Global Chemical Industry Presents Mixed Results for 2013

Many Players in Transformation, U.S. Firms Stalked By Activist Shareholders

02.04.2014 -

Annual results presented by global chemical companies for 2013 showed a diverse picture. This was scant surprise as many were still mired in a transformation process, while others with restructuring behind them were beginning to reap benefits.

Large German multinational players BASF and Bayer were firmly focused on the future and medium-sized producers Arkema, Solvay, Lonza and DSM moving swiftly in that direction. Evonik had already cleared a path, but Lanxess had painful moves ahead of it. In the U.S., activist shareholders were rattling corporate cages.

Across the international spectrum, corporate chieftains were cautious in their forecasts for 2014. Based on experience of past, all understand that whether forecasts are confirmed or fail to meet the target often depends as much on unforeseen events as on management's own efforts.

Mood at German Chemical Companies Most Solidly Upbeat

Compared with European rivals, the mood at Germany's largest chemical companies was the most solidly upbeat. With the domestic economy relatively robust, business developed well.  Faced with flat interest rates, the country's usually frugal citizens had put aside their piggy banks and consume. The export engine continued to run at full throttle, whether the rest of Europe liked it or not.

Although BASF chief Kurt Bock said economic headwinds buffeted business in 2013, the world's largest chemical producer outperformed management's cautious forecast. Despite a recent diversification drive, results were driven by bulk businesses such as oil & gas or petrochemicals. At the same time, the burgeoning shale gas bonanza rejuvenated the group's fairly stagnant North American activities.

The Ludwigshafen group closed 2013 with revenue of €74 billion, including oil and gas taxes, 2.6% ahead of 2012. EBIT before special items improved by 8% to €7.2 billion. In 2014, Bock expects sales and earnings to rise again, with "significantly higher" contributions from the Performance Products segment, which includes dispersions & pigments, care chemicals, nutrition & health, along with processing aids.

At Bayer, Germany's other large chemical multinational, business also held up well last year. Of the three corporate sub-groups, only MaterialScience lagged - a stress factor attributed to the overcapacity-plagued market for the engineering plastic polycarbonate. The HealthCare segment led the overall performance. Bayer's other life science segment, CropScience, also achieved its operational targets, group CEO Marijn Dekkers said.

Across all businesses, the Leverkusen group saw sales rise 1% in absolute terms to a record €40.2 billion. Adjusted figures show a 5% increase. EBIT before special items added 2.4% to reach €5.8 billion, and EBITDA rose 1.5% to €8.4 billion. In 2014, Dekkers expects currency- and portfolio-adjusted sales 5% higher at €41-42 billion, with EBITDA before special items improving by a mid-single-digit percentage figure.  In problem zone polycarbonate, MaterialScience, CEO Patrick Thomas predicted that the market could begin turning around as two Asian players are cutting capacity and the liquid crystal display market appears to be reviving.

Slightly lighter German heavyweight, Essen-based Evonik, saw 2013 sales deteriorate by 4% to €12.9 billion. In absolute figures, EBITDA sank 18.6% to €2 billion, but CEO Klaus Engel said the performance was in line with expectations. With demand for most of its products healthy, volume growth accelerated quarter-by-quarter. Especially strong volume expansion was seen for personal and baby care products, feed amino acids, silica, coating applications and MMA.

For 2014, Engel predicted slightly higher sales, with adjusted EBITDA of €1.8-2.1 billion roughly in the same corridor as 2013. Volume trends are expected to continue positive. This year, Evonik hopes to begin reaping the benefits of its Administration Excellence scheme targeted to save up to €250 million annually. Over 450 levers for efficiency gains have been identified, the CEO said.

Lanxess, now headquartered at Cologne, Germany, was a true rags-to riches story for some time after its 2004 spin-off from Bayer, but the bubble burst in 2013. Declining selling prices and stiff competition for synthetic rubber left the company with a net loss and CEO Axel Heitmann without a job from the end of February 2014. Last year's figures show EBITDA pre-exceptionals plummeting 40% to €735 million on sales down 9% year-on-year to €8.3 billion. Writedowns had to be taken on several businesses.

The Performance Polymers segment took one of the worst hits, as higher raw materials prices for rubber production could not be compensated by higher selling prices. In a preliminary forecast for 2014, Lanxess said it expected improvement, not least because of the absence of one-time items. Former CFO Matthias Zachert, who returned to the company on Apr. 1 to take Heitmann's job is to provide more guidance at a press briefing on May 8.

Companies Struggle with Unfavorable Currency Effects

Swiss companies in particular faced headwinds from foreign exchange rates last year. At specialty chemicals producer Clariant, sales were flat at 6 billion Swiss francs, but rose 4% in local currencies. EBITDA before exceptional items improved by 5% (or 9% in local currencies) to 858 million Swiss francs. CEO Hariolf Kottmann said the company's "unfolding operational strength" became visible in a challenging economic environment. After divesting several businesses, it is "now a more profitable, less cyclical and well-balanced specialty chemicals player."

The Clariant chief expects 2014 to be a year of organic growth as the company moves closer to its mid-term target of taking a position in the top-tier of the specialty chemicals sector. An annual EBITDA margin pre-exceptionals of 16-19% is targeted from 2015.

