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Drop in demand impacts Ciba profitability, despite substantial reductions in cost base
• Sales and profitability impacted by collapse in demand in Q4
• Sales prices increased significantly in the second half - offsetting much of 2008 raw material cost increases
• Significant savings made throughout the cost base, with Operational Agenda well on track to complete in 2009
• Acquisition by BASF expected to close by the end of Q1
Brendan Cummins, Chief Executive Officer comments:
“We faced some significant challenges in 2008, with raw material costs reaching unprecedented levels in the first half and a dramatic drop in demand towards the end of the year, as the economic downturn took hold. We have acted quickly to mitigate the effect of these factors; reducing capacity and inventory levels, as well as limiting capital expenditure and keeping costs to a minimum. Despite these difficult business conditions, we are well ahead with our Operational Agenda program and have been able to reduce costs throughout the organization. We have also substantially increased sales prices, which have offset much of the impact of higher raw material costs experienced in the first half of the year.”
Full year results 2008 overview
Sales in local currencies were maintained at 2007 levels until late in the fourth quarter, where demand dropped sharply in many customer industries, notably plastics and coatings for the automotive and construction industries, as the economic downturn took effect. Overall, sales were 3 percent lower than 2007 in local currencies, and 9 percent lower in Swiss francs, as the US dollar remained relatively weak against the Swiss franc and the British pound lost considerable value at the end of the year.
In Europe, sales were 8 percent lower in local currencies than 2007, while sales in the Americas held up better, just 2 percent below 2007 levels, with a particularly strong performance in Water & Paper Treatment. Despite growth slowing in Asia towards the end of the year, sales there increased 4 percent in local currencies over 2007.
In response to this significant drop in demand, capacity has been reduced at a number of production sites to balance output. Maintenance shut downs and ‘short time’ working have also been implemented and further action, including more temporary plant closures, are under consideration and the situation is being monitored very closely.
Sales prices were increased by 3 percent over 2007, with 8 percent coming through in the second half after significant raw material cost increases in the first half of 2008. These sales prices increases did not, however, fully offset the 13 percent higher raw material costs for the full year 2008. Volume mix was impacted by the demand collapse late in the year and declined by 6 percent from 2007. Raw material costs have started to soften in the last two months and are expected to decline further over the coming months.
Gross profit margin was 26.6 percent (2007: 28.7 percent), lower as a result of the exceptionally high raw material costs experienced in the first half of the year.
Profitability was lower than 2007, at CHF 308 million (2007: CHF 552 million), or an operating income (EBIT) margin before restructuring of 5.2 percent (2007: 8.5 percent). This drop was a reflection mainly of the first half dramatic increases in raw material costs, which significantly undermined efforts to reduce the cost base of the business.
The Operational Agenda program to streamline processes, reduce the cost base and facilitate growth achieved savings of CHF 145 million in 2008, more than the anticipated CHF 100 million. This led to a reduction in the cost base and Selling, General and Administrative costs were 3 percent lower than 2007.
Over 1,900 positions have now been reduced since the program began in 2006 and will result in a total reduction of 2,500 positions once the program is completed in 2009. Restructuring charges relating to this program were CHF 106 million for the full year.
A goodwill impairment of CHF 590 million was made in the second quarter in the Water & Paper Treatment segment, after the business climate in the first half deteriorated considerably, resulting in higher interest rates and equity risk premiums, which led to increased discount rates. In addition, the Company realized that the segment would not reach the profitability levels previously forecasted. The Company had been evaluating strategic options for the paper chemicals business to improve profitability; however the plan to review these options was stopped when the Board of Directors received an offer from BASF to acquire Ciba in September 2008, which it subsequently recommended to shareholders.
As a result of the impairment, restructuring costs for the Operational Agenda and other one time items, the Company recorded a net loss for the year of CHF 564 million (2007 net income: CHF 237 million).
Free cash flow was CHF 26 million, below 2007 levels mainly as a result of the lower operating profitability in 2008. Net debt increased by CHF 125 million to CHF 2,038 million.
Sales in the fourth quarter suffered from a dramatic drop in customer demand in late November and December for Plastic Additives and Coating Effects, as key markets were hit by the economic downturn. Sales to the automotive industry were significantly impacted, as were sales in the construction and displays market. Less affected was the Water & Paper Treatment segment, where sales in local currencies increased slightly with strong growth in the Americas and Asia, offsetting lower sales in Europe. Overall, in local currencies, sales were 13 percent lower in the fourth quarter and 19 percent lower in Swiss francs.
In Europe, sales were 18 percent lower in local currencies than the fourth quarter of 2007, where demand in the plastics industry fell, as did coatings. Water Treatment continued to show growth, however paper chemicals was slower as many paper mills ran at reduced capacity.
In the Americas, the picture was mixed, with Coating Effects sales being severely affected by the problems in the US automotive industry, but Water & Paper Treatment growing strongly. Overall, sales were 10 percent lower in local currencies, than the same period in 2007.
