Ciba Specialty Chemicals First-Half Results.

BASEL, Switzerland--(BUSINESS WIRE)--August 17, 1999--

Ciba Specialty Chemicals (SWX:CIBN)

-- Sales in the first six months rise 2 percent in Swiss francs

-- Business is emerging from its lows at year-end 1998; further

improvements seen in the second half of 1999

-- Operational improvement initiatives deliver benefits; expected

to support margins further

-- Full-year 1999 outlook confirmed

-- Recovery in results seen in 2000 should business climate continue

to improve

Consolidated Statements of Income
(in millions of Swiss francs)
                                                               Change
Six months ended June 30,           1999          1998(1)         %

Net sales                          4 374         4 286            2
Operating income(2)                  358           490          (27)
Net income(2)                        121           258          (53)
EBITDA(3)                            611           712          (14)

(1) The 1998 financial data includes the results of the business from Allied Colloids for the three-month period since April 1, 1998, the date of the acquisition.

(2) Before restructuring and special charges.

(3) EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortisation) is calculated as operating income before restructuring and special charges plus depreciation and amortisation.

Financial Review*

Overview

Ciba Specialty Chemicals' sales between 1 January 1999 and 30 June 1999 rose 2 percent in Swiss francs, or 4 percent in local currencies, to CHF 4.374 billion. The first half of 1999 saw a significant improvement in sales over the second half of last year. Excluding acquisition effects, however, the difficult market conditions, particularly at the beginning of 1999, precluded sales from reaching levels similar to the first half of 1998. Comparisons therefore are influenced by a strong base effect stemming from a much more favourable business climate in the first half of last year.

This is also reflected in operating income, which decreased compared with the first half 1998 but recovered on a comparable basis against the second half of last year.

The restructuring of the Performance Polymers division and the formation of the Colors division have been completed and are delivering benefits. In addition, the Water Treatments business has regained sales momentum under a strong new management team, and the Company is confident that operational improvements, including 250 planned job reductions, are positioning this business well for profitable sales growth. To support margins in a tough industry climate, Ciba earlier this year also launched a company-wide programme that focuses on generating profitable sales growth and cash as well as cutting discretionary spending. This programme is already showing positive effects that are expected to continue throughout the remainder of the year.

"We are well on our way towards meeting the objectives I set when I assumed operational responsibilities last January: the rapid and successful completion of cost reduction programmes, additional measures to dampen the effects of the industry downturn, and initiatives to promote profitable growth," said Rolf A. Meyer, Chairman and Chief Executive Officer of Ciba Specialty Chemicals. "These steps, coupled with the first signs of a moderate economic recovery, are supporting our results."

Ciba believes it is well positioned to leverage its strengths through its strategic focus on businesses with above average growth and innovation potential - Polymer Additives, Imaging and Coating Additives, Home and Personal Care products, Water Treatments, and colours for Inks, Paints and Plastics. These five businesses, which represent about half of the Company's sales, together enjoy an average market growth rate of about 4.5 percent a year. By continuing to devote two-thirds of R&D spending and capital expenditure to these areas, the Company aims to grow these businesses by at least one-and-a-half times the market growth rate, given normal business conditions. To help meet these strategic objectives, the Company is channelling innovation efforts into the most promising product and application areas.

"We are therefore supporting future profitable growth by effectively focusing our innovation initiatives on new effects, environmental benefits, and high product performance and efficiency," Rolf A. Meyer said.

Detailed Half-Year Results

Sales

The Company's sales grew 2 percent in Swiss francs, or 4 percent in local currencies. The appreciation of the Swiss franc against other major currencies as well as the devaluation of the Brazilian real resulted in an unfavourable currency impact. Prices were lower, on average 3.3 percent, and the Company initiated selective price increases in some businesses in order to enhance profitable sales growth. Volume rose 1.8 percent in the first six months, increasing in Additives, Water Treatments and Consumer Care and remaining stable in the Colors division. In the Performance Polymers division, volume decreased due to the deliberate move into higher value-added products.

Excluding the Allied Colloids acquisition, the Company's sales declined by 5 percent in Swiss francs, or 3 percent in local currencies.

