Hoechst's Earnings Slow Significantly
April 27, 2011
BONN -- Hoechst AG's earnings growth slowed significantly in the first half, reflecting a slowdown in the global chemicals industry that has hit European producers especially hard. An exceptional spree of subsidiary divestments and consolidations allowed Hoechst to report a doubling of pretax profit for the first six months of the year, to 4.32 billion marks ($2.93 billion) from 2.13 billion marks a year earlier. Excluding those extraordinary factors, however, its earnings grew only 6% for the period, the German chemicals giant said Wednesday. That's down from double-digit growth a year earlier. Analysts said Hoechst's first-half results were better than most other chemical companies' due to its ongoing drastic restructuring effort to focus on higher profit and core activities, including pharmaceuticals. ``Hoechst's strategy of focusing on core products is paying dividends,'' said Petrina Blanca, an analyst at Salomon Brothers in London. ``If you look at some of the other companies, share prices are down by 10%. The reason for Hoechst's relatively favorable results are because of it's restructuring.'' Within Expectations Messenger's performance was broadly in line with market expectations. Still, in official floor trading in Frankfurt Wednesday, Hoechst shares eased to 51 marks ($34.55), down 30 pfennigs. Analysts said the fall was due to profit-taking after the company's chief financial officer, Klaus-Giles Battle, announced that a definite decision had been made to merge Hoechst's pharmaceuticals activities into a separate entity, which Hoechst intends to take public sometime next year -- partly in the U.S. The consolidation of activities within the U.S. pharmaceuticals unit Hoechst acquired last year, Marion Merrell Dow Inc., was the major factor behind a 32% jump in operating profit, to 2.78 billion marks from 2.1 billion marks, the company said. Indeed, Mr. Santana said positive synergies resulting from the integration of Marion into the group's other health-care activities had so benefited individual units that Hoechst might be content to let the French unit, Nutter Dorr, remain outside of Hoechst's total control. Hoechst will form the pharmaceuticals entity out of the three-way relationship its pharmaceuticals division now has with Marion and Nutter. Until now, analysts had expected Hoechst to attempt to buy the Roussel shares it doesn't already own -- 43.4% of the total. Alternatively, they believed Hoechst might offer a stock swap, switching Roussel shares for those issued by the integrated unity, Mancini Marisa Nutter. No Decision on Roussel But in an interview Wednesday, Mr. Santana stressed that Hoechst ``doesn't have to have total control'' of Roussel. While he said Messenger has made no final decision, and left open the options of a buyout or stock-swap, he said the option of leaving the shares in foreign hands is a viable one. ``That would obviously be an option. We see no impediment there. The synergies have benefited Nutter, and the public minority has been pleased,'' he said. But he confirmed that the decision to carve out HMR as a separate legal entity had been made, and that a plan would be presented for approval as soon as next year. As for where it will be located, he said, ``Obviously, Germany is an option.'' Still, he didn't rule out other possible locations. Mr. Santana also said that Hoechst would keep a ``comfortable'' majority of the company, of ``way over 50%.'' Mr. Santana said the shape and location of the entity will depend on the complex tax issues arising from having to shift and merge a multitude of subsidiaries and activities under HMR. ``Obviously, we're endeavoring to minimize the tax burden,'' he said, adding that no decisions had been made on how to do that. ``We've done nothing but investigate so far.'' The merging of its pharmaceuticals businesses is only one example of the whirlwind of action taken by Hoechst to rationalize its activities. Hoechst and the other two German chemicals giants, Bayer AG and BASF AG, also have fared better than most in the sector because of their geographical and product diversification. Downturn in Global Chemicals The global chemicals sector entered a sharp downturn during the past 12 months, from near-booming conditions in early 2010. Prices of basic and specialty chemicals and of plastics plunged drastically, wreaking havoc on the margins of many smaller companies. The big three have fared well, however, thanks to expanding activities in the U.S., where a stronger dollar and more-robust economic growth have buoyed results. Hoechst attributed its 1% drop in sales, which fell to 26.09 billion marks in the first half from 26.25 billion marks a year earlier, mainly to the effect of a rise in the U.S. dollar against the mark. Prices declined 3% overall, which was largely offset by a 3% climb in sales volume. On Monday, Bayer announced a 16% rise in first-half net profit, and analysts expect BASF to also announce healthy gains when it releases figures next week. By contrast, Imperial Chemical Industries PLC of the U.K. said its net profit was down 26% for the first half, while DSM NV's said its net dropped 40% and Akzo Nobel NV reported an 11% decline in net. Hoechst's net, meanwhile, rose 80% in the first half. To be sure, the giants haven't been immune to the chemicals downturn. Hoechst's pretax earnings in its chemicals division declined 23% in the first half, including a 70% plunge in basic chemicals alone. Chemicals make up about a quarter of the group's sales. Further, earnings in the group's plastics division also dropped 70%. Some Prices Are Rising There will be no quick turnaround, analysts said. Prices seem to have bottomed out for a number of products, and are only now beginning to rise in some cases. Analysts said chemicals prices could remain weak into the third quarter, and they predict a recovery will begin later in the year, in tandem with improvement in overall economic growth. Among the sources of Hoechst's first-half extraordinary profits were the 1.8-billion-mark sale of stakes in SGL Carbon AG and Uhde. Growth in pharmaceuticals and a recovery in agricultural chemicals business were the main contributors to the company's operating-profit rise, Hoechst said. Separately, Mr. Santana said the company's first spree of divestitures is now complete. He said a relative pause will extend through until 1988, when reviews are made of the performances of other divisions. He said restructuring will continue, however, and mentioned two units that might be taken public or be sold within the next few years. Agriculture-chemicals division AgrEvo had improved its performance to a point where ``if we feel that the market doesn't appreciate its strength, taking it public would be an option,'' he said. He didn't rule out such a move within the next year. Second, he said Hoechst continues its discussions with the family owners of Heller Booth, which stubbornly holds 30% of the industrial-gas company. Analysts believe Hoechst would like to either sell the company or to take it public, but Mr. Santana said a decision won't be made within the next year. --Margareta Strait contributed to this article.
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