Business News
Ciba reports weaker than expected start to 2008
Thursday 01. May 2008 - Adverse raw material and currency impact Temporary production issues in Plastic Additives Profitability restored to high levels in Coating Effects Turnaround in Water & Paper Treatment making good progress Slowdown impacting NAFTA and Europe - Asia showing resilience
Brendan Cummins, Chief Executive Officer, comments:
“We have not had the strong start to the year that we were anticipating a few months ago. Dramatic changes in the currency and raw material environment had an adverse effect on the first quarter results and although in general we are seeing good underlying growth in many of our markets, we are also clearly starting to feel the impact of the economic slowdown on overall sales growth. This is particularly apparent in NAFTA, where growth has slowed and in Europe, where we are experiencing weakness in a number of industries. Asia and the Middle East are proving to be more resilient.”
“We expect this trend to continue in 2008, with some markets delivering good growth, and others slowing. In the short term, we will address underperforming areas of the business and focus on increasing sales prices on an ongoing basis to compensate for the higher raw material costs.”
“Over the next eighteen months, we will complete our Operational Agenda program to streamline our organizational structure, which has already substantially reduced the cost base, and we will leverage more value through a new industry focused innovation structure. Going forward, we expect that each of our businesses will earn at least its cost of capital.”
OVERVIEW OF FIRST QUARTER RESULTS 2008
A slow start, with some markets impacted by the economic slowdown and others proving more resilient
Sales in Swiss francs of CHF 1,557 billion (2007: CHF 1,659 billion) were significantly impacted by currency movements in the first quarter of 2008. Sales in Swiss francs were 6 percent lower and sales in local currencies were 1 percent lower.
Sales growth in local currencies was mixed, with Europe 2 percent down, the Americas flat and Asia 1 percent higher. The drop in European sales was mainly a result of a slowdown in the Paper business, which faced customer shutdowns of paper mills. There was also some weakness in Europe in the Inks pigments business.
The Americas saw an improved performance from Water & Paper Treatment, although a slightly weaker start for Plastic Additives and Coating Effects.
Sales in Asia were higher in Plastic Additives and Coating Effects, and flat in Water & Paper Treatment. China was slightly weaker than the first quarter of 2007, with lower sales in the Paper business after actively walking away from low margin business; but in other areas of the region, as well as Africa and the Middle East (which are included in the Asian sales figures) growth was strong.
Profitability impacted by higher raw material costs, an adverse currency environment and some temporary production shutdowns
Raw material costs surged in the middle of the quarter at an unprecedented rate and the increases were significantly higher than anticipated, up 4.5 percent over the first quarter of 2007. The Company expects that raw material costs will remain around these levels in 2008.
A number of sales price increases have already been initiated to mitigate the impact on margins of the raw material cost increases, however there is always a lag between the increased costs and their taking full effect in the form of increased sales prices.
Gross profit margin for the first quarter was 28.1 percent (2007: 28.7 percent). Production costs were 3 percent lower than the first quarter of 2007, partially offsetting variable cost increases from higher raw material costs.
Operating income (EBIT) before restructuring was CHF 107 million (2007: CHF 134 million) resulting in an EBIT margin of 6.9 percent (2007: 8.1 percent). This lower result was mainly related to a 5 percent negative currency impact, as well as the absorption of higher raw material costs and some temporary production issues in Plastic Additives. Profitability in Coating Effects was strong, with the segment making a full recovery from production shutdowns in the fourth quarter. Water & Paper Treatment showed improvement over the first quarter of 2007, although there was some short term volatility in profitability levels for the segment.
Net financial expenses increased by CHF 12 million over the first quarter of 2007, which was mainly the result of unfavorable currency developments.
Restructuring charges of CHF 18 million were incurred in the first quarter (2007: CHF 3 million) from the Operational Agenda program to streamline the organizational structure and drive growth. The program delivered savings as expected of CHF 26 million in the first quarter. This represents an overall net reduction in the cost base of approximately 1 percent.
Net income for the first quarter was CHF 37 million (2007: CHF 76 million).
SEGMENT OVERVIEW
In Plastic Additives, sales of CHF 528 million (2007: CHF 553 million), were impacted by the relatively strong Swiss franc and some product shortages from temporary production shutdowns. As a result, in local currencies sales in the segment were 1 percent higher than the first quarter of 2007, with Europe 2 percent higher, the Americas 1 percent lower and Asia 2 percent higher. This reflected a change in sales mix from the previous year, with significantly higher sales in Base Polymers in the first quarter of 2008, while the Polymer Products business was slightly slower than the previous year. Overall however, the underlying business is performing well, particularly in Europe.