Sales trends indicate that the industry reached its low point at the beginning of the year, with January and February being very weak. A slow industry recovery has since set in, with stronger sales in March and June. Overall sales levels are higher than in the second half of 1998, even though they do not match those posted in the first half of last year.

Sales were lower in Europe and parts of the Western Hemisphere and stronger in most Asian countries. The recovery compared with the second half of last year was most visible in Asia and North America. Sales in Europe, particularly Germany and the UK, were slower to rebound. Sales in Latin America remained weak.

Operating Income

Operating income declined by 27 percent in Swiss francs, or 22 percent in currency-adjusted terms. EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortisation) fell 14 percent in Swiss francs, or 10 percent in local currencies. This illustrates, first, the impact of weaker sales prices and resulting lower gross profit margins, which, however, recovered from the second half of 1998. Second, selling, general and administrative costs showed an increase over 1998, mainly as a result of acquisition effects, because expenses from the former Allied Colloids had been included for only one quarter in the first half of 1998. The Company also incurred additional costs due to the build-up of new business activities and operations as well as miscellaneous expenses in several divisions.

Third, income from the Company's 49 percent investment in Hexcel was CHF 19 million lower than in the first half of 1998. Finally, the Company booked CHF 32 million of goodwill amortisation for two quarters from the Allied Colloids acquisition after recording CHF 16 million for only one quarter in the first half of 1998 (Allied Colloids was consolidated 1 April 1998).

Nevertheless, first-half operating income is 16 percent higher than in the second half of last year, once adjusted for last year's higher Hexcel result and a one-off gain from an insurance settlement of CHF 43 million booked in the fourth quarter of 1998. This, again, confirms the trend that business results are improving.

To support margins, the Company in April introduced Impact'99. This programme has the following objectives: profitable sales growth through initiatives including selective price increases; cuts in discretionary spending; and cash flow generation, especially by limiting capital expenditure, effectively managing assets, and selectively selling non-essential assets such as the Company's share of the Cerdec ceramic colours joint venture with Degussa-Huls. The first positive effects from these initiatives were noted towards the end of the second quarter.

Interest expenses rose only slightly over those in the first half of 1998, when Allied Colloids was acquired. They have come down considerably when compared with the second half of 1998, reflecting effective treasury management through debt refinancing at even more attractive conditions. The average annual cost of long-term debt has dropped to 4.2 percent.

Net income for the first six months amounted to CHF 121 million, which translates into earnings per share of CHF 1.82.

Balance Sheet

While receivables increased due to the pick-up in sales, inventory levels do not reflect the usual seasonal increase before the typical summer production slow-downs. This is due to strong inventory management, particularly in the Colors and Performance Polymers divisions. Debt levels reflect the financing taken up in connection with the 1998 Allied Colloids acquisition. The increase over year-end 1998 is almost entirely due to the higher U.S. dollar and British pound exchange rates as of 30 June 1999 compared with 31 December 1998.

Cash Flow

Despite lower operational results, cash flow from operations was at the levels of the first half of 1998, primarily reflecting strong inventory management. Capital expenditure was lower than in the first half of 1998, in line with the Company's initiatives to reduce spending and focus investments.

Divisional Results

Additives

Additives, excluding the Water Treatments business unit, recorded sales of CHF 1.167 billion, up 2 percent in Swiss francs and 3 percent in local currencies. This was based on high volume growth which, however, was partly offset by what continued to be significant price concessions. Stronger sales in the Polymer Additives and Imaging and Coating Additives businesses during the latter part of the reporting period more than compensated for weakness early in the year. Strong sales increases were posted in China, Southeast Asia, Africa/Middle East and Japan. Europe showed little growth, and North America was stable. South America recorded a weak performance in Swiss francs but was strong in local currencies.

Operating income, reflecting the impact of lower sales prices, declined to 17 percent of sales and EBITDA to 22 percent of sales - ratios which are in line with normal performance levels in the division.

The Additives division announced selective price increases starting 1 July 1999 that it expects will help stop price erosion in the industry. Full benefits are primarily expected in 2000 after all new customer contracts have become effective. Profitability in 1999 therefore is expected to remain at current levels.

