Europeans Bask in Profits' Sun

For most of the major european chemical companies that have reported their year-end financial results, 2004 was a decidedly good year. In fact, a sense of optimism radiated through the plethora of annual press conferences held by companies in February and March, because, for a change, the news was mostly good.

For example, even financially beleaguered Rhodia was able to more than halve its net loss, with Chief Executive Officer Jean-Pierre Clamadieu confirming that the company expects to return to net profit in 2006.

A restructuring of the company's debt--which fell in 2004 to just above $3 billion--and tight cost controls, augmented by income from divestitures, helped the company strengthen its balance sheet, Clamadieu said. And Rhodia was able to pass on some higher raw material costs to its customers, as were other European chemicals suppliers.

Ironically, it was in Germany--where the national economy has been sputtering along fitfully--that chemical companies seemed to do best.

For example, at BASF, Chairman Jürgen Hambrecht announced that his company's sales were up nearly 13% over 2003 levels. That was despite significantly higher raw materials prices, he said, and the continuing impact of adverse currency effects.

The company was able to pass on some price increases, Hambrecht said, although efforts have been complicated by continued overcapacity in some areas. In fourth-quarter 2004, for example, growth over the comparable period of 2003 was slower than in the previous two quarters, as raw material price hikes outpaced the company's product prices. "If the price of raw materials such as benzene rises by 60% in just one month, you have to focus on value," he emphasized, explaining BASF's sales strategy of "quality, not quantity."

Chief Financial Officer Kurt Bock noted that BASF was able to improve its cost structure in 2004: Sales increased 12.5% over the previous year, while cost of sales rose only 9.9%. "In 2003, the situation was exactly the reverse," he said.

Moreover, Bock added, BASF increased its key financial metric of EBIT--earnings before interest, taxes, and special items--by 64% to $6.4 billion. "As a result, we achieved our goal of earning a premium on our cost of capital for the first time since the mid-1990s," he said.

EUROPEAN RESULT
Earnings, profit margins mostly improved in 2004

FOR DEGUSSA, "The efforts made in recent years are paying off. Our strategy is proving successful: Earnings rose perceptibly in 2004," according to Chairman Utz-Hellmuth Felcht. "The improvement in performance was supported by our extensive cost-cutting measures but counteracted by the weak U.S. dollar and higher raw material prices."

In fact, added Heinz-Joachim Wagner, Degussa's chief financial officer, the counteraction was noticeable in the growth of sales: up 3% over 2003 levels, or 6% after adjustment for currency effects. "This was attributable to a significant rise in volume sales in all divisions," he said. "On the price front, competitive price erosion was offset by slight price rises, mainly because we were able to pass on higher raw material costs."

Merck KGaA Chairman Bernhard Scheuble was able to proclaim that his company "produced the best year in its 336-year history, confirming our strategy of focused diversification." That result came even though the weak dollar trimmed sales growth for the year.

Profit after tax, Merck executives said, more than tripled as the result of exceptional gains, good business results, improved financial results, and a lower tax rate. Among the stars was liquid crystals, which jumped 33% in sales over 2003. Sales of electronic chemicals also showed a double-digit sales increase: 16% in local currencies but 11% after conversion to euros.

And Bayer was able to turn its official net loss of 2003--reflecting restructuring charges associated with the spin-off of Lanxess, its commodity chemical business--into profits in 2004. Sales were up by 4.2%. Adjusting for the effects of currency translations and portfolio changes, the increase was 9.1%, Bayer officials added.

Bayer's operating profit before special items increased by 53.1%, leading CEO Werner Wenning to note: "This improvement in our operating performance is very gratifying. We have exceeded our sales and earnings targets and successfully realigned our company."

The company's efforts to reduce costs and increase efficiency, he added, more than offset the sharp rise in raw material prices, negative currency effects, and expiration of the company's key U.S. patent for the antibiotic Cipro.

Lanxess also had a good year, reporting preliminary, unaudited sales last week of $8.4 billion, up more than 7%. The firm's operating profit before special items was $196.5 million, compared to a loss of $148.0 million in 2003.

At Swiss companies, however, raw material prices and currency effects were somewhat more problematic.

Clariant, for one, was able to boast an increase in sales, on a like-for-like basis, of 9% by volume and 7% in local currency terms, although the latter figure was trimmed slightly, to 6%, for its official accounts.

"There is still a lot of work to be done, but we can be proud of the achievements of the past year," CEO Roland Loesser claimed. Among the company's accomplishments was to achieve significant price increases in the fourth quarter in several product lines; that action, the company said, brought the average price erosion for the full year from more than 3% down to 2%. Raw material prices were up about 2%, the company said, lowering gross margins slightly from 32.0% in 2003 to 31.7% in 2004.

Clariant said its restructuring program helped it reduce costs by $121 million, $40 million more than originally planned for the year, and has put it well on its way to delivering further savings of $240 million this year.

Clariant's Basel neighbor, Ciba Specialty Chemicals, also had to work hard to overcome currency and raw material price impacts.

CEO Armin Meyer pointed out that sales for the company were up 6% in Swiss francs and up 8% in local currencies. Ciba's midyear acquisition, Raisio Chemicals, turned in "an especially strong performance with a 7% increase in local currencies," Meyer said. Adjusted for acquisitions, though, consolidated sales rose 2% in local currencies, "while in Swiss francs they were flat due to the exchange-rate situation--especially the weak U.S. dollar."

Meyer devoted a separate part of his press conference presentation to the sharp rise in the cost of raw materials. As he noted, "While the raw materials we use are mostly several stages downstream of crude oil, and so hikes in the price of oil have had less effect on us, the record prices we are seeing at the moment are nonetheless impacting on us."

One response, he said, is to exploit Ciba's centralized purchasing operations, which enabled the company to reduce raw material costs in the first half of the year and keep them stable for the year as a whole. And since the third quarter of 2004, he added, "we have been announcing and implementing a series of--in some cases--double-digit price increases in various product areas. This has led to a reversal in the price trend. In the third and fourth quarters, we virtually brought this price erosion to a halt."

Similarly, Givaudan's ambitious program to improve operating margins in all areas, begun in January 2004, bore fruit, the company said, significantly improving its operating profit margins. Volume sales declined somewhat, it added, particularly because of a decision by its fragrances division to phase out commodity ingredients to focus on production of high-value fragrance materials.