Earnings growth from its pharma solutions business helped push BASF's operating income (EBITDA) from fine chemicals up by 56.5 per cent to €288m in 2007.
That was despite pharma solutions sales remaining flat against 2006. However, active ingredients and excipients "developed favourably" following restructuring at BASF's site in Minden, Germany, the group noted. BASF originally announced plans to downscale production at the Minden site in August 2006, citing increased competition in the market for generic active pharmaceutical ingredients (APIs) as Asian suppliers drove down prices. The situation was aggravated by new restrictions on over-the-counter sales of the decongestant pseudoephedrine in the US as well as intense volatility in demand for caffeine.
The original threat of 200 jobs going at the Mindem site was mitigated somewhat through a compromise agreement between BASF PharmaChemikalen and the division's employee committee in December 2006, which reduced the redundancies to around 130. When it announced the restructuring plan, BASF said APIs would remain an important part of the pharma solutions portfolio but in future the real growth would come from pharmaceutical excipients and the business's custom synthesis range.
The custom synthesis arm is part of a strategic drive to diversify the group away from commodity chemicals and into segments with higher margins and less exposure to cyclical trends. This also includes catalysts, which are part of BASF's largest division, Chemicals, and contributed a full year of sales for the first time in 2007. Fine chemicals make up around 37 per cent of sales in the Agricultural Products and Nutrition division. Presenting its fourth-quarter and annual results, however, BASF noted that the potential of its custom synthesis business "has not yet been fully exploited". Initial work on development projects with its customers in this segment would start contributing to sales and earnings in 2008, the group added.
In the fourth quarter, earnings before interest, taxes, depreciation and amortisation (EBITDA) in the fine chemicals division jumped 172.2 per cent to €98 million, with a hand from lower fixed costs and higher selling prices for vitamins. Divisional sales were 8.6 per cent lower at €437m, though, with a 5 per cent lift from higher prices wiped out by portfolio shifts (-9 per cent) and negative currency translation (-5 per cent). BASF put the sales decline down to the discontinuation of its lysine business - the only amino acid in the group's nutrition portfolio - in March 2007 and the sale of a major part of its premix business to Dutch company Nutreco the previous month.
Announcing the exit from lysine, Dr. Wolfgang Büchele, president of the fine chemicals division, had commented: "In order to turn around our fine chemicals business, we are focusing on a more cyclically resilient product portfolio in nutrition as well as on growth areas in cosmetics and pharmaceuticals." In the full year, the impact of these measures on fine chemicals turnover was offset by higher selling prices in the nutrition and cosmetics businesses, although sales across the division in 2007 were 0.2 per cent down at €1,852m. Volume and price increases added 2 per cent apiece but portfolio changes shaved off 1 per cent and currency translation 3 per cent.
From this year onwards, fine chemicals will no longer be reported as a separate unit. Instead, it will be bundled with detergents and formulators under the new name Care Chemicals as part of the Performance Products division. BASF said it was expecting lower sales from Care Chemicals in 2008 due to last year's divestitures, while earnings "will increase further". In the chemicals division, the other piece of the BASF pie that includes the group's pharmaceutical-related interests, sales of intermediates grew by 8.7 per cent to €624m in the fourth quarter and by 8.7 per cent again to €2,470m in the year.
According to BASF, strong global demand was behind the fourth-quarter sales increase. The division could only pass on some of the impact of "significantly higher" raw material costs to customers through higher selling prices but improved volume more than compensated. Income from operations before special items in the intermediates segment was above the fourth quarter of 2006, BASF noted. The full-year growth in intermediates sales came from all regions of the world, especially Asia. Volume increases lifted sales by 8 per cent and prices by 5 per cent, while currency movements knocked off 4 per cent. Income from operations increased significantly in 2007, helped by restructuring measures taken in recent years. As for the year ahead in intermediates, "we expect further sales growth and earnings to match the high level posted in 2007", BASF stated.
The catalysts segment was effectively created by BASF's acquisition of US-based Engelhard Corporation in June 2006, the biggest such deal in the German group's history. The takeover had some ramifications for BASF's pharmaceutical interests, as many of Engelhard's catalysts can be used in chemical production processes for APIs and intermediates, while the US company also has a range of additives that improve drug appearance and efficacy. Sales of catalysts dipped 0.2 per cent to €1,130m in the fourth quarter of 2007. In the full year, however, they leapt 99.3 per cent to €4,804m. This was a key factor in the 22.4 per cent sales hike to €14,162m recorded by the whole of the chemicals division in 2007, while EBITDA was 20.3 per cent ahead at €2,689m.
The fourth quarter was blighted by scheduled plant turnarounds that lasted longer than expected and took about a €150m chunk out of Q4 earnings. Quarterly sales across the chemicals division slipped 0.9 per cent to €3,416m and EDITDA was 38.6 per cent lower at €476m, BASF reported. For the whole of the BASF group, sales rose by 10.2 per cent to €57,951m in 2007, generating EBITDA of €10,225m (+5.2 per cent). Net income for the year was €4.065m, up by 26.4 per cent on 2006.
Announcing the results, BASF chairman Dr Jürgen Hambrecht said the first few weeks of 2008 had "run on smoothly from the past year for BASF. The level of orders remains strong and the capacity utilisation rates of our plants are high. We therefore expect that BASF's business will also develop positively in 2008."