Water Treatments

The Water Treatments business unit posted sales of CHF 503 million, up 5 percent in Swiss francs and 7 percent in local currencies, on a comparable basis. Volume growth clearly outpaced price declines. Pollution Control benefited from strong U.S. and German markets, and the Paper Technology business remained on its growth path. Lower sales were posted by the industry segments Extractive Industries, which includes oil extraction and mineral processing, and Co-Producers and Specialty Monomers, which produces intermediates for a range of industries.

With operating income at CHF 18 million, profitability levels did not meet expectations. Affecting results were the weaker performance recorded by Co-Producers and Specialty Monomers and portions of Extractive Industries as well as some minor remaining charges linked to the integration.

In addition, under the previous management, the expected operational improvements were not realised to the extent possible, and the cost base in the second half of 1998 was expanded prematurely, considering the still limited sales recovery. The Company took decisive action to correct this situation. Under a strong new management team, Water Treatments was moved into the Additives division. The business has since regained sales momentum, and improvements were initiated, particularly in the supply chain and operations. In addition, approximately 250 job reductions were announced in the UK and the U.S. Care has been taken in the process to retain and further build this business' strong sales and technical capabilities.

Full-year 1999 results will be strongly affected by the delays in achieving operational improvements as well as by the weaker market conditions affecting parts of the business. There are good indications, however, that Water Treatments, under the umbrella of the Additives division, has resumed its overall sales growth and will achieve higher efficiency and profitability levels.

Colors

The division's sales declined 6 percent in Swiss francs to CHF 1.172 billion, or 4 percent in local currencies. Stable sales volume was unable to compensate for price reductions tied to the difficult market environment. Asia continued to recover, while sales in the Americas were flat. Europe posted a mixed performance.

In the business unit colours for Inks, Paints and Plastics (IPP), volume growth was unable to offset price decreases. Colours for Textiles continued to suffer from a depressed textiles industry even though Asia improved, with particularly strong sales in Thailand, South Korea and China. Sales in Europe and Africa remained slow but improved in the U.S.

At CHF 94 million, the division's operating income lay below the first half of 1998 but was clearly higher than in the second half of 1998. The IPP business was impacted by the effect of lower sales prices and had to absorb additional costs tied to the start-up of major production facilities in the U.S., China and Paisley, Scotland.

The Textiles business unit had to absorb higher idle capacity costs linked to lower volume demand. However, it strongly benefited from the synergy targets achieved through the combination of the former Textile Dyes and Pigments divisions. This allowed the business to offset margin pressure as well as post almost stable operating income compared with the first half of last year and significant improvements compared with the latter part of 1998.

The textiles industry is showing first signs of a small recovery, mainly in Asia, and market conditions in the ink and paint industries are also slowly improving. The potential for significant sales growth in textiles remains limited, however. Overall, the division will benefit from cost savings through the formation of the Colors division and should achieve results in line with 1998.

Consumer Care

The Consumer Care division posted sales of CHF 686 million. This corresponds to a 3 percent decrease in Swiss francs and a 1 percent increase in local currencies. Prices were lower, with small volume improvements. Nevertheless, strong sales were recorded by the Antimicrobials and Fabric Processing and Finishing businesses. The Home and Personal Care business maintained its high double-digit sales increase, with Whiteners steadily recovering in the second quarter after a weak start to the year.

The Eastern Hemisphere and, albeit only in local currencies, Latin America reported gratifying sales increases. Sales in North America and Europe remained below those posted last year.

The division's operating income of CHF 63 million reflects the fact that sizable portions of the division's sales occur in countries, such as in Latin America, where currencies have suffered strong de-valuations. The result also reflects costs related to the build-up of a leading Fabric Processing and Finishing business. The division incurred additional expenses because of first steps towards building a life-science molecules franchise as part of the Home and Personal Care business, one of Ciba's growth businesses.

For the full year, the division expects results that lie slightly below 1998 levels.

Performance Polymers

In line with the new strategic focus on profitable growth, sales of lower value-added products continued to decline while those of specialties increased. Sales totalled CHF 846 million, down 10 percent in Swiss francs and 8 percent in local currencies. The sales decrease was primarily attributable to volume mix and price declines. While Structural Composites showed flat sales, other business units recorded lower sales compared with last year's strong first half. Geographically, sales grew in the Eastern Hemisphere but declined in Europe and the Western Hemisphere.