Profitability was somewhat impacted by unrelated technical problems at three major sites, which resulted in disruption to customer supply before normal production levels could be resumed. In addition, the segment had some start up costs for the Singapore antioxidant plant which began test production in March. Customer orders for antioxidants, which are currently being supplied from other regions will move to the new plant in the next few months.
Operating income before restructuring was CHF 51 million (2007: CHF 87 million), resulting in a margin of 9.8 percent (2007: 15.7 percent). The result was also impacted by higher raw material costs, as well as the relative strength of the Swiss franc. The Company expects profitability levels to normalize going forward.
Coating Effects had a reasonable start to the year, with steady sales in local currencies and improved profitability. Sales were CHF 438 million (2007: CHF 469 million), 7 percent lower in Swiss francs as a result of the exchange rate, and 1 percent lower in local currencies.
Sales in Europe were 2 percent lower in local currencies, with weaker sales in Germany and the UK impacting sales in the first quarter. This was mainly a result of the Inks pigments business, where the decision was taken to actively walk away from lower margin sales. The Company is focusing on a turnaround program for this business. Sales in the Coatings business were strong in Europe and Asia, while the Electronic Materials business was also strong in Europe, but slightly lower in Asia in the first quarter. Sales in the Americas continued to be affected by the slower economy and came in 4 percent lower in local currencies. Asia remained on a par with 2007.
Profitability in the segment resumed its normal levels after the fourth quarter impact of planned production shutdowns. This was in spite of continued high raw material costs and an adverse currency effect. Operating income before restructuring of CHF 57 million (2007: CHF 61 million) was 6 percent lower than the first quarter of 2007, but significantly improved over the fourth quarter of 2007. EBIT margin improved over the first quarter of 2007 at 13.1 percent (2007: 13.0 percent).
Water & Paper Treatment had a mixed start to 2008 with sales of CHF 591 million (2007: CHF 637 million), 7 percent lower in Swiss francs and 2 percent lower in local currencies than the first quarter of 2007. The Water Treatment business showed solid growth in all regions, while the Paper business faced a very tough competitive environment and the decision was taken not to participate in a number of bids. Overall for the segment, in local currencies, sales in Europe were 6 percent lower, the Americas were 3 percent higher and Asia was flat.
Profitability in the segment was higher than the first quarter of 2007 with an operating income before restructuring of CHF 20 million (2007: CHF 15 million), resulting in a margin of 3.4 percent (2007: 2.4 percent). The turnaround in the Paper business is continuing to make good progress. Profitability in the Water Treatment business was negatively impacted by the high raw material costs, however the Company expects sales price increases to have a further positive impact in the second quarter. Overall the segment is expected to improve full year 2008 profit over 2007 levels.
GOING FORWARD
Industry focused strategy based around core innovation strength
The Company will further strengthen its industry focus by bringing together all its plastics related additives and pigments businesses to create an industry/market facing organization to better leverage its strong position in the plastics industry.
The Company is also implementing its new approach to innovation, with a focus on six core technologies, which between them represent 95 percent of sales and each have significant potential for further application and development. This will involve bringing together R&D activities for each of the technologies and creating dedicated research centers. In addition, a New Growth Platform is being established for embryonic technologies and external research partnerships. The existing R&D investment of around 4 percent of sales will be maintained, with a split of 75 percent going into the six core technologies and 25 percent into the New Growth Platform.
OUTLOOK
Underlying business performance remains strong in many of the Companys core markets, however, in a number of areas there are clear signs that the economic slowdown is impacting growth. The Companys financial results are also being adversely impacted by the relative strength of the Swiss franc, as well as very high raw material costs.
Brendan Cummins, Chief Executive Officer comments:
“It is very difficult at this stage to predict where currency exchange rates will go and how deeply we will feel the impact of the economic slowdown. Our underlying business is performing well, however some of our markets are clearly showing signs of weakening and raw material costs look set to stay at very high levels. Despite this, we expect to see sales growth in local currencies and we are confident that the measures we are taking in the organization will continue to deliver savings and increase the value we can leverage from our markets. We are also still expecting a base improvement in operating income of around 5 percent, however, if exchange rates were to continue at the levels we saw at the end of the first quarter, this would lead to a negative impact on profitability. We have therefore decided to take a conservative position on our outlook and lower the guidance for 2008.”
Assuming that current market conditions continue throughout the year, in 2008 the Company expects sales in local currencies to increase over 2007 levels. On the profitability level, should the exchange rates assumed for this outlook prevail during the year (1.54 Swiss francs to the Euro and parity with the US dollar), this may lead to an operating income before restructuring around 15 percent lower than 2007 and free cash flow to be around the levels reported in 2007.