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

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.

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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.

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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."