Operating income totalled CHF 62 million, compared with CHF 26 million in the first half of last year. The shift in product mix, coupled with decisive cost management in production and administration, led to a significant improvement in profit margins. This underscores the success of the restructuring project that was initiated last year and has been largely completed.

As part of the efforts to explore strategic options for the division, the Company recently distributed information about the business to parties potentially interested in buying it. The aim is to ensure a successful future for the business, its customers and its employees as well as for Ciba Specialty Chemicals as a whole.

The division expects to continue its return to profitability and will achieve clearly better results in 1999 than in 1998, although not at 1997 levels.

Outlook

Ciba Specialty Chemicals' first-half results on a comparable basis recovered noticeably from the second half of 1998 and the beginning of 1999. The Company expects its operating income to continue improving in the second half of 1999, though this result will be unable to compensate for the difficult first half, in part because of lower income from Hexcel. Ciba is nevertheless convinced that the industry is emerging from its lows, especially in view of a moderate improvement in the economic environment.

The Company is also convinced that business is improving. Operational initiatives are delivering benefits and are expected to support margins further during the remainder of the year. Assuming the improvement in the business climate continues, full-year sales are expected to be marginally higher than in 1998. Given ongoing margin pressure and effects such as Hexcel's weaker result, Ciba continues to expect a decline in the EBITDA margin in 1999 by 1 percentage point or somewhat more as compared with the full year 1998. This also is expected to lead to lower earnings per share. In general, however, if the trend of an improved business climate continues, the Company would expect to see a recovery in its results in 2000.

Forward-Looking Statements

Forward-looking statements contained herein are qualified in their entirety as there are certain important factors that could cause results to differ materially from those anticipated. Investors are cautioned that all forward-looking statements involve risks and uncertainty. In addition to the factors discussed above, among the factors that could cause actual results to differ materially are the following: the timing and strength of new product offerings, pricing strategies of competitors, the Company's ability to continue to receive adequate products from its vendors on acceptable terms and to continue to obtain sufficient financing to meet its liquidity needs, effects of overall economic conditions, including currency fluctuations, inflation and consumer confidence. -0-

Consolidated Statements of Income (unaudited)
(in millions of Swiss francs, except per share data)


Six months ended June 30,                          1999        1998

Net sales                                         4 374       4 286
Cost of goods sold                                3 043       2 920

Gross profit                                      1 331       1 366
Selling, general and administrative                 796         741
Research and development                            157         153
Amortisation of goodwill                             41          23
Income from earnings of equity affiliates           (21)        (41)
Restructuring and special charges                     0       1 060

Operating income (loss)                             358        (570)
Interest expense                                   (164)       (151)
Interest income                                      14          18
Other financial income (expense)                    (22)         (8)

Income (loss) before income taxes                   186        (711)
Provision for income taxes                           65          80

Net income (loss)                                   121        (791)(a)

Per share data:
Basic earnings (loss) per share                    1.82      (11.93)(a)
Diluted earnings (loss) per share                  1.82      (11.93)(a)
Weighted average shares outstanding (in millions):
Basic                                              66.5        66.3
Diluted                                            66.5        66.3

(a) For the six months ended June 30, 1998, net income before
restructuring and special charges was CHF 258 million and basic and
diluted earnings per share, before restructuring and special charges,
was CHF 3.89 and CHF 3.88, respectively.

Condensed Consolidated Balance Sheets
(in millions of Swiss francs)
                                                (Unaudited)
                                                  June 30    December
                                                    1999       1998
ASSETS
Current assets
Cash and cash equivalents                          246           206
Short-term investments                              47            47
Accounts receivable, net of allowances           1 614         1 416
Inventories                                      2 088         2 053
Prepaid and other current assets                   723           819

Total current assets                             4 718         4 541

Property, plant and equipment, net               4 455         4 396
Goodwill and other intangible assets, net        2 314         2 258
Financial investments                              597           602
Other assets                                       663           547

Total assets                                    12 747        12 344

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities
Accounts payable                                   689           587
Short-term debt                                  1 814         1 905
Income taxes payable                                39            22
Accruals and other current liabilities             803         1 085

