(Extract from the Financial Statements of Auriga Industries A/S for 2005)
| In millions of DKK |
2005 |
2004 |
|
Revenue
Operating profit before depreciation
and amortisation (EBITDA)
Operating profit (EBIT)
Net financials
Profit before tax
Net profit for the year |
4,017
639
458
(88)
369
262 |
4,094
837
646
(39)
607
403 |
|
Total assets
Long-term assets
Equity
Net liabilities |
4,237
1,043
1,914
945 |
3,829
996
1,750
572 |
|
Cash flows from operating activities
Cash flows from investing activities
Available cash flow |
109
(211)
(128) |
421
(63)
349 |
|
Investments in long-term assets
Depreciation and amortisation |
123
181 |
62
192 |
|
Profit margin (EBITDA)
Profit margin (EBIT) |
16%
11% |
20%
16% |
Objectives and strategy
It is Cheminova’s objective to be the best innovative global supplier of generic products within the agrochemical industry.
It is Cheminova’s strategy to optimise and develop it’s five core competences: to identify, develop, register, manufacture and market known plant protection products better and cheaper than any other company in the industry.
Market development
Whereas 2004 was characterised by favourable climatic conditions and high prices for a number of crops, 2005 was a more difficult year. Global sales of conventional plant protection products are estimated to have totalled USD 31 billion in 2005, representing a 3 per cent decline relative to 2004 at unchanged USD rates. This decline should, however, be seen in the light of an actual increase in 2004 relative to 2003 of 5 per cent.
As was the case in 2004, the North American market declined by few per cent in 2005, primarily because of an increase in the share of GMO crops and a continued fall in the price of glyphosate. In South America, the actual decline in sales of plant protection products was 9 per cent. Due to a drought in southern Brazil, the demand for fungicides to combat Asian rust fungal disease and the demand for herbicides were lower than in 2004. Moreover, the strengthening of the Brazilian currency relative to the US dollar meant lower prices for Brazilian farmers and thereby less incentive to protect the crops.
In the rest of the world, the demand for plant protection products fell by 2 per cent. A low level of insect infestation and a drought, especially in Spain and Australia, contributed to the decline.
Sales and distribution
In 2005, Cheminova’s sales declined by 2 per cent relative to 2004, which was a record year. Disregarding the fall in the USD, sales increased by 3 per cent. Revenue in 2005 was higher than expected at the beginning of the year.
Sales of Cheminova’s organophosphorous insecticides accounted for 26 per cent of total revenue in 2005 against 30 per cent in 2004. After an extraordinarily good year in 2004, characterised by high levels of insect infestation in most of the world, by locusts in Africa and by many boll weevils in southern USA, expectations for 2005 were more modest. Nevertheless, sales of organophosphates were higher than expected. Sales of malathion to the American boll weevil eradication programme were down relative to 2004, but higher than expected. The programme, which has been a tremendous success, is expected to end in a few years’ time.
Cheminova’s newer products increased their share of revenue from 41 per cent in 2004 to 47 per cent in 2005. Glyphosate, which is the largest product of this group, saw a satisfactory increase in revenue, especially on account of good sales in Europe. Competition within the glyphosate market intensified further in 2005, resulting in declining prices.
Sales of the fungicide flutriafol, which Cheminova bought from Syngenta in 2001, increased again in 2005. As was the case in 2004, most of the products sold were used to combat Asian rust fungal disease in Brazil, and despite a general fall in sales of fungicides in Brazil, sales of flutriafol increased. A contributing factor was the introduction of the Impact Duo mixture product. Flutriafol also achieved good sales in Russia, while sales in Australia disappointed.
Cheminova’s other new generic products, including the insecticide gamma-cyhalothrin, saw increasing sales in 2005, slightly higher than expected. New products’ share of total revenue is set to grow dramatically in the coming years.
Sales of third-party products accounted for 16 per cent of total revenue in 2005, unchanged relative to 2004. In a number of Cheminova’s sales companies, sales of third-party products is complementing the product programme.
