Bad Wimpfen, Germany – Chemical company Solvay is navigating through challenges following its recent separation, with soda ash as its primary product. While the company is facing price declines and decreased volumes impacting EBITDAs, a cost control plan is being implemented. However, the effectiveness of the current cost reductions may not be sustainable in the long run. Despite a planned annual cost reduction of 300 million EUR by 2028, intended to mitigate dis-synergies from the separation, external factors like unsustainable importing into China and pending one-off separation costs are adding pressure to the business.
Guidance indicates continued pressure on the business for the remainder of the year, with industrial production in Europe on a downward trend. Despite the challenging outlook, Solvay’s valuation remains favorable, continuing its history of being undervalued compared to peers even with similar specialty exposures. The company’s stock appears inexpensive, but with ongoing unfavorable guidance and economic conditions, making a case for investment becomes challenging.
Soda ash remains a crucial profit driver for Solvay, used in various applications such as glass production. Recent earnings reflect significant price declines in soda ash, impacting the business’s overall performance. With price declines linked to transportation and energy costs, the lack of demand in volumes underscores the industry’s underlying challenges, particularly in Europe where industrial production is weak.
In the basic chemicals segment, EBITDA declined by approximately 22% due to falling prices and unit margins. Performance chemicals saw a decrease in sales, with volumes unable to offset price pressures in key areas like Silica and Coatis. The disposal of a specialty chemical insulation business also contributed to the decline in sales, while electronics end markets faced pressure.
Looking ahead, Solvay anticipates continued challenges in the next quarter, with EBITDA expected to decrease further. Cost savings initiatives are crucial in light of the separation and impending dis-synergies, with efforts to control costs and manage cash flow intensifying. Despite cost-saving measures, non-recurring separation costs are projected to impact EBITDA for the year, highlighting the company’s need for financial prudence.
As European markets experience economic strain, the demand for specialty chemicals like those in the automotive and healthcare sectors remains relatively stable. While Solvay’s stock appears attractively priced compared to industry peers, uncertainties surrounding its growth trajectory post-separation pose challenges. The company’s valuation, although discounted historically, may not align with its near-term financial performance, making investment decisions complex in the current market conditions.