Total current liabilities                        3 345         3 599
Long-term debt                                   4 171         3 648
Deferred income taxes                              217           227
Other liabilities                                1 635         1 577

Total liabilities                                9 368         9 051
Total shareholders' equity                       3 379         3 293
Total liabilities and shareholders' equity      12 747        12 344


Condensed Consolidated Statements of Cash Flows (unaudited)
(in millions of Swiss francs)

Six months ended June 30,                        1999          1998

Cash flows from operating activities
 before restructuring payments(1)                 258           266
Cash used for restructuring payments             (141)         (120)
Cash used in investing activities(2)              (45)       (3 823)
Cash (used in) provided by financing activities   (51)        3 475
Effect of exchange rate changes on
  cash and cash equivalents                        19             4

Net increase (decrease) in cash and
 cash equivalents                                  40          (198)

Cash and cash equivalents, beginning of year      206           644
Cash and cash equivalents, end of June            246           446

(1) Depreciation and amortisation during the first six months of 1999 amounted to CHF 253 million (first six months 1998: CHF 222 million).

(2) Investments in property, plant and equipment during the first six months of 1999 amounted to CHF 141 million (first six months 1998: CHF 182 million). On April 1, 1998, the Company completed the acquisition of all outstanding common shares of Allied Colloids, a leading company in the water treatment additives field, for CHF 3 615 million.

Condensed Business Segment Data (unaudited)
(in millions of Swiss francs)


Six months ended June 30,                      1999          1998

Net sales
Additives                                     1 670         1 390
   Additives (excluding Water Treatments)     1 167         1 143
   Water Treatments(1)                          503           247
Colors                                        1 172         1 245
Consumer Care                                   686           707
Performance Polymers                            846           944

Total net sales                               4 374         4 286

Operating income
Additives                                       212           250
   Additives (excluding Water Treatments)       194           225
   Water Treatments(1)                           18            25
Colors                                           94           159
Consumer Care                                    63            83
Performance Polymers                             62            26
Corporate and other expenses                    (73)          (28)
Restructuring and special charges                 0        (1 060)

Total operating income (loss)                   358         (570)

EBITDA(2)
Additives                                       305           331
   Additives (excluding Water Treatments)       256           285
   Water Treatments(1)                           49            46
Colors                                          155           217
Consumer Care                                    90           110
Performance Polymers                             94            57
Corporate                                       (33)           (3)

Total EBITDA(2)                                 611           712

(1) The 1998 financial data for Water Treatments are presented for the
    three-month period since April 1, 1998, the date of the Allied
    Colloids acquisition.
(2) (2) EBITDA (Earnings Before Interest, Taxes, Depreciation and
    Amortisation) is calculated as operating income before
    restructuring and special charges plus depreciation and
    amortisation.

     In the second half of 1998, the Company, as part of a business
realignment, created the "Colors" division to strengthen the focus on
the Company's core competencies in colours for industrial and consumer
applications. This new division was established through the
combination of the Company's Inks, Paints and Plastics business unit
(principally the Company's former Pigments division) and the Textiles
business unit (principally the Company's former Textile Dyes division,
excluding the fabric finishing business which was transferred to the
Consumer Care division). The following table provides financial data
for the Inks, Paints and Plastics and Textiles business units:

Inks, Paints Six months ended June 30, 1999 and Plastics Textiles Colors

Sales 628 544 1 172 Operating income 67 27 94 EBITDA

89 66 155

Six months ended June 30, 1998 Sales 636

609 1 245 Operating income 123 36 159 EBITDA 152 65 217

Ciba Specialty Chemicals (SWX:CIBN) is a leading company
dedicated to producing high-value effects for our customers' products.
Our specialty chemicals, added in small quantities, enhance the
performance, look and feel of the final product. Business success is
driven by our long-term strategy of innovation and continuous
operational improvements. Ciba brings new and creative thought to the
processes and products of our customers in more than 117 countries.
Ciba generated sales of more than CHF 8.4 billion in 1998 and spent
300 million on R&D to foster innovation across the Company.

Ciba Specialty Chemicals Website: http://www.cibasc.com