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The Rupp Report: The Spirits That I Called

Jürg Rupp, Executive Editor

Difficult times lead to difficult decisions. However, sometimes it seems that business life is back on the old track: Shareholder profitability is the major target for stock listed companies. This came to mind when Switzerland-based specialty chemicals manufacturer Clariant International Ltd. presented its annual results last week.

Improving Operating Profitability Means ...
The company reports "progressively improving operating profitability and a strong cash flow during a challenging 2009." However, 2009 sales dropped 18 percent in Swiss francs and 14 percent in local currencies. Consequently, the operating income before exceptional items fell to 270 million Swiss francs in 2009 from 530 million Swiss francs in the year earlier. But cash flow from operations nearly doubled to 757 million Swiss francs from 391 million Swiss francs in 2008, and net debt was more than halved to 545 million Swiss francs from 1,209 million Swiss francs in 2008.

... Asset Network Optimization
Clariant reported restructuring and impairment costs totaling 298 million Swiss francs, attributing them primarily to the first phase of site closures within the global asset network optimization program (GANO), and a reduction in its employee base to 17,536 from 20,102 at the end of 2008.

In 2009, Clariant started the GANO program. Among other measures, such as temporary shutdowns, short time work or involuntary vacation, Clariant targeted a "reduction of Sales, General & Administration (SG&A) costs." Of course, lower sales or profit means increased SG&A costs with the same staff -- in this case, from 20.3 percent of sales to 22.2 percent.

Above Industry-average Profitability
As part of GANO, further measures are being implemented. The CEO made the following comment on the company's annual results: "During the year we have successfully focused on generating cash, decreasing costs and reducing complexity. In an economic environment that is still challenging, we will continue to focus on our restructuring efforts. The aim remains to achieve sustainable above industry-average profitability by the end of 2010 and to create a solid platform for profitable growth in the years thereafter."

The restructuring efforts include several measures -- including production consolidations and workforce reductions -- that were reported in Textile World 's e-newsletter last week (See " Clariant Continues GANO Restructuring," Feb. 16, 2010).

Code Of Conduct
The Clariant Code of Conduct, launched in 2007, states that "Clariant places great value on acting as a responsible and supportive corporate citizen, wherever we do business." On its website, under "Fairness and Cooperation," one can read: "A culture of fairness extends throughout all aspects of our global employee relations. Clariant is fully compliant with the International Labor Organization and constantly monitors its locations in this regard."

Elsewhere on Clariant's website, one can read: "For a career that's diverse and never dull, colorful and creative, empowered and rewarding... then we've got exactly the right chemistry for you. ... At Clariant, we consider our employees to be the single most valuable resource within the company. Joining us would mean a career in a fast-paced environment in a variety of business areas. We provide opportunities for all applicants - internships and apprenticeships, graduates and experienced professionals." I see.

The Boomerang Principle
It's certainly not an easy task to let people go, and at the end of the day, everybody can understand that saving 17,500 people's jobs is better then to sack more than 20,000. However, why does there need to be "above industry-average profitability"?

Reflecting the current worries in the economic environment, the Board of Directors will send a recommendation to Clariant's 15th General Assembly on March 29, 2010, "to suspend dividends, grants or payouts to shareholders for 2009." Will they also propose to suspend bonuses for the management? Being in this industry for three decades, I am reminded by this story -- among many identical issues -- of past times when I used to say, "If people are not ready indeed to pay a fair price for a good work, one day the low-cost producers will take the lead." Today, the music's playing in Asia. And over the years, the sorcerer's apprentice has become a master.

February 23, 2010

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