(Extract from the Interim report for 3rd quarter 2009 for Auriga Industries A/S)
The market conditions for Cheminova’s largest product, glyphosate, have deteriorated considerably during 2009. Developments in Q3 were, in particular, characterised by substantial price erosion, which negatively impacted sales and resulted in unsatisfactory earnings. Revenue fell by 5% in the first three quarters of the year, when measured at unchanged exchange rates. Measured in Danish kroner, revenue was down 7% at DKK 4,180 million. Except for glyphosate, organic growth of more than 10% was achieved for Cheminova’s other crop protection products despite a declining market. This confirms the long-term targets set out in the business plan “Five-in-Fifteen”.
| DKKm |
Q1-Q3 2009 |
Q1-Q3 2008 |
|
Revenue
EBITDA
Operating profit (EBIT)
Net financials |
4,180
205
63
(96) |
4,502
657
510
(87) |
| Profit/loss before tax |
(33) |
423 |
|
Balance sheet total
Non-current assets
Equity
Net interest-bearing debt |
5,422
1,335
1,556
2,242 |
5,007
1,191
1,710
1,696 |
|
Cash flow from ordinary activities
Cash flow from operating activities
Cash flow from investing activities |
342
279
(289) |
(20)
(85)
(358) |
| Available cash flow |
(10) |
(443) |
|
Investments in property, plant and
equipment
Depreciation and amortisation |
78
142 |
89
147 |
|
EBITDA margin
EBIT margin |
5%
2% |
15%
11% |
(Figures in brackets are figures for 2008)
Income, balance sheet and cash flow
The market conditions for the herbicide glyphosate have deteriorated considerably during 2009, and developments in Q3 were, in particular, characterised by substantial price erosion. Consequently, Cheminova has not been able to achieve the expected sales and results, and revenue for the first three quarters fell by 7% to DKK 4,180 million (DKK 4,502 million). Despite a higher settlement rate for USD than in the same period last year, the impact from changes in exchange rates has overall been negative. At unchanged exchange rates, a decline in revenue of 5% would have been realised. Stähler is fully consolidated from March 1, 2009 and contributed revenue growth of DKK 222 million.
An operating profit before depreciation and amortisation (EBITDA) of DKK 205 million (EBIT 657 million) was realised, corresponding to an EBITDA margin of 5% (15%), while operating profit (EBIT) fell to DKK 63 million (DKK 510 million), corresponding to an EBIT margin of 2% (11%). The downturn in earnings is attributable to considerably lower prices for Cheminova’s largest product, glyphosate, in several important markets, including in particular North America.
Financial expenses were up at DKK 96 million (DKK 87 million) after an increase in interest-bearing debt, and a loss before tax of DKK -33 million (DKK 423 million) is consequently posted.
Following the full consolidation of Stähler, the balance sheet amounted to DKK 5,422 million (DKK 5,007 million). Working capital has increased relative to the same period last year, but inventories and receivables were successfully reduced in Q3, with working capital reduced by DKK 422 million. A positive cash flow from operating activities of DKK 279 million (DKK -85 million) was realised. After investments of DKK 289 million (DKK 358 million) the available cash flow amounts to DKK -10 million (DKK -443 million).
Sales and distribution
After strong market growth of about 20% in 2008, the market has been declining in 2009. The longterm development trends for the agrochemical industry remain positive, but for 2009 market players are reporting declining revenue as a result of climatic conditions, the credit crunch, distributors reducing inventories and considerable declines in glyphosate prices. Except for developments in glyphosate and exchange rate fluctuations, Cheminova is expecting to continue to increase its market share in 2009, realising growth of not under 10% for other crop protection products, which confirms the targets of a doubling of Cheminova’s market share to 5% in 2015.
