Business News

Ciba increases sales prices 6% in third quarter

Thursday 06. November 2008 - Sales growth strong in Asia, but slowing in Europe; Operational profitability in Q3 improved significantly over Q2; Raw material prices increased 18 percent; Business conditions deteriorating as economic downturn affects demand in customer industries - outlook revised; Ciba shareholders accept BASF offer - two thirds majority secured

Brendan Cummins, Chief Executive Officer comments: “The third quarter improved considerably over what had been a disappointing second quarter. Sales price increases took effect across the business, Coating Effects continued to maintain its high profitability levels and Water & Paper Treatment showed much better results. In Plastic Additives, however, demand started to drop significantly in August in a number of industries, notably automotive and construction, which severely impacted the results.”

“Looking ahead, we are experiencing the effects of the economic slowdown, particularly in Europe, where there was a sudden deterioration in demand in a number of customer industries in the third quarter. In the Americas, we are not yet seeing the same extent of weakness, but we are expecting volumes to decline in the fourth quarter. We are also anticipating that growth in Asia will start to slow over the coming months as the economies in the region begin to be affected by the global downturn.”




Three Month Results Overview


Sales in the third quarter of CHF 1,549 million were 5 percent lower in Swiss francs and 1 percent higher in local currencies. Europe was 5 percent lower in local currencies, with weaker demand in construction and automotive impacting the coatings and plastics businesses. Local currency sales in the Americas were 1 percent lower than the third quarter of 2007, with a similar pattern of construction and automotive weakness impacting NAFTA. Water & Paper Treatment, however, performed well. Central and South America showed good growth. Asian sales for the quarter were 11 percent higher in local currencies, with a strong performance in China, particularly in the Water & Paper Treatment segment.



Gross profit margin of 26.5 percent (2007: 28.8 percent) was impacted by higher raw material prices and energy costs during the third quarter.



Sales prices increased 6 percent in the third quarter as a result of sustained efforts to offset the impact of higher raw material prices, which rose 18 percent in the quarter, as the effects of record high oil prices in July filtered through to downstream derivatives. Raw material prices are expected to ease in the fourth quarter. Volume mix was 5 percent lower in the third quarter.



Operating income (EBIT) before restructuring of CHF 113 million or a margin of 7.3 percent (2007: CHF 150 million, 9.2 percent) reflected lower profitability levels in Plastic Additives, where demand slowed in a number of customer industries, notably construction and automotive, and this intensified competitive pressure during the quarter. There was also some impact from Hurricane Ike, where a number of customers in the US stopped ordering and declared ‘force majeure’ in contracts. Coating Effects profitability remained at high levels and Water & Paper Treatment increased profitability in the quarter.



Restructuring charges of CHF 26 million relating to the Operational Agenda program were incurred as expected in the third quarter.



Net income for the third quarter was CHF 46 million.




Nine Month Results Overview


Sales of CHF 4,637 million for the nine months were 6 percent lower than 2007 in Swiss francs and flat in local currencies, as the Swiss franc remained strong relative to the US dollar. Sales in local currencies were 5 percent lower in Europe, with a significant slowdown in the automotive and construction industries, as well as continued weakening in the paper and inks markets. In the Americas, sales were 1 percent higher, with good growth in the Water & Paper Treatment segment, which offset some softening in plastics and coatings, which were impacted by the slowdown in the automotive and construction industries. Central and South America showed growth of 10 percent and 6 percent respectively. In Asia, growth remained strong across most business lines, up 8 percent in local currencies.



Sales prices increased 2 percent over the nine months, accelerating significantly in the third quarter. This did not however, fully offset the CHF 247 million or 11 percent increase in raw material prices experienced during the period. Volume mix was 2 percent lower.



Gross profit margin was 26.7 percent (2007: 28.9 percent), lower as a result of the raw material price increases in 2008.



Operating income (EBIT) before restructuring of CHF 274 million or a margin of 5.9 percent (2007: CHF 423 million, 8.6 percent) for the nine months, reflected the weaker second quarter, where raw material price and energy cost increases were significant. Sales price increases improved profitability in the third quarter.



Restructuring charges relating to the Operational Agenda program to improve the cost structure and facilitate growth, were CHF 70 million (2007: CHF 93 million) for the nine months. There was also a goodwill impairment charge of CHF 590 million in Water & Paper Treatment mainly incurred in the second quarter.



Savings from the Operational Agenda were CHF 90 million for the nine months and are expected to come in at CHF 120 million for the full year, higher than the previously anticipated CHF 100 million.



Net financial expenses increased in the nine months to CHF 109 million (2007: CHF 88 million). This increase was mainly a result of the sell-off in emerging market currencies in September, especially the Brazilian real, and the decrease in the value of the Euro against the Swiss franc, which resulted in higher foreign exchange costs.



