to EUR 35.4 from Eur 52.9 mio last year).  High raw material and energy costs were blamed.  July to September net sales rose 7% to EUR 780 mio from about EUR 730 mio a year ago.

For the pulp and paper chemical activities, Kemira reported a rise in revenue from July to September of 9% (EUR 259.7 mio) with an organic growth in local currencies of 13%.  Operating profit, excluding non-recurring items, declined to EUR 15.3 mio (-32%).  The reasons for the decline were given as:

• Currency exchange (-EUR 8 mio)
• Competitive environment - by this they probably mean that producers in the USA, China and India had an advantage, especially in the growth markets.  This has made it difficult for Kemira to offset their increasing costs by raising prices.
• Closure of paper mills - pulp and paper production has increased over the same period and as Kemira point out, the market has declined in Europe and North America and increased in the growing markets (especially China) where Kemira has not been as competitive against strong local companies.
• High raw material, freight and energy costs - there was some gain in raising prices (EUR 9 mio) and an increased volume (EUR 7 mio) but European paper chemical producers continue to find it hard to compete.  

From January to December, 2008, Kemira's pulp and paper chemical business has seen a moderate revenue growth to EUR 799.4 mio (+ 1%) and a decline in operating profit to EUR 41.0 mio (-39%).

The one significant non-recurring item was the EUR 10.15 mio fine imposed by the European Commission on Finnish Chemicals (acquired by Kemira) for their part in the sodium chlorate cartel.

It will now be interesting to see how once largest pulp and paper chemical producer manages the threat from the now larger combination of BASF and Ciba speciality chemicals.  Kemira will remain big in pulping chemicals but are now dwarfed by the new BASF when it comes to speciality chemicals used in papermaking.  The biggest threat to these larger European chemical companies will continue to come from the smaller, lower-cost, flexible companies emerging in the growth markets.

FT view - Ciba Braces for Further Cuts

The Financial Times has also commented on the recent half-year results for Ciba Specialty Chemicals. The comments included:

• Ciba prepared employees and investors for further pain yesterday, as the Swiss specialty chemicals maker plunged into loss after sharply weaker margins and huge impairment charges.
• In almost permanent restructuring in recent years, Ciba warned of cuts ahead with the potential sales of its struggling paper and publication inks activities.
  
• The moves came alongside a one- off SFr595m goodwill impairment in water and paper treatment, pushing the group into a SFr569m ($521m) net first half loss. Sales fell by 7 per cent to SFr3.09bn.
• The scale of task facing Ciba, and many other European counterparts such as cross-town Clariant, was highlighted in the second quarter, when surging raw materials and energy costs prompted a SFr11m loss, even excluding impairment. Including the latter, Ciba lost SFr606m, compared with a modest net SFr27m profit in the same period last year and analysts' expectations of a SFr42m gain this time.
• Two attributed quotes of financial analysts were: 1) "Even though further strategic options are under evaluation, the company is still facing strong headwinds and has to achieve a turn around in difficult times," noted Oskar Schenker at Sarasin, the Swiss private bank; and 2) "We expect demand to weaken further in the coming months, particularly in Europe, but also in Asia, and therefore believe the group's guidance is too optimistic," added Martin Flückiger at Helvea, the Swiss brokerage.
• Ciba blamed its problems on its inability to pass higher costs to customers, many enjoying long-term contracts. The impairment charge was ascribed to rapid changes in the paper industry, especially a structural shift in growth to Asia [as pointed out in earlier blogs, this structural shift is not recent!]
  
• It also blamed about two-thirds of the charge on Allied Colloids, the UK manufacturer bought for £1.42bn ($2.65bn) in 1998 - [this has been an old excuse which Ciba should have been able to recover from by now! Clariant blame the acquisition of BTP for many of their woes - is there something about the ability of Swiss companies to analyse, acquire, and leverage business opportunities? It would be interesting to see how a Chinese company would transform Ciba or Clariant were they to acquire them - significant value generation?]
  

The Times also highlighted 'endemic lethargy', as seen in the belated sale in 2006 of Ciba's textile effects division in the face of a sharp but predictable shift in production to Asia. What we have highlighted in earlier blogs has been lethargy elsewhere in Ciba:

• The strengthening of the Asia market has been staring the industry in the face for many years!
  
• Asian paper chemical producers will lead in the drive for acquiring market share in China (the fastest growing paper chemical market).
• There is a strong need for consolidation of the paper chemicals business in Europe.
  

See earlier, recent blogs on the Ciba/Clariant situation:

• Forbes point to Ciba and Clariant as acquisition targets
• Ciba announce half year results
• Bloomberg - Clariant and Ciba may be targets for BASF, Dow or Sabic
• Clariant announce half-year results
• Clariant to shut Leeds, UK production site - paper chemicals affected
• Ciba looses patience with paper chemicals business

Please contact us if you would like further insight into any aspect of the paper chemicals buisiness world-wide.

