REQUEST FOR COVENANT WAIVERS DUE TO UNPRECEDENTED MARKET CONDITIONS AND POOR VISIBILITY THROUGH TO Q1 2009
Further to the Q3 2008 trading update announced on 24 October 2008, INEOS Group Holdings plc (“INEOS” or “the Group), the world’s third largest global chemical company announces its results for the nine and three months ended 30 September 2008 and a request for covenant waivers from the lenders in its senior facilities.
Key highlights:
- Three month revenues for the quarter ended 30 September 2008 were €8.5 billion (2007 €6.9 billion) Nine month revenues of €24.2 billion, were up 18.3% on prior year (2007: €20.5 billion). The increase predominantly reflects the impact of higher oil prices during 2008.
- EBITDA for the quarter ended 30 September 2008 was €402 million (2007: €504 million). This includes:
- Inventory holding losses of €100 million as a result of the significant decline in oil prices in the quarter.
- Storm and flood damage from Hurricane Ike impacted results by €15 million. A further €15million will be reported in Q4, 2008.
- Year to date EBITDA was €1.3 billion compared to €1.7 billion in 2007.
Exceptional events during the year have impacted results by €166 million, primarily the Grangemouth strike and Hurricane Ike.- Margins have been squeezed during 2008 as rising feedstock (oil-based) prices outpaced the rise in selling prices.
- A weaker US$ reduces the year on year comparison of EBITDA by over €100 million.
- A further €140 million of fixed cost savings have been delivered in the nine month period bringing total fixed cost savings since the acquisition of Innovene in 2005 to over €700 million. Working capital improvements since the acquisition of Innovene have delivered €550 million of cash benefits.
- Net debt at the end of the quarter was €7.29 billion resulting in net debt leverage of 4.0x EBITDA for the last twelve months.
- Liquidity remains strong with €1.8 billion of cash and undrawn committed facilities available as of 30 September 2008.
- All businesses are now positioned to be profitable and cash generative at “normal” bottom-of-cycle conditions.
- In Q4, 2008 we have seen an unprecedented fall in demand due to de-stocking and plant closures by customers reacting to the weak macro-economic environment. This has created extremely limited short-term visibility.
- In addition, the collapse in oil prices will mean a significant further inventory holding loss in Q4, 2008 expected to be around €560 million, assuming $60 oil price at the year-end. This would take the full year loss to €400 million.
- As a result of the above, short term covenant waivers are being sought until clearer market conditions resume at end of Q1 2009.
- Further near term actions being taken to optimise the defensive qualities of the business include:
€200 million of further annualised cost saving identified and actioned.
Reduction in planned capex for 2009 to €250 million from €600 million in 2008.
Further steps to improve working capital performance. - INEOS remains profitable and cash generative. Liquidity is expected to remain good as lower prices lead to a working capital unwind.
- INEOS forecasts full year 2008 EBITDA in the range €1.7 billion to €1.8 billion before inventory holding losses of €400 million and exceptional events of €180 million.
- INEOS’ lead bankers, Barclays Capital and Merrill Lynch, have approved the bank covenant waivers.
- Lazard & Co., Limited is acting as financial advisor to INEOS.
John Reece, CFO of INEOS, said today:
“INEOS is a business that is profitable and cash generative. The actions taken to reduce the cost base and invest in efficient plants over the past few years mean that each individual business and the Group as a whole can produce significant profits and cash flows even at the bottom of the cycle.
In recent weeks, it has become clear that the entire industry is now facing a period of unprecedented market turmoil caused by the declining price environment and driven by general macro-economic uncertainty. This is resulting in severe customer de-stocking. While this reduces short-term visibility, we believe that the picture will become much clearer at the end of Q1 2009.
We are therefore requesting covenant waivers from our senior banks for the period to the end of May 2009. At that stage we expect to have clearer visibility, which will allow us to deliver the new business plan. In the meantime, we have adequate liquidity and expect to remain cash generative. We have already begun the process of optimising our cash flows by reducing fixed costs further, curtailing capital expenditure and improving our working capital ratios. We expect to deliver €60 million of fixed cost savings as early as Q4 this year.”
About INEOS
INEOS is one of the world’s biggest chemical companies with 70 manufacturing sites and 16,000 employees. This growth has been achieved by INEOS acquiring non-core assets from other major chemical companies including Dow, Dupont, ICI, BP and BASF. INEOS invests in these facilities, significantly reduces the cost base and turns them into some of the world’s best high quality / low cost production plants. Since 2002, INEOS has created $12.2 billion of shareholder value. INEOS senior management is considered as one of the most experienced in the chemicals industry.