The negative developments for glyphosate, which is the world’s largest crop protection product, are attributable to increasing exports from China at low prices, which have now led to considerable price deterioration in the market. Prices are thus back to the historically low level seen in 2006/2007 after a period of significantly increasing prices since mid-2007. During the first three quarters of 2009, Cheminova’s glyphosate prices have on average declined by more than one third relative to the same period in 2008. Price declines have accelerated since June 2009. Region ANZAC, where glyphosate accounts for a large share of total revenue, is hardest hit, but all regions are negatively impacted by developments in glyphosate.
Region Europe
The region has realised total growth of 7% relative to the same period in 2008. The acquisition of Stähler has contributed additional revenue of DKK 222 million. While sales of glyphosate are declining, new products have seen sound growth, while developments for the organophosphorous insecticides dimethoate and chlorpyrifos have been satisfactory. In October 2009, the full ownership of the Hungarian subsidiary, Cheminova Magyarország, was acquired.
Region ANZAC
The negative glyphosate developments have reduced revenue and earnings for the region considerably. Sales of glyphosate were up in Q3, but an operating loss was posted due to glyphosate stocks being sold below cost price. Sales of new products and the insecticide gamma-cyhalothrin and the fungicide flutriafol have developed satisfactorily. Revenue for the region fell by 13% to DKK 873 million in the first three quarters of 2009.
Region Latin America
Revenue for the region fell by 4% relative to the same period in 2008. At the start of the year, sales were impacted by the credit crisis and drought in Argentina and southern Brazil. Sales are influenced by the negative development in glyphosate prices, while sales of fungicides, including flutriafol, have increased satisfactorily.
Region International
The credit crisis meant a conscious preseasonal slowdown in sales to the CIS countries, and sales to the region are down 36% relative to the same period last year. Despite a slightly more positive development, the granting of credit is still restrictive. Sales of pyrethroid insecticides have been satisfactory, while glyphosate has disappointed.
Other activities
Total revenue from other activities was down 19% in the first three quarters of 2009. India recorded sound growth in revenue and earnings, whereas sales of fine chemicals have, in line with expectations, declined.
Products
Cheminova’s new products are continuing to develop satisfactorily, while the traditional products’ share of revenue has now been halved. This trend is expected to become more pronounced in the coming years with Cheminova’s largest product, glyphosate, accounting for a relatively smaller share of revenue than is the case today.
Herbicides accounted for 42% of revenue in the first three quarters of 2009 after a decrease of 4 percentage points relative to the same period last year. The downturn is attributable to developments for glyphosate, which accounts for approx. 25% of total revenue, while several selective herbicides are seeing sound growth.
Insecticides consist of the traditional organophosphorous insecticides, pyrethroids and several insecticides introduced in recent years. Insecticides accounted for 32% of sales after positive developments, especially for dimethoate and gamma-cyhalothrin.
Fungicides accounted for 14% of revenue, up 4 percentage points relative to 2008. Flutriafol remains the largest single product, but new products such as fluazinam and epoxiconazole are seeing sound growth and account for an increasing share of revenue.
Other products accounted for 12% of revenue, down 3 percentage points relative to last year. This segment comprises micronutrients, growth regulators such as trinexapac introduced in the first markets in 2009 and other fine chemicals etc. The segment accounts for a falling share of sales due to declining sales of fine chemicals.
Production and logistics
Developments at Cheminova’s production plants in both Denmark and India have generally been satisfactory. For the purpose of reducing inventories, production was stopped at the glyphosate plant and a small number of other production plants for a sixweek period from mid-September; the employees affected by this step are undergoing supplementary training during this period. The LEAN project has already resulted in considerable streamlining within several areas and functions, and further scope for efficiency improvements have been identified.
Deliveries and the availability of raw materials have been satisfactory throughout the first three quarters of the year. At the same time, raw material prices have shown a declining trend and have, on average, been lower than the prices seen during the same period last year. Energy prices (natural gas) have been somewhat lower than last year during this period.