Sales of fine chemicals accounted for 11 per cent of revenue in 2005, against 12 per cent in 2004.
During 2005, Cheminova increased the number of sales companies by four, and the company now has its own sales companies in sixteen of the most important agricultural countries.
In Colombia, Cheminova acquired a majority stake in CropTech, and in Australia a majority stake in Ospray. At the same time, sales companies were established in Poland and Bulgaria.
Brazil and the USA are the world’s two largest agricultural countries and also the two countries in which Cheminova generates the highest revenue. Both countries did well in 2005 with sales in local currencies slightly up on the year before. Mexico and Russia also had a good year with increasing sales. Cheminova’s western European companies generally saw stagnating sales due to climatic conditions, with the exception of France, which saw a satisfactory increase in sales. Hardest hit was Spain where the market for plant protection products declined by 13 per cent. Cheminova’s company in Spain, Agrodan, gained market share again in 2005.
Production and investments
Production at Cheminova’s factories in Denmark and India was satisfactory throughout 2005.
Increasing oil prices and a continuing high level of global demand have resulted in increasing prices of raw materials and energy. Long-term supply contracts and optimisation of logistics have, however, to some extent compensated for the increases.
Investments in property, plant and equipment amounted to DKK 68 million against DKK 58 million in 2004.
Sales and production of the food preservative potassium sorbate were discontinued at the end of 2005. Over the next two years, the plant will be converted for other production.
In 2005, a total of DKK 112 million was invested in the acquisition of subsidiaries in the UK, Colombia and Australia.
Investments in registration data totalling DKK 40 million have been capitalised.
Environment
Concern for the environment, health and safety is an integrated part of Cheminova’s business policies. Responsible behaviour within these areas is of material importance to the company. In addition to compliance with current legislation, rules and regulations, it is group policy to introduce constant improvements in these areas.
Cheminova’s environmental permissions in Denmark have been reviewed in recent years. This review will be completed in 2006 ensuring that the company is living up to the most recent EU regulations in these areas.
Standardised control systems have in recent years been established at the production plants in Denmark to safeguard the external environment and the working environment. The systems are expected to be certified in 2006.
Focus areas for the company in Denmark are energy savings and a reduction in CO2 emissions. In 2005, electricity consumption was reduced by 6.8 per cent, while steam consumption was down 1.9 per cent relative to 2004.
In addition to its production facilities in Denmark, Cheminova has a production plant in India. The Indian plant has been granted all the necessary environmental approvals. Cheminova has introduced ongoing improvements within both the external and the internal environment. This development will continue with a view to achieving further improvements in the coming years.
A new chemicals regulation (REACH) is being adopted by the EU. It is expected to come into force in 2007. Cheminova consideres the overall principles outlined REACH positively. However, the financial consequences for the company will largely depend on the implementation and administration of the regulation in practice.
Product development
In the coming years, Cheminova will introduce an average of three new products per year. At the same time, the addition of new products will require significant resources by the development department in support of both production and marketing. Increasing activity are seen within all areas of development within synthesis chemistry, formulation technology and technical upscaling. New resources are continuously being added to the development department to ensure that the target growth can be achieved.
Cheminova has entered into a cooperation agreement with Bayer CropScience concerning the insecticide imidacloprid. Under the agreement, Cheminova has acquired global rights to sell its own formulations based on Bayer’s active substance. Imidacloprid is the world’s leading insecticide with annual sales of approx. EUR 650 million. This new product will in the coming years contribute significantly to Cheminova’s revenue and earnings.
Income, balance and cash flow
Figures in brackets are the figures for 2004.
Revenue for 2005 was DKK 4,017 million (DKK 4,094 million).
EBITDA was DKK 639 million (DKK 837 million) corresponding to 16 per cent (20 per cent) of revenue. Depreciation and amortisation amounted to DKK 181 million (DKK 191 million). EBIT was DKK 458 million (DKK 646 million) corresponding to an EBIT margin of 11 per cent (16 per cent). With an unchanged USD settlement rate relative to 2004, EBIT would have been approx. DKK 145 million higher.
