Arkema Looks Ahead

IT WAS IN MAY 2006 that Arkema was launched on the Paris stock market, completing its spin-off from the oil company Total. So with more than a year of business behind it, the company is looking ahead and setting its strategy through 2010.

With 2006 sales of $7.4 billion, Arkema started life as one of the world's top 50 chemical players. As Chief Executive Officer Thierry Le Hénaff explained at the company's first ever investors' day last month, Arkema is present in more than 40 countries, has 17,000 employees, and operates six research centers in France, the U.S., and Japan.

The company has three business segments: 25% of sales last year came from vinyl products, 44% from industrial chemicals, and 31% from performance products. Operating earnings, Le Hénaff added, reflect the split pretty closely: 20% were from vinyls, 47% from industrial chemicals, and 33% from performance products.

Le Hénaff said he was pleased with his company's performance in the first half of this year. The vinyls business, in particular, benefited from strong demand for polyvinyl chloride and caustic soda and from restructuring measures. First-half operating profit margins rose to 8.1%, compared with 3.5% in first-half 2006.

Performance products, he said, benefited from good demand overall, despite tougher market conditions in functional additives. Its operating margin was 11.4% of sales, compared with 9.0% in first-half 2006. Only industrial chemicals fell, in part because of what Le Hénaff termed "challenging market conditions" in acrylics and fluorochemicals. The result: Operating margins were 11.2% in the half, compared with 12.2% a year earlier.

The first-half performance this year was good enough, in fact, that Le Hénaff forecast that the company's operating profits for the entire year would be up 20% over 2006; his initial target had been an improvement of 10-15%. Next year should be even better, he predicted, reflecting gains from productivity, organic growth, and acquisitions.

For now, the French investment community seems to be willing to wait to see how the company progresses. Several analysts have put a "neutral" rating on the company.

Following the posting of second-quarter results in August, for example, UBS lowered its expectations for the firm's share performance. The results for the quarter slightly exceeded Arkema's forecasts, UBS analysts said, but overall prospects remained unchanged.

On the other hand, Denis Lantoine, an analyst with Internet-based investment advisers Investir.fr, sees enough promise in the company that his firm is buying Arkema shares. Lantoine thinks its stock could reach 55 euros per share—compared with about 43 euros today and a historic high close to 51 euros this past summer.

While the investment community waits, however, Arkema will be following "a clear path forward" to 2010, according to Le Hénaff. By then, the company will be "a deeply transformed" organization, focused on optimizing its costs, expanding its best industrial sites, divesting nonstrategic businesses, and acquiring other operations to strengthen core businesses.

He said Arkema wanted to acquire businesses with annual sales of anywhere from $700 million to $1.1 billion by 2010. Its first acquisition under this plan was the July purchase of acrylic polymers producer Coatex, which has sales running at the rate of about $210 million a year.

ALSO HIGH on the agenda is strengthening operations in China. Le H??naff emphasized the company's goal of increasing the share of its overall sales in Asia from 13% today to 20% by 2012.

The company already has fluorochemicals plants at its site in Changshu, just northwest of Shanghai, and plans to expand operations there. At the investors' day, Arkema announced that it would build a polyvinylidene fluoride (PVDF) plant at Changshu by 2011. "Our decision to invest in China is based on the expanding Asian construction market and on our plan to grow the Kynar family of products into new construction and industrial applications," said Lando Ferretti, group president for technical polymers.

The PVDF project will provide Arkema with full manufacturing capabilities in the three main regions of the world, company officials said. Arkema already operates PVDF plants in France and in Calvert City, Ky.; and an expansion of the Kentucky plant is scheduled for completion early next year.

The PVDF announcement came just three days after Arkema announced a partnership with Japanese fluorochemicals company Daikin to produce and market new-generation refrigerant fluids in the Asia-Pacific region.

The partners will create two joint ventures. One, the 60-40 joint venture Arkema Daikin Fluorochemicals, will produce and market hydrofluorocarbon HFC-125. Arkema will provide its process and technological expertise for a "world-scale" plant in Changshu that is scheduled to open in 2010.

The other joint venture, the 60-40 Daikin Arkema Refrigerants Asia, will produce and market HFC refrigerant blends in Asia, in particular the R-410A blend of HFC-125 and HFC-32, which is intended as a replacement for hydrochlorofluorocarbon-22.

Le Hénaff also revealed that his company plans to double the size of a PVC heat stabilizer plant in Beijing, increasing capacity for organotin stabilizers to 12,000 metric tons per year. Set to open early next year, it will be the largest such plant in Asia, the company said.

The various projects will create a stronger Arkema in the future, Le Hénaff told investors. "I want to emphasize Arkema's rapid and in-depth transformation into a stronger group that is more coherent and more resilient to the economic cycles and has a genuine growth potential by 2010 and beyond," he said.