For further information contact:
INEOS
Richard Longden +44 (0) 2380 287037
Financial Dynamics
Edward Bridges +44 (0) 207 831 3113
Giles Sanderson
Lazard
Michael Grayer +44 (0) 20 7187 2000.
Notes to editors:
Introduction
Following the delivery of a strong performance in 2007 with EBITDA of €2.2 billion (22% higher than in 2006), operating conditions in the chemicals markets have deteriorated during 2008.
Despite this, revenues for the nine months ended 30 September 2008 increased by 18.3% to €24.2 billion reflecting the pass through of increases in underlying feedstock prices, which are linked to oil prices. Volume of product sold has been steady in the first three quarters of 2008.
EBITDA for nine months to 30 September 2008 of €1,297 million is 25.7% lower than prior year, reflecting the unprecedented oil price movements which have suppressed margins. EBITDA for the period has also been impacted by exceptional events of €166 million. These are principally €100 million due to the strike action at Grangemouth and €15 million storm and flood damage from Hurricane Ike (with a further €15 million to be reported in Q4, 2008). The effect of movements in foreign exchange rates also have a combined impact on year-on-year profits by €108 million.
The business had €1.3 billion in cash and €500 million of availability under a revolving credit facility and securitisation facility, as at 30 September 2008.
Since INEOS bought the Innovene business in 2005, the Group has grown from revenues of €22 billion to €31 billion. It has repaid €1 billion of debt and reduced working capital by €550 million. It has also cut fixed costs by €700 million of which €140 million was achieved in the nine months ended 30 September 2008. All businesses are now well positioned to be profitable at the bottom of the cycle and to deal with bottom-of-the-cycle conditions. Many of these have built market-leading positions in a wide variety of petrochemical and specialty chemical products, with 73% of chemicals assets situated in the first two cost quartiles.
The rapidly changing market environment – short-term effects that make forecasting difficult
The collapse in the oil price and the reversal in global economic conditions have caused an unprecedented drop in feedstock and product prices. Asia is a leading indicator of global trends and Asian polymer margins have collapsed in recent weeks. Customers are delaying orders and rapidly de-stocking which, when overlaid with plant closures over the Christmas break, makes volume prediction difficult. Unit margins have held up well due to quarterly pricing regimes but margins are expected to decline when prices are reset in Q1 2009.
INEOS expects more normal, bottom-of-the-cycle market conditions to be apparent by the end of Q1 2009.
Liquidity is expected to remain stable, augmented by working capital releases as raw material input prices continue to soften.
In light of the current abnormal market conditions, INEOS has already begun to undertake a series of further near-term initiatives in order to improve cash flow. Additional reductions in fixed costs with savings of €60 million in Q4 2008 and annual savings of €200 million by 2009 have been actioned. Capital expenditure, which is expected to amount to €600 million in 2008, will be reduced to €250 million in 2009. In addition, further measures are being taken to improve working capital performance and a number of initiatives are being considered to reduce indebtedness further.
Request for covenant waivers
INEOS is well positioned to trade through the chemicals cycle. However, the short-term market visibility is exceptionally low, a situation that is likely to continue until the end of Q1 2009 for the reasons outlined above. INEOS is seeking consent for a waiver of bank covenants for the next two quarters, conditional on submission of a new business plan in April 2009. INEOS is proposing to pay consenting lenders a fee of 50 bps and increase the interest margins applicable to its senior debt facilities by 100 – 125 bps. The Group expects this waiver process to be completed in December 2008.
Business review
Refining results in the third quarter continued to benefit from a strong demand environment, which saw the continuation of the high average margins experienced in the second quarter. Q3 EBITDA was very strong as a result of the robust margins on middle distillates such as gasoil, diesel and jet fuel and strong volumes. Demand for middle distillates continues to be strong with tight supply conditions being experienced in Europe. However, Refining’s performance in 2008 was negatively impacted by the industrial action at Grangemouth (€83 million EBITDA impact), non-recurring operational issues at Lavéra (€35 million EBITDA impact) and by inventory holding losses as the price of crude oil fell from its peaks in July to below $100/bbl at the end of September 2008.