Forbes article also points to Ciba and Clariant as acquisition targets

A further article, this time by Forbes, suggests the efforts of Ciba to streamline its business seem to have been in vain. The article gives views on Ciba's 2nd half 2008 financial results where they posted a larger loss than analysts were expecting, possibly making Ciba vulnerable to a takeover bid.

Ciba's shares fell 16.6%, or 5.30 Swiss francs ($4.83), to 26.60 Swiss francs ($24.23), in Zurich on Tuesday morning, after it reported a loss of 606.0 million Swiss francs ($552.0 million), during the second quarter of the year, following a profit of 27.0 million Swiss francs, a year earlier. The company also took a 595.0 million Swiss franc ($542.1 million) charge on its water and paper-treatment unit.

Like the rest of the chemicals industry Ciba has been struggling with rising raw material costs, as well as quality competition from Asia. (See “Clariant Collapses On Costs.”).

The article goes on to point out that, 'With a market capitalization of 2.2 billion Swiss francs ($2.0 billion), Ciba is trading at 9.2 times its 2009 earnings, and its shares have fallen 44.9% since the start of the year. That compares to a 14.0% drop in the Dow Jones EuroStoxx index of European chemical companies.'

As reported in an earlier Bloomberg article, Ciba and Clariant, its fellow Swiss rival, could find themselves the target of takeover interest from a number of Germany chemical giants such as BASF (analyst at Bayerische Landesbank).

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!

Bloomberg update: Clariant or Ciba may be targets for Dow, BASF or Sabic

A recent Bloomberg update (Clariant May Be Bait for Dow as Oil Hammers Shares) makes for some interesting reading. The gist of the article is:

• Clariant AG trades at 15 percent under book value and less than half what it fetched a year ago. That may make the Swiss company a $4 billion takeover target for BASF SE or Dow Chemical Co., which are shopping for acquisitions.
• It is suggested that Clariant and Ciba Holding AG of Basel, would be logical targets for Dow Chemical, as it is looking for opportunities, and in the U.S. there isn't much that is attractive.
• Clariant and Ciba, spinoffs of drug companies in the 1990s, never "took off'' because they were unable pass along higher raw material costs.
• Clariant is a good buy with a P/E ratio is 7.80.
  
• BASF, Dow and Riyadh-based Saudi Basic Industries Corp., or Sabic could all be in line to bid.
• Ironically, Clariant was today's second-best performing share in the benchmark Swiss Market Index, rising 3.8% to 9.31 Swiss francs at the close of trading in Zurich, giving the company a market value of 2.06 billion francs ($2.1 billion).

Further consolidation of the paper chemicals market it may well involve acquisitions into larger companies rather than spin-offs into pure paper chemicals companies. Watch this space as there is considerable activity in the market today.

Kemira go on cost-cutting rampage after disappointing 2nd quarter results

After the recent disappointing financial results, Kemira, the leading supplier of paper chemicals, has launched a global savings program to improve its profitability (see press release).

Kemira plans to save more than EUR 50 million per annum, of which more than EUR 20 million is planned to come from Kemira's Finnish operations. It will start 'co-determination negotiations' at 5 of the group's Finnish sites - Oulu, Vaasa, Äetsä, Espoo and Helsinki. The restructuring and savings program may involve a net reduction of up to 300 jobs in Finland but none of the Finnish sites will be closed.

Kemira has approximately 10,700 employees worldwide, almost 3,000 of whom are based in 13 sites in Finland. The company has spent its way to being the largest supplier of paper chemicals by making a series of small to medium-sized acquisitions which have proven difficult to integrate. As it becomes clear where the cost-savings will impact on Kemira's paper chemicals operations, the information will be published on this weblog.

The reaction to the announcement has been:

• An employee walkout at the Vaasa facility (see press article)
• ........ other details will be added as they arise
  

Kemira first-half results - tough times for pulp and paper chemicals

Kemira announced their first-half, 2008 results today - these are clearly troubled times for the paper chemicals giant, but they are not alone. Highlights for the Pulp and Paper business are (1H08):

• First-half sales of EUR 517.5 mio (down from 529.7 mio in 2007) - Kemira point to mill closures in Europe and North America for loss of sales with some effect of unfavourable currency exchange rates
  
• Operating profit 5% of sales (down from 8.7% in 2007) - Unable to increase sales prices sufficiently and compensate for the cost hikes - especially higher oil and energy-related costs
• There was an impact on cash-flow from the EU fine for operating a chlorate cartel (see earlier blog)
  

Kemira has made a commitment to paper chemicals and will no doubt be able to survive the current market climate. It is doubtful that they will, in the short term, participate in the future market consolidation as they are yet to effectively integrate their recent acquisitions.