(Adds CEO interview, detail on debt, analyst comment)
By Nick Tattersall
FRANKFURT, March 27 (Reuters) - German industrial gas and engineering group Linde AG pledged on Thursday to spin off its ailing refrigeration business and said group earnings would improve this year as it slashes costs and cuts jobs.
"We expect to see a noticeable improvement in earnings before interest, tax and amortisation (EBITA), assuming the Iraq war does not cause any lasting deterioration in the world economy and Germany does not enter a recession," Linde Chief Executive Wolfgang Reitzle told a news conference.
Investors have been hoping the former Ford executive, who took over at the helm of the world's fifth-biggest industrial gas producer at the start of the year, would tighten its sprawling business portfolio and focus on its stable gas business as it battles an economic downturn.
The group posted a 15 percent drop in core earnings last year to 647 million euros ($693 million), below market forecasts, as its economically sensitive forklift trucks and refrigeration businesses took the shine off a stronger performance at the core gas unit.
Orders so far this year are stronger, rising 4.7 percent to 1.4 billion euros in the first two months due exclusively to plant construction orders, although sales dipped slightly to 1.2 billion euros.
Reitzle said the group would spin off the refrigeration unit, which has suffered as retailers cut back on spending, by the end of the year. It would keep its options open on whether to sell the business, look for partners, or expand it as an independent company.
"We have to think about it in the coming months. For now it's up to our own team to come up with ideas," Reitzle told Reuters in an interview.
Shares in the group, which have underperformed the DJ Stoxx chemicals index by around six percent since January, were 0.8 percent higher by 1250 GMT in a weaker German market.
"I think the refrigeration spin-off is to be viewed positively. It is easier to sell once you turn it into a separate entity," said one Frankfurt-based analyst who declined to be named.
FOCUS ON GAS
The stability of Linde's largest industrial gas unit has traditionally made it a defensive play for investors, but its conglomerate structure -- it aims to be market leader in industrial gases, forklift trucks and commercial fridges -- has meant it has fared worse recently than pure gas peers.
Reitzle said he was focused on growing the company's gas and engineering unit, which he said would see a significant rise in both sales and earnings this year.
As a result, the group as a whole only expected to cut its debt levels by around 150 million euros this year, about half the reduction it originally aimed for, because of possible investment spending at the gas division.
Linde has been aiming over the last few years to cut its debt by 300 million euros a year on average, although it exceeded that target in 2002, bringing total liabilities down 500 million euros to 3.3 billion.
Although its gas strategy could mean small acquisitions in the long term, Reitzle ruled out any large buys in the near future, pointing to the group's high debt and low share price.
"Because of our debt level and the possible credit rating downgrade we are facing, and because of our share price, our strategic room for manoeuvre is not that great," he said.
Credit rating agency Standard & Poor's said in February it may downgrade the ratings of a number of European companies including Linde, citing underfunded pension liabilities, although it did say Linde's liquidity position remained strong.
Despite the company's limping share price -- the stock has more than halved in value over the past 12 months -- Reitzle did not expect the group's main institutional shareholders to bail out in the short term.
"I have no reason to believe that we are on the selling list in the near future," he said.
Germany's Allianz holds 12.4 percent of Linde, while Deutsche Bank and Commerzbank each hold stakes of 10 percent.
Reitzle said restructuring at the group's material handling unit, which makes forklift trucks and accounts for around a third of group sales, would be accelerated.
Annual cost savings at the division would be beyond the planned 100 million euros by 2005 or 2006, and it would cut more jobs than the 1,000 previously announced.