Rhodia Charts Its Survival

Rhodia reported "a sharp deterioration" of results in 2003 and doesn't expect to return to profit until 2006--and then only by selling off more operations.

First to go in the latest round of divestitures is the French specialty chemicals producer's food ingredients unit. The company is in exclusive negotiations to sell the unit to Denmark's Danisco. And Rhodia is paring down a field of 14 potential bidders for its specialty phosphates business. Sale of both units is expected by the end of the first half of the year.

The sales are part of the company's action plan, launched last October, to refocus its portfolio and slash costs and spending in a bid to return to profitability. That is a must, CEO Jean-Pierre Clamadieu says. "The results are terrible," he says of the company's sales and earnings for 2003.

Clamadieu, who took over late last year following the resignation of long-standing CEO Jean-Pierre Tirouflet, has been on a whirlwind trip to try to convince investors and securities analysts that the company can turn itself around. That's a challenge: The company reported net 2003 sales of $6.2 billion, down from the $7.5 billion reported in 2002--both converted at the average exchange rate for 2003--following an earlier batch of divestitures. After the two new planned sales, Rhodia will be left with sales of between $5 billion and $5.6 billion.

More critically, the net loss of just under $5 million reported by Rhodia in 2002 had swollen to a loss of $1.53 billion for 2003.

Clamadieu refuses to predict earnings for this year, saying only that the company expects to be back in the black in 2006. But he also points out that every 10-cent variation between the U.S. dollar and the euro has an impact of $70 million to $80 million on the company's operating profits. For example, figured at the current exchange rate rather than the average for 2003, the company's net loss last year would have been $1.73 billion.

Some of the company's businesses--acetate filter tow, sulfuric acid regeneration, and polyamides--are strong cash generators.

The specialty businesses, on the other hand, have been suffering from intense competition and price erosion. About Rhodia's fine organics unit, in particular, Clamadieu says, "We need to put in place an energetic turnaround of this business, perhaps getting out of agrochemical intermediates." However, he adds, "for now, I don't see a buyer for [fine organics]. It is not yet time to give up this business--there is still value for shareholders."

However, wherever possible, the company is selling off non-core operations. For example, last week the company sold its 34% stake in the French specialty ceramics joint venture Baikowski Chimie to partner PSB Industrie, which owns the other share.

"Marketing strengths and cross-fertilization cannot compensate for intrinsic weaknesses," says Clamadieu. "We must look very closely at our competitiveness."

Part of the problem, he concedes, was the binge of acquisitions the company had made in the past: "To a large extent, the acquisitions were the wrong decision--it is clear that the debt load has had an overwhelming impact on the company. We would be in a much better position without some of those acquisitions." But the past is past, he shrugs, and more important is what the company does, starting from its present position.

The survival of Rhodia as a stand-alone company is Clamadieu's current goal, and, ironically, he is optimistic because of its problems. "I don't see a lot of people ready to take over Rhodia as it is right now. We are bringing it back to health. If at the end of the road, people want to merge with us, that's okay--the very existence of the Rhodia name is not the ultimate goal."

"I don't see that merger scenario now," ; he continues, "but I also don't see the company going bankrupt either." Shareholders just have to be ready for a slow haul back to profitability.

SHRINKING

Rhodia has been jettisoning units to stay afloat

NOTE: Sales figures are based on 2003 average exchange rate of U.S. $1.00 = 0.8838 euros. a Forecast.