The O&P North America segment saw a decline in performance compared to the second quarter, partly as a result of inventory holding losses experienced in the quarter as crude oil and product prices fell significantly during the period. The olefins business continued to optimise its advantaged gas feedstock position to maintain margins. The segment was also impacted by storm and flood damage from Hurricane Ike in September 2008, which led to the closure of the Chocolate Bayou facility with a €30 million EBITDA impact, part of which will be in the fourth quarter. The site is now fully operational again. In the absence of this closure O&P North America would have had a record Q3 as a result of robust olefins margins on falling feedstock prices.
In Q1 and Q2 2008 O&P Europe experienced lower margins as feedstock (oil-based) price rises could not be passed on quickly in selling prices due to the quarterly pricing regime in Europe. This margin squeeze continued in Q3 2008 due to peak oil prices, though there was some recovery in September 2008. Polyolefins has encountered weaker market conditions in the third quarter, which have impacted volumes to some degree.
Chemicals Intermediates experienced an improved performance in the third quarter, resulting from strong demand for Oxide, Oligomers and Phenol. Oligomers’ performance in the quarter was much improved with strong demand across all products leading to an improvement in margins. Oxide and Phenol continued to deliver strong performances with good market conditions and solid margins. Nitriles performance was satisfactory, although impacted by early signs of weaker demand in the Asian markets. Margins in ChlorVinyls continued to be impacted by high UK gas prices, although their results have improved from previous quarters as a result of tighter demand in the caustic market.
Conclusion and outlook
The chemical industry is currently experiencing a period of unprecedented volatility and uncertainty across all end markets and accurate forecasting is expected to remain extremely difficult in the short term.
INEOS is well positioned for normal bottom-of-the-cycle conditions with leading positions across all key segments and well invested manufacturing facilities that maintain cost competitiveness versus peers. The business has a strong liquidity position and we are taking all available actions to preserve cash.
After adjusting for the effect of inventory holding losses (expected to be €400 million in 2008 assuming $60 oil) and the exceptional events of €180 million, underlying EBITDA is expected to be in the range of €1.7 billion to €1.8 billion for the year ending 31 December 2008.
Forward looking statements
This announcement includes “forward-looking statements”, within the meaning of the U.S. securities laws, based on INEOS Group Holdings plc’s (“IGH”) current expectations and projections about future events. All statements other than reported financial results and statements of historical facts included in this announcement may be deemed to be forward-looking statements, including, but not limited to, estimates of IGH’s EBITDA for 2008 and expected future cost savings. Words such as “believe”, “expect”, “anticipate”, “may”, “intend”, “will”, “should”, “estimate” and similar expressions or the negatives of these expressions are intended to identify forward-looking statements. These forward-looking statements are subject to a number of risks and uncertainties, including: IGH’s high degree of leverage and significant debt service obligations, as well as future cash flow, profitability and liquidity; a continuation of, or further negative developments in, adverse financial market conditions that may affect IGH’s ability to incur or refinance indebtedness and the terms of its existing and future indebtedness; changes in raw material costs and supply arrangements, including rapid fluctuations in the costs of feedstocks; the cyclical and highly competitive nature of IGH’s businesses; adverse developments in global economic conditions; currency fluctuations; disruptions in production at IGH’s facilities, including due to plant and equipment failures, labor stoppages and adverse weather conditions and natural disasters; IGH’s ability to realize synergies and cost savings; and, current or future environmental requirements and the related costs of maintaining compliance and/or addressing liabilities. Reference should be made to IGH’s 2007 annual report, including the section therein titled “Risk Factors”, for a description of certain of these risks and uncertainties. In addition, from time to time IGH or IGH’s representatives, acting in respect of information provided by IGH, have made or may make forward-looking statements orally or in writing and these forward-looking statements may be included in but are not limited to press releases, filings with the regulatory authorities, reports to IGH’s security holders and other communications. Although IGH believes that the expectations reflected in such forward-looking statements are reasonable, IGH can give no assurance that such expectations will prove to be correct. IGH does not undertake any obligations to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
Lazard & Co., Limited is acting for Ineos Group Holdings Plc, Ineos Holdings Limited and Ineos US Intermediate Finance LLC and no one else in connection with the matters referred to in this announcement and will not be responsible to any person other than INEOS Group Holdings Plc, INEOS Holdings Limited and INEOS US Intermediate Finance LLC for providing the protections afforded to clients of Lazard & Co., Limited or for providing advice in relation to the matters referred to in this announcement.