Cheminova's Financial Statements for 2003

(Extract from the Financial Statements of Auriga Industries A/S for 2003)

With a revenue of DKK 3,420 million and a profit before tax of DKK 251 million in 2003, Cheminova's sales of plant protection products on the whole developed as expected. In 2003, the increase in sales of the company's newer products more than compensated for the fall in sales of the company's older organophosphorous insecticides. Stable economic conditions in Brazil and a good monsoon in India contributed to the increase in sales. For 2004, Cheminova expects a small increase in revenue to DKK 3,500 million and a profit before tax about 5 per cent higher than in 2003.

In millions of DKK	2003	2002
Revenue Operating profit before depreciation and amortisation of goodwill (EBITDA) Operating profit (EBIT) Net financials Profit-sharing Profit before tax Net profit for the year	3,420   540 336 (70) (15) 251 142	3,226   548 348 (96) (14) 238 147
Balance sheet total Fixed assets Equity Net debt	3,466 1,059 1,578 868	3,008 941 1,546 701
Cash flow from operating activities Cash flow from investing activities Available cash flow	363 (329) 34	330 (130) 201
Investments in fixed assets Depreciation	307 204	137 200
Profit margin (EBITDA) Profit margin (EBIT)	16% 10%	17% 11%

It is Cheminova’s objective to be the most value-generating global supplier of generic products within the agrochemical industry – based on technology, innovation and competitive professionalism. To fulfil this objective, the company’s global market share must be increased from the present approx. 1.5 per cent to at least 2 per cent over the next three to four years. This has to happen despite the fact that Cheminova’s organophosphorous insecticides are currently losing market shares to newer products.

The increase will be achieved partly through the acquisition of products and companies, and partly through the introduction of new generic products developed by the company itself. Distribution will primarily happen through the company’s own sales companies.

During this period of growth, the aim is to maintain a cash flow from operating activities of 10 per cent of revenue and an EBIT margin of 10 per cent. Depending on developments in the USD exchange rate, the EBIT margin may in some years fall below the stated level.

Following a number of years of declining sales, the global market for plant protection products was largely unchanged in 2003 relative to the year before. Measured in USD, however, an increase of 5-6 per cent was seen. Contributory factors in this context were, in particular, increasing world market prices for a number of crops as well as the improved economic situation in Latin America, especially in Brazil.

Unlike the previous year, both North America and South America experienced normal weather conditions in 2003, and the industry saw increases in sales in both areas. On the other hand, large parts of Europe were hit by drought, and measured in EUR, sales in Europe fell by approx. 4 per cent.

In 2003, the market for conventional, synthetically manufactured plant protection products was just over USD 26 billion. The North American market remains the biggest market, accounting for 30 per cent of global sales. Then follow Western Europe and Asia with 24 per cent and 22 per cent of the market, respectively.

The only area which is currently seeing structural growth is Latin America, which now accounts for 15 per cent of sales of plant protection products. Eastern Europe, which in the coming decade is expected to become a growth area, still accounts for a mere 4 per cent of the world market.

While sales of conventional products are seeing only modest or no growth at the moment, sales of biotechnological products are increasing and now amount to approx. USD 4 billion.

At the moment herbicides account for half the market for plant protection products, while insecticides account for 25 per cent and fungicides for 22 per cent of the market as a whole.

The agrochemical industry is currently characterised by considerable consolidation and has been for some time. The two largest companies in the industry, Bayer and Syngenta, account for about 40 per cent of the world market, and together with four other multinational research-based companies they represent approx. 80 per cent of the market as a whole. About ten to fifteen years ago, it took just under 20 companies to cover a similar share of sales. Consolidation often leads to divestment of products, and a number of these products offer interesting potential for Cheminova.

Furthermore, the industry is characterised by more and more products becoming patent-free. Sales of patented products account for only approx. 34 per cent of the world market. Another trend within the industry is that a large number of products are currently being reregistered in Europe and North America. The costs involved in this are often so high that a number of minor products are disappearing from the market in the process.

In this scenario there will be some scope for companies such as Cheminova to win market shares, but subject to intensifying price competition. In 2003, developments were affected, in particular, by price competition on glyphosate in the US market.

In 2003, Cheminova’s sales of plant protection products developed satisfactorily and largely as expected.

Sales of the insecticide malathion also fell in 2003, although not by as much as anticipated. This is due, in particular, to increased sales to the USA boll weevil eradication programme for cotton. Cheminova has for a number of years been the main supplier to the programme, which is approaching a successful end. Cheminova’s other organophosphorous insecticides also saw satisfactory sales on a par with the year before. In 2003, organophosphorous products accounted for 32 per cent of the company’s sales against 56 per cent five years ago. In step with the completion of the boll weevil eradication programme, the organophosphorous products’ share of sales is expected to continue to fall.

Sales deriving from the company’s newer products, including the herbicide glyphosate, are continuing to grow and accounted for 39 per cent of revenue in 2003.

Sales of glyphosate increased again in 2003, but at heavily reduced prices, especially in the USA. The fungicide flutriafol, which was acquired from Syngenta in 2001, had a satisfactory year with increasing sales relative to 2002. Flutriafol has proved effective in the eradication of rust, which in 2003 seriously affected soya in Brazil. The two products which Cheminova acquired from Bayer at the beginning of the year, acrinathrin and phosalone, both lived up to expectations.

Gamma-cyhalothrin, Cheminova’s new pyrethroid insecticide, generated sales on a par with expectations. The product is being marketed by Pytech GmbH, a 50:50 joint venture between Dow AgroSciences and Cheminova.

