The assessment came in the press conferences held by each of the three firms in mid-March, during which the respective chairmen reported dramatically differing results for 2003.
All of them, though, see light at the end of the tunnel. This time, instead of rushing to lengthen the tunnel--which BASF Chairman Jürgen Hambrecht said is the natural German tendency--they are cautiously welcoming the light.
However, according to Hambrecht, that recovery is not spread universally around the world. European business, he said, "is not generating growth by itself. The industry is showing improvement in growth in Asia and to a lesser extent in the U.S. But in Europe, we see only a very moderate recovery. When it comes to our hopes, we have few illusions."
At BASF, a fourth quarter that turned out substantially better than expected, with earnings before special items up by more than 25% from the 2002 period, helped convince Hambrecht that the outlook for 2004 truly has improved.
Hambrecht said that, with the exception of North America, BASF was able to improve sales in all regions. In Asia and Latin America, BASF showed growth in both sales and earnings. However, he noted, "We are not satisfied with our earnings in North America," where pretax earnings fell 56% to just over $11 million. Operations in North America, he said, were hit by charges for the first phase of a two-phase restructuring program designed to yield $100 million in cost savings by the end of this year (C&EN, March 22, page 11).
One day later, Chairman Werner Wenning reported the largest loss in Bayer's history, because of nonrecurring special charges. However, take away the $2.9 billion in charges--and a nonrecurring gain of $885 million in 2002 from divestiture income--and the company boosted operating earnings by 67% over 2002.
Three-quarters of the special charges resulted from Bayer's strategic realignment of its portfolio. And of that, said Klaus Kühn, chief financial officer, just over one-half related to charges taken for the businesses that are being incorporated into Bayer's new chemicals unit, named Lanxess. For example, $565 million was marked down in the polyols business, $339 million in acrylonitrile-butadiene-styrene, and another $339 million in the fine chemicals business in order to adjust to reduced earnings forecasts, Kühn said.
And for the first time since litigation arose over the withdrawn Baycol/Lipobay anticholesterol drug, the company has taken a charge to its operating results, of just under $340 million. In the past, Bayer said there was no way to estimate possible expenses, so it made no allowances for them in its accounts.
The businesses that will make up Lanxess, which is scheduled to be launched on international stock markets this year or early next, "suffered particularly from the general weakness of the market last year," Wenning said. The operations also had to absorb many special charges, resulting in a 2003 loss before interest and taxes of $1.47 billion.
ON THE OTHER HAND, Bayer CropScience, augmented by the business acquired from Aventis last year, was the largest contributor to the company's operating earnings. Crop protection sales were up by 23%, Wenning reported, putting Bayer "nearly level with the market leader, Syngenta."
Degussa had reported its 2003 results the week earlier. Chairman Utz-Hellmuth Felcht said the company had taken "prompt action to counter the difficult economic trends in the past year." As a result, he added, Degussa was able to limit the decline in sales and pretax earnings.
Despite an increase of 2% in sales volume, adverse currency exchange effects caused overall sales to slip 3% from those of 2002. The company's core, continuing businesses showed a similar decline, as the upturn anticipated by many observers never materialized. However, Felcht pointed out, the company was able to hold the fall in the pretax earnings of its core businesses to 5% from 2002 levels.
An impairment charge of $565 million against the company's fine chemicals unit reflected the unit's altered business prospects, CFO Heinz-Joachim Wagner said. That charge was the primary cause of the company's reported net loss, he added.
Currency effects made themselves felt at all three of the German companies, as at every other European chemical company whether in the euro zone--where the euro is the currency--or outside it, including the U.K. and Switzerland. At BASF, for example, Hambrecht noted that excluding currency effects, sales would have grown 10.8% to reach $40.4 billion.
AND AT ALL THREE COMPANIES, capital expenditure was held below the level of depreciation. Degussa's was "slightly lower" than depreciation and will be at about the same level this year, Felcht said. At Bayer, where capital investment was less than 70% of depreciation, spending will be up but only slightly, Wenning said, reaching about 75% of depreciation this year. Capital spending will pick up a bit more in 2005, when Kühn forecasts it will reach about 85% of depreciation.
Such stringent investment controls are not sustainable, executives at all three companies agreed. However, as Hambrecht pointed out, BASF's average capacity utilization through 2003 was at or slightly below 80%. "Without any major capital spending, we have additional growth potential," he said.
Where spending does show up, Felcht added, it will be in regions where the company expects its major growth: in Asia and Central and Eastern Europe.
China will be a particularly competitive challenge, he suggested. Degussa already has 17 companies in China, of which 12 have production facilities. Half are joint ventures; the other half, wholly owned.
And in Central and Eastern Europe, the company is stepping up its activities, he said. For example, Degussa's Plexiglas business is investing in a plant in Russia to extrude solid acrylic sheet. It will be operated by a joint venture. And Degussa has relocated carbon black output from several sites in Western Europe to one modernized and enlarged site in Poland.