1) Improved profitability in the third quarter over Q1 & Q2
2) 10% increase in raw material costs impacts 9 month profitability
3) Further sales price increases initiated
4) Mixed industry demand
5) Project Shape on track - firm cost management taking effect
6) Plans to reposition Textile Effects business further advanced
7) Significant investment in Asia
Commenting on the results, Armin Meyer, Chairman of the Board and CEO said: “We have made progress in the third quarter, especially in profitability. Our focus on profitable growth, along with firm cost and current asset management is showing results, and we are well on track with savings from Project Shape. On the other hand, industry demand is still showing a mixed picture and raw material costs are significantly higher. We are expecting this pattern to continue over the coming months, so the rest of the year will remain demanding.”
The third quarter saw a positive impact in the Water & Paper Treatment business as sales returned to normal levels after the end of the lock out in the Finnish paper industry in the second quarter. There was also a recovery in demand from the converting industry for Plastic Additives. Coating ( glossary ) Effects continued to be impacted by the slow down of demand in the US automotive industry and the decline in the optical information storage market. Textile Effects saw good progress in the chemicals business, but weaker performance in dyes.
Sales prices were 3 percent higher than the same period in 2004 and were at similar levels to the second quarter of 2005. Further price increases are expected in a number of business lines in the fourth quarter. Volumes were about 1 percent lower than in the same period of 2004 after taking into account the base effect from including 4 months of Raisio Chemicals in the third quarter of 2004. Capacity utilization remained similar to the same period in 2004.
Operating income before restructuring was CHF 168 million, improving over the second quarter, although lower than the third quarter of 2004. Adjusted EBITDA margin before restructuring was 14.6 percent of sales, which although lower than the 15.3 percent in 2004, showed a significant improvement over both the first and second quarters, at 13.0 percent and 13.3 percent respectively. Key reasons for this continuing sequential recovery are the improving sales price development and benefits from cost saving programs such as Project Shape.
Net income for the third quarter was CHF 74 million. Similar to the comparison for nine months, the quarterly 2005 net income is not directly comparable to the third quarter 2004 net income, due to certain one time effects. Excluding these effects, comparable net income, before restructuring charges and one time gains, was CHF 92 million for the three month period in 2005, compared with CHF 104 million in the same period of 2004. Free cash flow generation in the third quarter was substantial as the operational performance further improved and current assets started to decline from the traditional seasonal peak of mid-year.
Outlook
Business conditions are expected to remain mixed, with varying demand across different customer industries and stable, high raw material costs. With these factors in mind, the Company anticipates that the fourth quarter will also be demanding.
Assuming this continuation of current business conditions, for the full year 2005, the Company expects sales in local currencies to be higher and an adjusted EBITDA in Swiss francs to be at similar levels to 2004. Net income on a comparable basis, excluding aperiodic benefits and restructuring charges, is expected to reach levels close to 2004. It remains a challenge to achieve a free cash flow within the range previously indicated.
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