Restructuring to continue for Degussa after weak first half

- Last updated on GMT

Related tags: Revenue, Management, Degussa

With an overall drop of 3 per cent in sales for this year's first
half, Degussa refutes expectations of an upturn in the second half.
Restructuring of core businesses and divesting non-core operations
will continue in a drive to boost sales, although the company is
still forecasting a rise in operating result for key businesses.

Leading German chemicals group Degussa released first-half year results this week, announcing that core businesses lifted sales 1 per cent to € 5.5 billion, but overall sales dropped 3 per cent from last year's figures to €5.9 billion.

Net income fell 74 per cent to €51 million for the six months to June, due to a €71 million fine for price-fixing and €207 million of restructuring charges.

Volumes were up slightly in core businesses but prices declined, said the company. The non-core businesses reported sales of €417 million, well below the previous year's €673 million, mainly due to the current divestment strategy.

Professor Utz-Hellmuth Felcht, management board chairman of Degussa, said: "Although economic conditions remain difficult and there is not yet any sign of a cyclical upturn, our core businesses essentially performed very well. This is clear confirmation of our steady focus on less cyclical speciality chemicals operations and evidence of the consistency and reliability of our forecasting over the past few months. At the same time, the restructuring and cost-cutting measures we have introduced made a major contribution to this trend."

Degussa's core businesses reported EBIT (earnings before interest and taxes) of €475 million, in line with last year's figure. The Performance Chemicals and Coatings & Advanced Fillers divisions reported higher earnings while Construction Chemicals in particular was affected by the weakness of the construction industry. Overall business reduced EBIT 3 per cent year-on-year at €463 million.

The Health and Nutrition division reported sales of €600 million, in line with last year's figure. EBIT slipped €10 million to €75 million (minus 12 per cent). The Flavors & Fruit Systems business unit reported a year-on-year drop in EBIT because of softer demand for flavours. In the Texturant Systems business unit EBIT was slightly below the good level reported in the first half of 2001.

By contrast, the BioActives business showed improved EBIT as a result of a sharp reduction in fixed costs.

In the Fine & Industrial Chemicals division sales rose 11 per cent to €1,165 million, mainly due to the acquisition of Laporte, whose sales and earnings were only consolidated from 1 April 2001.

Looking at figures on a regional level, about 75 per cent of sales in Degussa's core business is generated abroad. In Germany, sales were essentially unchanged year-on-year at €1,390 million. In the other European countries sales declined slightly to €1,654 million and accounted for 30 per cent of total sales.

In the NAFTA region, sales rose slightly with Specialty Polymers and Fine & Industrial Chemicals divisions doing especially well in this region. Overall, NAFTA accounts for 26 per cent of sales. In Latin America sales dropped 6 per cent because of the economic difficulties in this region. By contrast, sales rose significantly to €727 million in Asia.

The operating result after interest increased 10 per cent to €329 million (January - June 2001: €298 million). The company attributed the improvement partly to a substantial decline in interest expense to €63 million as a result of an appreciable reduction in debt.

The group has continued the strategic restructuring of its portfolio begun in early 2001. As part of its refocusing on speciality chemicals, the group disposed of five operations no longer ranked as core businesses - the gelatins and textile additives operations, SKW Piesteritz, Viatris and Degussa Bank. This comes to nearly 90 per cent of the sales of approximately €6.5 billion identified as non-core. The divestment strategy is to continue in the coming months.

Degussa also said that the new best@chem programme, part of the group-wide restructuring drive, should raise earnings by €500 million per annum from 2004.

"Contrary to previous expectations, we still see no signs of a broadly based upturn in the second half of this year. We have to assume that the upswing will start far later than anticipated so far. Despite the difficult global economic conditions, our core businesses should continue to hold up well as a result of our focus on speciality chemicals and our consistent restructuring," said Felcht.

Degussa is expecting sales to be around €11 billion at year-end and is still forecasting a slight rise in EBIT and the operating result for the core businesses.

However on Tuesday the company was dropped from Germany's DAX index by Deutsche Borse after analysts called the fall in first-half net profits irrelevant while future ownership of the company was undecided, reported the Financial Times.

Eon, the German utility group, and RAG the partly state-owned coal company, hold equal stakes in Degussa, which will end its spell in the DAX on September 23 to be replaced by Altana, Germany's third-largest pharmaceuticals group.

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