Solvay shows underlying growth, may sell Eco Services
11:34 AM MST | February 28, 2014 | —Ian Young in Brussels
One-off expenses and other nonrecurring factors weighed on Solvay’s fourth-quarter 2013 earnings, but the company says its underlying performance is improving. And, the financial benefits of Solvay’s ongoing transformation program will be more visible in 2014, the company adds.
Solvay’s adjusted net income fell 87% year-on-year (YOY) in the fourth quarter, to €25 million ($34 million), on net sales down 5%, to €2.42 billion. Recurring Ebitda (Rebitda) declined 6%, to €384 million, although it beat consensus analyst estimates of €376 million, according to Vara Research (Frankfurt).
The decrease in Rebitda reflects the phasing out of a certified emission rights (CERs) scheme in 2013, sharply lower prices for natural guar derivatives in Solvay’s advanced formulations business, and the integration of the recently acquired ChemLogics (Paso Robles, CA), Solvay says. Rebitda would have risen 8% YOY excluding those items, the company adds. Solvay says it sold €58 million of CERs in the first half of last year.
Solvay’s fourth-quarter net income missed analyst estimates of €57 million, according to Vara. The net profit figure includes €68 million in nonrecurring costs, such as restructuring expenses related to the company’s excellence initiatives and integration plans. The year-earlier result had included a €149-million gain from a partial reversal of impairments in Solvay’s soda ash business.
“In 2013, Solvay made headway in creating a higher-growth, less cyclical, and more valuable company,” says Jean-Pierre Clamadieu, CEO of Solvay. “The numerous excellence programs, ranging from manufacturing to innovation and marketing and sales, have started to bear fruit.”
Solvay has identified its advanced formulations, previously named consumer chemicals, and advanced materials business segments as its main growth engines. Fourth-quarter Rebitda at advanced formulations declined 16% YOY, to €87 million, because of guar-related effects, on stable sales of €644 million. Fourth-quarter Rebitda at the advanced materials segment, which includes specialty polymers, increased 18%, to €160 million, but sales decreased 4%, €603 million, because of foreign exchange headwinds and price declines. Sales of rare earths, also part of the advanced materials segment, fell 18% YOY, to €70 million, because of lower prices.
Fourth-quarter Rebitda at Solvay’s performance chemicals segment, which includes several businesses classified by the company as cash-generators, including soda ash, rose 4% YOY, to €186 million, on sales down 2%, to €784 million. Sales were undermined by a 6% drop in biochemicals revenue, to €101 million, due to poor demand and price pressure. “The biochemicals business is not doing so well,” Clamadieu told a press briefing held in Brussels at the end of February. “It has different pricing and cost drivers from naphtha-based products.”
Solvay overall had a “solid performance in challenging conditions during the fourth quarter and [is] poised for growth,” CFO Karim Hajjar told the briefing. “We have a balanced, diversified portfolio, and it is forging ahead.”
Solvay, meanwhile, is exploring options, including divestment, for its Eco Services business, the US leader in sulfuric acid regeneration technology for the refining industry. Eco Services, which forms part of the performance chemicals segment, posted a 13% YOY decline in sales during the fourth quarter, to €67 million. “Eco Services is a good cash generator, and we’re under no pressure to sell, but divesting the business would reduce complexity, and we are looking to reallocate resources to our growth engines,” Clamadieu says. Solvay intends to make a decision by year-end on the future of Eco Services, he says.
Solvay and Ineos, meanwhile, await the outcome of the European Commission’s in-depth antitrust investigation into the companies’ planned chlorvinyls joint venture. The commission’s verdict had been expected in late March, but Clamadieu now anticipates a decision by early May. The delay is just “a technicality,” he says. “We’re in discussions with the commission, with a willingness to come to a conclusion. We’re working hard to give the commission reasons to approve this deal,” Clamadieu says. He confirms that Ineos and Solvay are offering to divest polyvinyl chloride (PVC) assets to secure approval but declines to provide details.
Solvay plans to exit the planned jv with Ineos after a few years. The company has also agreed to divest its majority stake in PVC producer Solvay Indupa (Buenos Aires) to Braskem. The PVC markets in Western Europe and Latin America are under pressure from competitively priced imports from the United States, enabled by cheap energy and feedstock derived from US shale gas, Clamadieu says. “US PVC producers are exporting aggressively to Europe,” he says. “We are suffering and, longer term, we believe this business will suffer even more.”
However, Solvay intends to retain its higher-growth PVC business based in Thailand as well as its stake in a PVC jv in Russia with Sibur that is slated to start production in the second half of 2014. “We have no urge to divest the PVC businesses in Thailand and Russia so long as they contribute profitably to the group,” Clamadieu says.
The $1.35-billion acquisition of oilfield chemicals and services firm ChemLogics last October will enable Solvay to benefit from the shale boom in North America. “Acquiring ChemLogics is a smart way to be exposed to the US energy scenario,” Clamadieu says. The deal doubles Solvay’s sales to the oil and gas sector, to about $1 billion/year, but the company is not planning more acquisitions in this field. Solvay’s acquisition plans and R&D spending will focus on advanced materials, especially specialty polymers, and advanced formulations, Clamadieu says.
Clamadieu expects Solvay in 2014 to start demonstrating positive results from its business transformation—which began with the 2011 acquisition of Rhodia and the earlier divestment of Solvay’s pharmaceuticals business—with fewer headwinds from nonrecurring items. “The exceptional costs of 2013 are behind us,” Clamadieu says. He expects the company to return to earnings growth this year with a Rebitda higher than the €1.66 billion achieved in full-year 2013, supported by delivery of the excellence programs.
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