Financial expenses amounted to DKK 88 million (DKK 39 million). The deviation is primarily attributable to increasing financial expenses in Brazil and a forward discount in connection with the hedging of especially USD.
Profit before tax was DKK 369 million (DKK 607 million), which is higher than expected at the beginning of the year.
Balance sheet total increased by 11 per cent to DKK 4,237 million (DKK 3,829 million), primarily as a result of the increase in working capital. Inventories were up DKK 203 million, of which approx. DKK 110 million was attributable to exchange rate fluctuations and inventories in companies acquired towards the end of the year. Trade receivables were up DKK 329 million, of which approx. DKK 190 million was attributable to exchange rate fluctuations and receivables in acquired companies. Of the actual increase in trade receivables, approx. DKK 140 million, the main part originates from Brazil where it has been necessary to extend longer credits due to poor harvest yields in 2004/05 in the southern parts of the country.
After tax of DKK 216 million, cash flow from operating activities amounted to DKK 83 million (DKK 412 million). Investments in property, plant and equipment and intangible assets amounted to DKK 211 million (DKK 63 million). Available cash flow was DKK -128 million (DKK 349 million).
Plan 2010
In 2005, Cheminova prepared a Business Plan covering the period up until 2010. During this period, Cheminova will aggressively pursue growth opportunities identified through development of new products and acquisitions.
The target is to increase revenue, through organic growth alone, from just over DKK 4 billion in 2005 to DKK 6 billion in 2010. The target is an EBIT margin of 14 per cent towards the end of the period.
The plan will require considerable investments in development, registration and marketing, which will lead to a decline in EBIT margin to about or, as in 2006, slightly under 10 per cent for the first years of the plan period.
Companies without the necessary competences are expected to be obvious acquisition targets in the coming years. Cheminova will be part of this consolidation process.
Plant protection products are currently subject to joint EU registration. EU requirements have become stricter, which means that several products will disappear from the market. In the USA, the registration of generic products is becoming cheaper, which will result in intensified competition, but at the same time it will make it possible to register more products.
Patented products’ share of the global market has been falling for a number of years and continues to fall. This allows Cheminova to introduce new and interesting products in the coming years. Furthermore, an increasing number of products also open up for new and interesting mixture formulations.
Plan 2010 is the result of the upgradation of Cheminova’s core competences in recent years. Development of know-how and the ability to innovate will continue throughout the plan period. The plan will ensure that by the end of the decade, Cheminova will have further expanded its position as one of the leading companies within the agrochemical business.
Outlook 2006
The beginning of 2006 has been characterized by difficult weather conditions in the northern hemisphere and therefore Cheminova expects a decline in the global market for plant protection products relative to 2005.
In 2006, Cheminova expects a continued fall in sales of malathion to the American boll weevil eradication programme in cotton as well as a continued fall in prices of glyphosate in North America. Cheminova does not expect to see sales of flutriafol in the USA in 2006, for which reason sales of flutriafol are expected to be on a par with or slightly lower than in 2005.
Sales of Cheminova’s new products, including gamma-cyhalothrin and imidacloprid, are expected to increase substantially in 2006, while the new sales companies are also expected to contribute to growth in revenue.
Cheminova expects to see an increase in revenue of 7 per cent relative to the year before. Almost all the parent company’s expected net income of USD in 2006 has been hedged through forward exchange contracts and options at a price of DKK 6.10. The average settlement price for 2005 was DKK 6.03.
In accordance with Cheminova’s growth plan for the coming years, 2006 will see a strong increase in development, marketing and registration costs.
Cheminova expects an EBIT margin of 9 per cent for 2006. Financial expenses are expected to be on the same level as in 2005.
For 2006 as a whole, Cheminova expects revenue of approx. DKK 4.3 billion and a profit before tax of approx. DKK 300 million. Cash flow from operating activities is expected to improve substantially relative to 2005. Investments in property, plant and equipment are expected to total just over DKK 100 million.
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The entire Financial Statements of Auriga Industries A/S for 2005 can be found at Auriga's website www.auriga-industries.com.
March 21, 2006
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