European Firms See Improvement

Significant pickup in third-quarter earnings shows results of cost cutting

Rounds of cost cutting and restructuring have brought good news from the first clutch of European chemical companies reporting third-quarter results. The firms are enjoying stronger growth, following a year of sluggish earnings performance.

DSM Chairman Peter Elverding exulted that "our third-quarter results were clearly better than anticipated at the start of the quarter. We were able to maintain our performance at the level of the second quarter during the normally weaker summer season." DSM's one sore spot, Elverding said, is the bulk antibiotics business, where the company is "currently preparing actions" to improve results.

For much of the European industry, improvements reflect the results of restructuring that frequently have added significant nonrecurring costs and gains to companies' balance sheets.

Akzo Nobel, for example, showed a nonrecurring gain of nearly $390 million from divestments. Net income from ongoing operations was also significantly stronger than that of the same period in 2003, according to Chief Financial Officer Rob Frohn. The firm's overall sales were down, however, because improved chemical and coatings sales could not offset the effects of lower sales in pharmaceuticals--including the Diosynth fine chemicals business--and the effects of currency changes and divestments.

Cost-cutting efforts are continuing throughout the industry. Ciba Specialty Chemicals announced that it plans a reduction of 950 jobs--roughly 5% of its workforce--as it restructures its water and paper treatment division following the integration of Finnish specialty chemicals producer Raisio Chemicals, acquired in June. The cut in jobs over the next two years will be accompanied by charges of roughly $100 million.

"Even without acquisition effects, sales in Ciba's underlying businesses were higher in both the nine-month and third-quarter periods in local currencies," CEO Armin Meyer said. "One important factor in our improved performance was our conscious decision to pursue quality sales and to walk away from business that had unsatisfactory margins. We also kept manufacturing costs under control, even as we produced more."

Degussa continues to review its options for businesses that don't have a chance to meet Chairman Utz-Hellmuth Felcht's target of being number one, two, or three in their global markets. In recent months, the company has revealed plans to sell its water treatment and food ingredients businesses, which have annual sales of $215 million and $670 million, respectively.

At the firm's quarterly press conference last week, Felcht said Degussa will increase R&D in its remaining businesses, from 3.2% of sales currently to 4.0% of sales in the midterm. "The only way to safeguard existing jobs and create new ones is by means of innovation," he said.