Another Swiss specialty chemicals producer, Lonza, jump-started its transition from a product-oriented to a market-driven player in 2013. CEO Richard Ridinger said the elimination of low-margin business resulted in lower full-year revenues, but margins improved. While sales receded by 4.2% in Swiss francs, EBITDA rose by 4.4% and core EBIT by 11.2%. Overall, the reduction of the company's marketing footprint led to improved productivity.

Ridinger said Lonza's transformation will continue in 2014. Its new market orientation calls for concentration on key customer industries, response to global megatrends and further optimization of the portfolio. For the full year, management forecasts core EBIT growth of around 10% and revenue growth of around 5%.

At France's Arkema, CEO Thierry Le Henaff, said the economic environment was less favorable for the chemical company in 2013, especially in Europe sales fell 4.6% to €6.1 billion and EBITDA shrank by 9.4% to 902 million. Volume sales gained 1.4%, thanks mainly to progress in the Coatings Solutions business. Pointing to a "solid" performance Le Henaff brushed over the shrinking of the EBITDA margin from 15.6% to 14.8%. A "highly promising" number of capital spending projects started in 2013 "will bear fruit in the near future," he promised.

Despite highly divergent market conditions in world regions, the CEO said the French company "is confident in its ability to grow EBITDA in 2014." By 2016, Arkema expects annual sales of €8 billion and an EBITDA margin of 16%. Up to 2020, the respective numbers are predicted to rise to €10 billion and 17%.

For Belgium's Solvay, 2013 was a year of transition in which CEO Jean-Pierre Clamadieu said the stage was set for a hoped-for improvement in macro-economic conditions in 2014. Top moves were the acquisition of U.S-based Chemlogics and the separation of chlorvinyls activities to prepare for the proposed joint venture with Ineos.

Highlighting 2013 figures, Clamadieu said sales, pressured by unfavorable foreign exchange rates, decreased by 5% to €9.9 billion. The phase-out of guar and the end of the carbon credit combined to depress REBITDA by 12% to €1.67 million. For 2014, the company is "cautiously optimistic." Even in a fragile macro-economic environment, the CEO said he is confident that Solvay will see REBITDA growth. Priorities will be to complete the ongoing portfolio transformation and explore unspecified strategic opportunities.

In the Netherlands, coatings specialist AkzoNobel saw 2013 sales revenue shrink 5% to €14.6 billion, which it said reflected adverse currency effects. EBITDA declined by the same margin to €1.6 billion. "We indicated at the beginning of 2013 that trading conditions would continue to be challenging, and that proved to be the case," CEO Ton Büchner said. In response, he said the company accelerated its performance improvement program, concluding it a year ahead of schedule and above target.

Although AkzoNobel saw signs of stabilization in some businesses in last year's second half, the economic environment remains fragile and foreign currencies volatile, Büchner said. Plans for 2014 foresee reducing the cost base further to offset persistently soft demand. Nevertheless, the CEO said the company is on track to deliver on its 2015 targets of a return on sales of 9% and a return on investment of 14%.

Another Dutch player, DSM, has made progress in transforming itself into a dual-core life science and material science player. In 2013, CEO Feike Sijbesma said the company completed the third year of the strategy that "has served us well since 2010." Sales from continuing operations moved forward 5.4% to €8.6 billion. Despite persistent macro-economic challenges, EBITDA increased by 18% to €1.3 billion.

For 2014, DSM is taking "a prudent approach," Sijbesma said, assuming the unfavorable currency exchange rates will continue throughout the year. The economic backdrop is seen to continue challenging, with growth in Europe low, modest in the U.S. and slowing in the high growth economies. Management's target is to at least offset the negative currency impact.

American Chemical Producers Have Problems of Their Own

While to the economic sun appears to be shining on shale gas El Dorado U.S.A. so brightly it makes European rivals squint, American chemical producers have problems of their own. One of the most worrying to big names such as Dow or DuPont is stalking by activist shareholders seeking higher payouts.

Presenting 2013 results, Dow Chemical CEO Andrew Liveris took a swipe at a hedge fund urging the company to spin-off of its petrochemicals business.  He said the U.S. market's largest chemical player exceeded its corporate targets despite challenging conditions - "clear evidence of our ability to manage all aspects of our integrated business to generate a strong financial performance." Total sales, excluding Feedstocks & Energy, nudged forward 1% to $57.1 billion, adjusted sales by 3%. EBITDA nearly doubled to $10.5 billion from $5.6 billion a year earlier.

For 2014, Liveris said, "while we are seeing positive trends in major economies, global growth remains tentative. Dow "will continue to allocate capital carefully, focusing on highly accretive growth projects such as new agricultural projects as well as investments on the U.S. Gulf Coast and in Saudi Arabia."

DuPont, another U.S. chemical giant pursued by an activist shareholder, lifted sales 3% in 2013 to $35.7 billion. Operating profit rose 2% to $3.6 billion. Here, Agriculture - profiting from earlier than usual orders for seeds in Q4 - stood out with an earnings rise of 16% to $345 million, while Performance Chemicals brought up the rear with a loss of $816 million.

CEO Ellen Kullman said the company's results and "strategic actions" last year reinforce its plan to build a "higher growth, higher value DuPont" and its decision to carve out Performance Chemicals - a move urged by a hedge fund shareholder. For 2014, she predicted an 8-15% rise in operating profit and a 4% increase in sales. The CEO said the outlook reflects expected improvement in global industrial production, lower agricultural input costs, and a slightly stronger average exchange value for the U.S. dollar.