Asia showed more signs of weakening in the fourth quarter, with sales 10 percent lower in local currencies than the same period in 2007. Declines in the plastics, automotive and construction industries impacted the plastics and coatings businesses, as well as the displays business in Electronic Materials. Water & Paper Treatment again had a strong quarter, with good growth in both water treatment and paper chemicals.
Sales price increases came through strongly in the fourth quarter, up 9 percent, which went some way towards offsetting the earlier increases in raw material costs in the first half. Volume mix, however, was 22 percent lower than the fourth quarter of 2007, with the collapse in demand in late November and December. Although raw material costs eased somewhat from the third quarter to the fourth quarter of 2008, the increase over the fourth quarter of 2007 was still very high at 18 percent.
Profitability levels in the fourth quarter suffered from the deterioration in economic conditions at the end of the year. Operating income (EBIT) before restructuring was CHF 34 million (2007: CHF 129 million) or a margin of 2.6 percent (2007: 8.2 percent).
Savings from the Operational Agenda program were CHF 55 million, with CHF 36 million of restructuring charges incurred in the quarter. There were also CHF 39 million of expected charges relating to the BASF transaction booked in the fourth quarter.
As a result of the lower operating profitability and the additional charges relating to the BASF transaction, the Company posted a net loss of CHF 41 million in the fourth quarter (2007: net income CHF 84 million).
Segment overview
Plastic Additives sales in 2008 were 5 percent lower in local currencies than 2007, as the economic downturn in the second half heavily impacted sales in Base Polymers and Polymer Products. Action is being taken in these businesses to reduce output and take more costs out of the organization.
Process and Lubricant Additives experienced strong growth throughout the year, with increased sales to global additive-packaging houses and oil companies.
After a weak start to 2008, with changes in order pattern and some destocking in the industry, Home and Personal Care resumed normal growth levels towards the end of the year.
Operating income was impacted by the drop in demand in the last quarter, however was mostly affected by unprecedented raw material and energy price increases in the first half, that could only partly be compensated by the higher selling prices that came through in the second half. The Operational Agenda restructuring measures, however, had again a strong positive effect on production and administrative costs.
Coating Effects sales were 7 percent lower in local currencies in 2008, with severe declines in customer demand in the fourth quarter, particularly in the automotive and construction industries. The majority of this impact was felt in the Coatings and Plastics business lines, initially in Europe and the Americas, and then later in the year, in Asia. The Inks and Printing business also faced difficult market conditions, with a slowdown in demand in the European and US publication industries. The Electronic Materials business line, however, held up well until late in 2008, when the market for displays started to weaken.
The segment successfully offset most raw material price increases with selling price increases, which came through across all business lines and regions.
Operating income was below 2007 levels as a result of the lower sales volumes, however, this impact was partially offset by cost reductions. Efforts continue to further improve the cost structure and reduce capacity in the short to medium term.
Water & Paper Treatment sales were 1 percent higher than 2007 in local currencies, despite demand starting to weaken towards the end of the year. Asia and the Americas showed growth in both the Water Treatment and Paper business lines, while in Europe, sales growth in the paper business was negatively affected by the continued consolidation of the paper industry and extended downtimes at many mills.
Operating income margin was slightly below previous year, as sales price increases did not fully offset the unprecedented level of increases in raw material costs, particularly in the second quarter. Profitability measures implemented in 2007 and 2008 fully delivered the planned cost savings and largely mitigated the impact of the difficult business environment.
Update on the offer from BASF to acquire Ciba
In September 2008, the Board of Directors recommended a CHF 50 per share public offer from BASF to shareholders to acquire Ciba Holding Inc.
The offer was accepted by shareholders in November – more than 95 percent of the Company’s shares are tendered to, or have been acquired by, BASF. In addition, the shareholder voting restrictions were lifted at the Extraordinary General Meeting on December 2, 2008, on condition that the offer is settled. There are still outstanding regulatory approvals from the competition authorities required before BASF can take full control of Ciba, but these are expected to come through in time to close the transaction in the first quarter of 2009.
Outlook
Brendan Cummins, Chief Executive Officer comments:
“The outlook for the economy over the next few months is very unclear. Raw material costs have started to ease, but we are not expecting market demand to show any meaningful recovery until late in 2009 at the earliest. Our focus is to make sure our production capacity is well balanced with the reduced demand, and that the fundamental structures of our business are fully optimized. We will also continue to focus on maximizing our innovation potential and making sure our businesses are well positioned in their customer markets for an upturn in demand whenever it may come.”
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Ciba (SWX: CIBN) is a leading global company dedicated to producing high-value effects for its customers’ products. We strive to be the partner of choice for our customers, offering them innovative products and one-stop expert service. We create effects that improve the quality of life – adding performance, protection, color and strength to plastics, paper, automobiles, buildings, home and personal care products and much more. Ciba is active in more than 120 countries around the world and is committed to be a leader in its chosen markets. In 2008, the Company’s continued operations generated sales of CHF 5.9 billion and invested more than CHF 230 million in R&D.
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