Solvay Cuts Forecast as Energy Clients Buy Less on Price DropJohn Martens
Solvay SA, the world’s largest maker of guar-derived gelling agents used in hydraulic fracturing, abandoned its forecast for profit growth this year as clients in the energy and electronics industries cleared inventories.
Earnings before interest, tax, depreciation, amortization and one-time items will be little changed from last year’s 1.88 billion euros ($2.49 billion) when adjusted for exceptional income, Brussels-based Solvay said today in a statement. That compares with analyst projections for Ebitda of 1.88 billion euros, the average of 23 estimates compiled by Bloomberg.
Declining prices for guar gum and rare earths used in light bulbs led customers to postpone purchases and clear their stocks, affecting Solvay’s most profitable businesses. With no recovery so far in demand for chemicals such as soda ash and fluor-based refrigerants and facing excess capacity in plastics, Solvay had to pass on almost all of its lower raw-material costs into prices in the quarter.
“The quality of the results was slightly lower than expected,” Wim Hoste, an analyst at KBC Securities NV in Brussels, wrote in a note to clients. “The slight change in the wording of the full-year guidance is no major issue.”
Solvay fell as much as 3.5 percent on Euronext Brussels and traded 1.5 percent lower at 102.55 euros by 11 a.m. local time. The shares have returned 25 percent including dividends in the past 12 months, exceeding the 20 percent return for the 24-company Stoxx 600 Chemicals Index.
The lowered forecast and weakness in some of Solvay’s growth businesses, which was offset by the sale of all its remaining carbon credits, casts doubt about Chief Executive Officer Jean-Pierre Clamadieu’s 2016 profit target, which requires growth of about 20 percent annually.
Cash generation also suffered in the quarter because of increased tax expenses and rising inventories amid maintenance shutdowns, even as the chemicals maker reduced capital spending in the quarter. Net debt increased to 1.57 billion euros from 1.31 billion euros at the end of March.
Clamadieu approved a budget of as much as 950 million euros in spending projects this year, a 21 percent increase from 2012, to expand production of guar derivatives, silica for tires and specialty polymers to help meet his 2016 target for earnings before interest, tax, depreciation, amortization and one-time items of 3 billion euros.
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Solvay spent only 319 million euros in the first half, slightly less than in the same period a year earlier.
To confront weak demand in its European home market for commodity products and potential competition from producers outside the 28-nation bloc profiting from lower feedstock prices, Solvay has announced cost-reduction programs in polyamides and soda ash of 100 million euros annually each and agreed to join forces with Ineos Group Holdings Ltd. for vinyls with an option to exit the business as early as 2018.
Clamadieu expects to complete that deal by the end of the year after making progress in discussions with European antitrust regulators.
Separately, Solvay said Bernard de Laguiche will quit as chief financial officer and will be replaced as of Oct. 1 by Karim Hajjar, formerly a finance director at Imperial Tobacco Group Plc. De Laguiche is leaving to pursue personal interests in Brazil.