Development and registration
Satisfactory progress has been seen in Cheminova’s project work concerning the development and registration of new products. The number of new registrations globally has been high, and most recently gamma-cyhalothrin has been registered in Germany. Trinexapac, a growth-regulating product, has been introduced in the first markets, and a large number of products have been successfully introduced in a number of countries following registration. Through the Stähler acquisition, Cheminova has gained access to several patented, selective herbicides which are gradually being registered in several European countries, i.e. pethoxamid, which is used for controlling weeds in maize, has been registered in France. Consequently, the local subsidiary will be able to introduce the product prior to the coming season.
Corporate Social Responsibility (CSR)
The realisation of the CSR targets for 2009 is progressing according to plan.
Product stewardship
Phase-out plan on track
By the end of 2009 at the latest, ten products will no longer be marketed in a number of countries. This is in line with the phase-out plan for WHO Class I products outlined in Cheminova’s CSR reports. The phase-out is progressing according to plan, and the majority of products due to be phased out in 2009 have already been phased out completely. Only two Class I products will be marketed in two countries in 2010. Subsequently, the phase-out plan will be fully implemented, and sales of all Class I products outside the USA, Europe, Australia and Japan will have ceased.
Phase-out of monocrotophos in India
Production of the active ingredient monocrotophos in India was discontinued in October 2009. Sales of Luphos 36, a Class I product based on monocrotophos, will cease at the end of the year, which is in line with the phase-out plan.
The Indian subsidiary has applied for approval of a new, considerably less toxic insecticide based on the same active ingredient. The development and testing of this patented product have been carried out by the Indian subsidiary’s development department. Marketing of the product is expected to start in the first half of 2010.
The production plant which has supplied monocrotophos will be rebuild for production of new fungicide products entering into Cheminova’s global product programme.
Production
In September, a recertification audit was carried out at the factory in Denmark within environmental, occupational health and energy areas with reference to the ISO 14001, OHSAS 18001 and DS 2403 standards. Renewed certificates are expected to be issued before the end of the year.
Mission, vision and values
The roll-out of Cheminova’s mission, vision and values is progressing satisfactorily and involves the entire global matrix organisation. The programme is thus being rolled out in different cultures. Most recently, the employees in Mumbai and the management team from the factory in Panoli have implemented a committed and successful process to ensure the anchoring of Cheminova’s mission, vision and values in the local company.
Business Plan "Five-in-Fifteen"
Cheminova is pursuing an ambitious goal to double its market share to 5% in 2015 in its business plan “Five-in-Fifteen”. The business plan is based on growth from new products and acquisitions, while Cheminova’s traditional products, including glyphosate, are expected to account for an everdeclining share of sales and earnings. The growth in revenue will lead to economies of scale within e.g. sales and administration, while earnings will be relatively less burdened by development and registration costs. In addition, improved efficiency in all functions and a higher share of differentiated products will improve Cheminova’s earnings margins resulting in an EBITDA margin being achieved in 2015 which is in line with the best among peers in the industry.
Market penetration of the new products is progressing satisfactorily despite a declining market. For crop protection products, organic growth of more than 10% has thus been achieved in the first three quarters when measured at unchanged exchange rates and excluding glyphosate. The largest contribution to this growth will come from products developed and introduced since 2000. Products which have been added to the product programme through acquisitions, including the most recent acquisition of Stähler, will also contribute to growth. Developments in 2009 thus confirm the long-term targets set out in our business plan “Five-in-Fifteen”.
Outlook 2009
The market conditions for Cheminova’s largest product, glyphosate, are not expected to improve in Q4 2009, but growth is expected in sales of Cheminova’s other products. In Brazil, the planted acreage is on a par with last year, and consequently, satisfactory demand for crop protection products is expected.
Cheminova is therefore maintaining the outlook announced on October 26, 2009 of revenue of approx. DKK 5,500 million and an operating profit of approx. DKK 10-50 million. A positive cash flow from operating activities is also expected.
Significant uncertainty factors are market developments in general and for glyphosate specifically the current season in Brazil.
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The total interim report can be found on Auriga's website www.auriga-industries.com.
November 10, 2009
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