Taxes were lower in the nine month period at CHF 28 million (2007: CHF 76 million). In both the third quarters of 2007 and of 2008 there were one-time effects relating to a change in tax law which had an impact on tax expenses. In the third quarter of 2007 there was an additional expense of CHF 15 million, and in the same period in 2008, an additional CHF 10 million income. The outstanding difference mainly relates to the lower pre?tax income between the years.



The second quarter goodwill impairment resulted in a net loss for the nine month period of CHF 523 million (2007 net income: CHF 153 million).




Update on the offer from BASF to acquire Ciba


On September 15, 2008 it was announced that BASF would make a public tender offer for all outstanding shares of Ciba Holding AG at CHF 50.00 per share. Ciba’s Board of Directors has thoroughly examined the offer and additionally commissioned an independent fairness opinion. On this basis, the Board of Directors has recommended that shareholders accept BASF’s offer and tender their Ciba shares.

Ciba strengthens BASF’s strategy and operations in the field of specialized chemical engineering through its leading innovation capabilities and application expertise in Plastic Additives, Coating Effects and Water & Paper Treatment. At the same time, Ciba benefits from BASF’s global research, production and marketing platform, as well as the associated backward integration into important raw materials and intermediates. The two companies already maintain long?standing and extensive supplier and client relationships.

The offer is progressing as planned and BASF has now secured the required two thirds majority of Ciba shares in the tender offer, which ended on Tuesday October 28, 2008. The additional acceptance period began on November 3, 2008 and will finish on November 14, 2008. The offer is still subject to merger control approvals, as well as the elimination of Ciba’s statutory voting and registration limits, which will be voted upon at an Extraordinary General Meeting on December 2, 2008. The transaction is expected to close in the first quarter of 2009.




Outlook


Business conditions have deteriorated in the third quarter, with the economic downturn evident in many customer industries. The Company is seeing a slowdown of demand in European and US markets and is anticipating that this will spill over into Asia. In this environment, the outlook for the fourth quarter is more challenging than previously anticipated.

The Company therefore believes that the earlier guidance given for 2008 is no longer applicable in the current business climate. While the Company’s market positions remain strong and operational improvements continue to come through across the business, it is difficult to predict demand for the remainder of the year, as the extent and duration of the economic downturn is not yet clear. Based on the visibility the Company has today, it is expected that current EBIT margin levels can still be maintained, however free cash flow levels are expected to be lower than previously anticipated.




Segment Review


Plastic Additives sales of CHF 1,512 million for the nine months were 7 percent lower in Swiss francs and flat in local currencies. Demand in the construction and automotive industries in Europe and NAFTA weakened considerably during the period and as a result, segment sales in local currencies were 2 percent lower both in Europe and in the Americas. Hurricane Ike also impacted sales in the US, where some customers declared ‘force majeure’ in contracts and stopped buying. Sales in Central and South America continued to grow strongly, while in Asia, sales were 4 percent higher, with double digit growth in the lubricants and personal care businesses. Going forward, the segment sees slower demand, particularly in the construction and automotive industries and to a lesser extent in the packaging industry, worsening over the coming months.

Profitability was lower in the nine month period, with an operating income (EBIT) before restructuring of CHF 122 million or a margin of 8.0 percent (2007: CHF 243 million, 15.0 percent). This was mainly a result of intense margin pressure from increased raw material prices in the first and second quarters, as well as the weaker demand. Sales price increases did, however, start to take some effect into the third quarter.



Coating Effects sales in the nine month period of CHF 1,296 million were 7 percent lower in Swiss francs and 1 percent lower in local currencies. The segment also experienced a weakening of demand from the automotive and construction industries, with 6 percent lower sales in Europe and the Americas. In Asia, sales growth was 10 percent in local currencies, with a strong performance in all business lines, especially coatings and electronic materials. Operating income (EBIT) before restructuring remained high at CHF 158 million or a margin of 12.2 percent (2007: CHF 182 million, 13.0 percent), despite high raw material prices and lower demand in the period.



Water & Paper Treatment sales of CHF 1,829 million were 5 percent lower in Swiss francs and 2 percent higher in local currencies. Sales growth was mainly driven by Asia, where there was an 11 percent increase in sales for the segment in local currencies. In Europe sales were 5 percent lower in local currencies, as demand fell in the paper industry, however the water treatment business grew well. In the Americas, sales were 7 percent higher in local currencies, with good growth in both water and paper in most of the region, offsetting a weaker performance in Canada. Profitability in the segment was lower than in the same period in 2007, with operating income (EBIT) before restructuring of CHF 64 million or a margin of 3.5 percent (2007: CHF 80 million, 4.2 percent). This reflected a weak result in the second quarter, which had been due to the lag effect in timing between raw material and other cost increases and acceptance of our customers for price increases. However, the third quarter improved considerably, with sales price increases largely compensating for the costs increases and together with the growing positive impact of the various ongoing ‘turnaround’ measures, the segment achieved an EBIT margin before restructuring of 6.2 percent.