At the end of the year, gamma-cyhalothrin had been registered in eleven countries, but in most countries registration was not obtained until after the growing season. Registration of the product in the USA is expected in March 2004.

A number of new growth products, including the insecticide imidacloprid, have been introduced in recent years and are generating satisfactory sales figures. However, so far imidacloprid is only patent-free in a small number of countries.

In 2003, sales of fine chemicals accounted for approx. 13 per cent of revenue and developed largely as anticipated, but with continuing fierce price competition.

Third-party products which are complementing the sales companies’ programme are continuing to grow and in 2003 accounted for approx. 15 per cent of revenue.

An important element in Cheminova’s strategy is the distribution of the company’s own brands via its own sales companies in the most important agricultural countries. In 2003, Cheminova took over the French distribution company Flexagri from Bayer. At the beginning of 2004, Flexagri was merged with Cheminova France and provides a good starting point for Cheminova’s future expansion in France.

Unlike the situation in two previous years, 2003 was characterised by financial stability in South America. Developments in Brazil were particularly positive, and Cheminova Brasil had a good year with considerable increases in revenue and earnings. India had a good monsoon in 2003, which meant that Cheminova India returned satisfactory results.

Sales in Europe have developed in different directions. Some countries in Northern Europe have been affected by frost and drought, negatively impacting sales of plant protection products, while the Spanish subsidiary Agrodan, for example, had another year of satisfactory growth.

Developing formulations of Cheminova’s new pyrethroid gamma-cyhalothrin continued in 2003 along with the work to obtain registrations in a large number of countries. The registrations are obtained by the joint-venture company Pytech. The production process has been developed by Cheminova, and it is Cheminova which also produces the product, while sales are in the hands of Pytech through local sales companies owned by Dow AgroSciences and Cheminova. The product will in the coming years and up until 2010 constitute an increasing share of Cheminova’s revenue and earnings.

Cheminova’s R&D departments in Denmark and India have in the course of the year worked on the development of new generic products which will be launched in the coming years.

At the end of 2002, the company acquired the two insecticides phosalone and acrinathrin in connection with the merger between Bayer and Aventis.

At the end of 2003, Cheminova took over the global brands and registrations for the insecticides methyl parathion and malathion from the US company Griffin LLC. Malathion in particular will be an important product for Cheminova in future. The acquisition will improve capacity utilisation at Cheminova’s Danish production plant.

Cheminova’s production takes place in Denmark and India. Furthermore, subcontractors are being used to an increasing extent in connection with the manufacture of active ingredients and the formulation of sales products.

In 2003, operations at the factories in both Denmark and India went well with satisfactory capacity utilisation and production economy.

In 2003, approx. DKK 106 million was invested in property, plant and equipment, primarily in connection with the construction of the plant for the production of pyrethroids. The construction has proceeded according to plan.

In the coming years, investments in property, plant and equipment will decrease primarily in the Danish factory. It has therefore been necessary to reduce the number of jobs in the Danish production and construction departments by approx. 90 employees in the period 2002-2004.

Revenue amounted to DKK 3,420 million in 2003, which is 6 per cent higher than in 2002. With unchanged foreign exchange rates relative to 2002, the increase in revenue would have been 16 per cent. The satisfactory growth in revenue is primarily attributable to increases in sales by Cheminova’s sales subsidiaries in Brazil, India and Spain.

Cheminova’s EBITDA was DKK 540 million, corresponding to 16 per cent of revenue against 17 per cent in 2002. After depreciation on fixed assets of DKK 204 million against DKK 200 million in 2002, Cheminova’s operating profit was DKK 336 million against DKK 348 million in 2002. An EBIT margin of 10 per cent was achieved in 2003 against 11 per cent in 2002. Thus, Cheminova lived up to expectations at the beginning of the year and to the financial earnings targets.

Net financials amounted to DKK 70 million against DKK 96 million in 2002. The improvement is primarily due to the fact that 2002 was characterised by the currency crisis in Brazil and Argentina.

The profit before tax was DKK 251 million against DKK 238 million in 2002.

The company’s balance sheet total was DKK 3,466 million at the end of 2003. An increasing share of Cheminova’s sales takes place in South America where the peak season arrives around the end of the year. This is the reason for the increase in trade receivables in 2003 relative to the year before.

Despite an increase in debtors, Cheminova realised a cash flow from operating activities of DKK 363 million in 2003, up DKK 33 million on 2002.

Investments in 2003 amounted to DKK 329 million, of which DKK 223 million concerns investments in intangible assets, primarily in connection with the acquisition of the products phosalone and acrinathrin, the acquisition of Flexagri in France and the acquisition of Griffin’s malathion and methyl parathion rights.

Emerging optimism is generally being detected within the agrochemical industry. However, on account of the weak US dollar and the intensifying competition, especially for glyphosate, Cheminova is only expecting a slight increase in revenue in 2004, to DKK 3,500 million.

The parent’s net income in USD for 2004 has been hedged in the form of forward exchange contracts at a satisfactory rate.

For 2004, an EBIT margin of 9 per cent is expected, and an operating profit slightly under the profit for 2003. Owing to the combination of long credit periods and high interest rates in Brazil, the sales prices of Cheminova Brasil contain a substantial financing element. For technical accounting reasons, the EBIT is reduced by this financing element, resulting in a corresponding improvement of net financials.

For 2004, Cheminova expects its profit before tax to be up by approx. 5 per cent on 2003.

Cash flow from operating activities in 2004 is expected to be on the same level as in 2003. Investments in property, plant and equipment for 2004 are expected to be slightly lower than in 2003.

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The entire Financial Statements of Auriga Industries A/S for 2003 can be found at Auriga's website www.auriga-industries.com.

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