H&R Wasag stays positive as oil prices bite in pharma

By Pete Mansell

- Last updated on GMT

Related tags Benchmark Earnings before interest and taxes H&r wasag

Oil price fluctuations had the expected impact of dampening profits
in H&R Wasag's key chemical-pharmaceutical raw materials
business during 2007.

The effect was amplified by the windfall profits seen in 2006, as earnings before interest, taxes, depreciation and amortisation (EBITDA) in the chemical-pharmaceutical raw materials segment declined by 18.0 per cent to €80.6m last year. Announcing its interim results for 2007, however, the German speciality chemicals company highlighted its "impressive​" sales growth in chemical-pharmaceutical raw materials, up by 4.1 per cent over 2006 to €729.3m. The segment accounted for the bulk of group sales in 2007, which dropped by 2.3 per cent to €797.9m. That included a one-off hit, though, from the sale of H&R Wasag's explosives division to Spanish-Italian group Maxam/Pravisani in late April 2007. Adjusted for the disposal, H&R Wasag noted, group sales rose by 4.5 per cent to €776.6m in 2007. Adjusted operating income for the year was €56.4m, down by 23.5 per cent on 2006 but slightly higher than the revised forecast given by H&R Wasag last October. Pre-tax profit was also slightly above forecast, reaching €73.1m for 2007. This was 2.5 per cent down on the €75.0m recorded in 2006, but last year's figure included around €20m in windfall profits. Group EBITDA for 2007 were €92.7m, a decline of 8.1 per cent year on year. The windfall effect was particularly marked in the chemical-pharmaceutical raw materials segment during 2006, when a relatively stable crude oil market kept raw material prices in check and, helped by a price increase for chemical-pharmaceutical specialities, operating profit nearly quadrupled to €82.4m. Market conditions were less favourable during 2007, with sharp increases in the price of crude oil while the price of base oil was static on a dollar basis or, in euro terms, even declined. This hit H&R Wasag both ways, as higher crude oil prices push up the cost of chemical-pharmaceutical raw materials and the price of base oil serves as an indicator for the selling prices of a number of important speciality products based on crude oil and sold to the pharmaceutical and chemical industries. The outcome in 2007 was a "return to more normal​ [i.e., thinner] margins on finished products and consequently lower windfall profits​" for chemical-pharmaceutical raw materials, the company reported. Without these "conditions beyond H&R Wasag's control​", underlying operating profit in the raw materials segment "even showed a slight year-on-year improvement​", it noted. According to H&R Wasag spokesman Christian Pokropp, the gap between crude and base oil prices was €300 per ton at peak, with a long-term average of €150 per ton. As for the current trend, "it's really hard to say how the crude oil price will develop​", he commented. The company has cut its operating profit forecast for 2008 from "up to €70m​" in October to €50-60m now. Based on expected selling prices and reduced volumes due to downtimes caused by investment in capacity expansion, H&R Wasag "anticipates higher second-half earnings after a weak first quarter​", it added. The guidance assumes a crude oil price level of $90 per barrel (Brent) and "an accordingly stable price delta of indices that are relevant for many finished product prices (e.g., the ICIS reports for base oils)​". Group sales in 2008 are expected to grow by around €200m to roughly €1 billion. "In view of the significantly higher windfall profits in the financial year 2006, we have further strengthened our underlying operating earnings potential,​" commented H&R Wasag's chief executive officer, Gert Wendroth, on the interim results for 2007. This optimism is reflected in the company's decision to invest a further €15m in its Project 40 capacity expansion programme, which includes a planned increase in the output of crude oil-based pharmaceutical and chemical specialities by 20 per cent or 200 tons. With total investment in Project 40 now up to €70m, the initiative now incorporates a new distillation unit to be built at H&R Wasag's specialities refinery in Salzbergen during 2009. The original intention was just to expand and optimise the existing plant. The new capacity will make a substantial contribution towards enhancing the flexibility of the company's raw materials input and diversifying its product range, H&R Wasag said, describing the move as "an important step in making the company more independent of the development of price indices such as those for base oil​s". This year, Project 40 alone is expected to contribute €9m to pre-tax profits, rising to €14m in 2009 and €20m in 2010. A follow-on project, Golden Cut, is also geared to boosting the share of specialities in H&R Wasag's overall business. Pokropp said Golden Cut was about "establishing more production steps to improve the quality of our products​". The sales of the explosives division last April likewise recognised that H&R Wasag's explosives and plastics businesses were no longer so pivotal to offsetting the impact of crude oil prices on the company's refinery operations. "The activities of the Chemical-Pharmaceutical Raw Materials Division, which are characterised by a high degree of dependence on the development of the crude oil price, have in the meantime reached a volume that effectively provides a hedge against the effects of a volatile oil market within the division​," H&R Wasag stated at the time. "This allows peripheral activities to be sold, leading to a reduction in the complexity of the speciality chemicals group, and a more defined corporate profile."

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