Solvay Sees Accelerated Savings, Investments as Net Debt Drops
Solvay SA, the chemicals maker created 150 years ago to produce soda ash using ammonia, brought forward a cost savings goal and forecast accelerated growth investments after net debt fell by more than analysts estimated.
Chief Executive Officer Jean-Pierre Clamadieu said capital spending will increase by as much as 21 percent this year to help meet his 2016 profit target by expanding production of guar derivatives for oil and gas drilling, silica for tires and specialty polymers. He declined to give a 2013 profit forecast, saying that cost savings are ahead of plans and that conditions in Europe, which accounted for 42 percent of revenue last year, remained “challenging” at the start of the year.
Solvay said today it will meet its target for cost savings of 400 million euros ($533 million) in 2014, one year ahead of initial forecasts. Reductions in purchasing, transportation and administrative expenses, mostly linked to the purchase of Rhodia SA in September 2011, surpassed the Brussels-based company’s own projections by 40 million euros at the end of last year. Fourth- quarter earnings met most analysts’ estimates.
“While it is positive to see cost savings kicking in faster than anticipated, it also implies that the underlying performance was weaker,” Filip De Pauw, an analyst at ING Groep NV in Brussels, wrote in an investor note today. The 2016 target “requires a compound annual growth rate of 10 percent versus the reported 2 percent growth in 2012.”
Solvay’s stock swung between gains and losses at least eight times in trading on Euronext Brussels today. The shares lost as much as 2.6 percent, leading declines among the 24 companies in the Stoxx 600 Chemicals Index in early trading, and traded 50 cents lower at 117.75 euros by 4:15 p.m. local time.
Since taking the helm in May, Clamadieu has made a priority of cash generation through the reduction of inventories, collection of receivables and by trimming capital spending. As a result, Solvay reduced net financial debt by 635 million euros last year to 1.13 billion euros, or about 0.54 times Ebitda. Analysts projected net indebtedness of 1.75 billion euros, according to the median of 17 estimates compiled by Bloomberg. Net debt excludes pension liabilities.
Solvay forecast 2013 incremental cost savings of 110 million euro and “a few tens of million euros” from other optimization projects. Still, Clamadieu told analysts on a conference call that Solvay will face a 90 million-euro decline in profit from the sale of carbon emission allowances this year and won’t see a repeat of inflated guar gum prices, which boosted profit by about 100 million euros last year.
Adjusted earnings before interest, tax, depreciation and amortization will increase to 2.13 billion euros this year from 2.07 billion euros in 2012, according to the average of 22 estimates compiled by Bloomberg.
Solvay also made a start with the disposal of its underperforming vinyls businesses by reclassifying its Buenos Aires-based subsidiary Solvay Indupa SAIC as an asset held for sale. Indupa, which has been unprofitable since the second half of 2011, has plants in Bahia Blanca, Argentina, and Santo Andre, Brazil, producing PVC plastic and caustic soda.
“In Europe, we will have to find a scenario, which would allow us to contribute to an improvement in the overall structure of the PVC market,” Clamadieu said on the conference call. “It’s a complex problem and there’s no obvious solution, but we’re not just simply waiting for other people to do the job.”
Solvay, through its 75 percent-owned SolVin joint venture with BASF SE, is Europe’s second-biggest producer of PVC plastic, after closely held Ineos Group, with a production capacity of about 1.3 million metric tons.
An overhaul of its polyamide business including fixed cost reductions and an improvement of plant operating rates by developing more specialty products, should restore earnings in the business unit to 2011 levels. Ebitda from polyamide materials slumped by 50 percent to 99 million euros last year and vinyls decreased by 13 percent to 151 million euros. Together, both units accounted for 12 percent of Solvay’s earnings last year.
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