Earnings Increase Again for Many Firms

The second quarter of 2005 was another good period for the U.S. chemical industry. Prices for chemical products continued to climb. Production was up from year-earlier levels, although growth slowed somewhat from the first quarter. And demand for products rose, helped by exports.

The result was that earnings from continuing operations, excluding unusual items, for 24 of the 25 companies surveyed increased 45.7% over second-quarter 2004 to $3.71 billion as sales rose 12.7% to $42.5 billion. The average profit margin for the group was 8.7%, up from 6.8% a year earlier. Ferro is excluded from the totals because it is reporting earnings only for the current period while an investigation into its accounting in prior years continues. Thus, comparisons with 2004 are not possible.

The second-quarter performance improvement for the group was slightly less than that of the first quarter, so the improvement in the first six months of the year is higher than for the second quarter alone. In the first half, earnings for the firms reporting comparable data for 2005 and 2004 jumped 54.3% to $7.51 billion on a 12.9% increase in sales to $84.0 billion. Profitability for the period was 8.9%, compared with 6.5% in first-half 2004.

The only downside for the chemical industry--albeit a big one--was that higher costs for raw materials and energy continued to put pressure on profit margins. Dow Chemical Chief Financial Officer J. Pedro Reinhard put a number on this, telling securities analysts that energy and feedstock costs for the company were $900 million higher than in the second quarter of last year.

In spite of that, U.S. chemical industry fundamentals seem to be pretty good. According to Labor Department data, the average producer price index for the second quarter for all chemicals increased 10.3% over the same period last year. And the index for basic chemicals, the largest industry sector and probably the one most affected by the cost increases, rose 17.8%. This, again, represents a slight slowing in growth from the first quarter, when the index for all chemicals was up 11.8% and that for basic chemicals rose 20.7%.

Chemical output, according to the Federal Reserve Board, experienced that same slower growth as prices in the second quarter. The production index for all chemicals was up 2.7%, but for basic chemicals, it was down a slight 0.1%. In the first quarter, the index rose 4.6% for all chemicals and 3.6% for basic chemicals.

Demand was good for chemical products in the second quarter, according to Commerce Department figures. The value of all chemical shipments rose 6.2% to $133.2 billion while shipments of chemicals excluding pharmaceuticals rose 9.8% to $105.2 billion.

The data on shipments were helped by chemical exports, which rose 9.0% for the quarter to $29.8 billion. Excluding pharmaceuticals, exports increased 10.1% to $23.2 billion.

As a result of the economic and pricing strength, earnings increased for all but two of the companies surveyed. Cabot's earnings fell 29.3% to $29.0 million, despite a 10.8% increase in sales to $545 million. Chief Executive Officer Kennett F. Burnes says, "We are, of course, not pleased with our results for the quarter, as we underperformed our own expectations by roughly 20 cents per share." The company earned 43 cents per share.

"The shortfall," Burnes adds, "was attributable to significantly higher feedstock costs in carbon black and costs related to the ongoing labor situation at our Supermetals facility in Pennsylvania." Burnes notes, though, that volumes were strong in the quarter.

The other company, Georgia Gulf, saw earnings decline 65.7% to $10.2 million even as sales rose 11.9% to $584 million. "While the second quarter has typically been a seasonally strong quarter, our results included several items that significantly reduced our bottom line," CEO Edward A. Schmitt says. "The costs from our plant outages were higher than anticipated, and we also had to work through higher priced inventories and raw material purchase commitments. In addition, our customers reduced inventories as sales prices for several products fell throughout the quarter."

AT THE OTHER END of the growth spectrum, four companies--Chemtura, Eastman Chemical, Lubrizol, and Nalco--turned in triple-digit earnings increases. Chemtura's earnings increased 185% to $19.4 million on a 3.6% sales rise to $602 million. Chemtura was formed from the merger of Crompton and Great Lakes Chemical, but because the merger didn't take place until July 1, the results are from Crompton alone.

Eastman's earnings rose 103% to $130 million as sales increased 4.5% to $1.75 billion. The increase, according to CEO J. Brian Ferguson, was a result of "strong performance throughout the company due to a number of factors, including solid economic growth as well as the actions we have taken to improve our profitability."

Lubrizol's earnings for the quarter were up 106% to $63.8 million as a result of improved prices and product mix, the acquisition of Noveon, favorable currency translations, lower expenses, higher shipment volumes, and a lower tax rate. Earnings at Nalco jumped 367% to $11.2 million as sales rose 16.6% to $863 million. "Raw and other purchased material cost increases stabilized but are up about $40 million from the same period last year," CEO William H. Joyce says. "Price increases contributed about $36 million to sales."

Nalco is an old name newly returned to C&EN's sample of companies, as is Celanese. Huntsman also has taken a place on the list. The appearance of these companies on the list is a result of the disappearance of Great Lakes and of Monsanto, which no longer derives more than 50% of its sales from chemicals. Cambrex also has been dropped, as a result of C&EN's raising its minimum annual sales figure to qualify for listing to $1 billion from an almost 30-year-old floor of $200 million in yearly sales.

Prices were also a big factor at Rohm and Haas, where earnings improved 51.7% to $179 million as sales increased 11.4% to $2.01 billion. CEO Raj L. Gupta says, "Our performance reflects the ongoing emphasis on implementing price increases to recover extraordinarily high raw material and energy costs while maintaining tight control over our expenses."

THE LARGEST second-quarter sales growth among the companies was at Cytec Industries, which reported a 92.7% increase to $813 million. A major portion of this increase came from the company's acquisition of Surface Specialties, which had 2004 sales of about $1.45 billion, from Belgium's UCB Group. Cytec's earnings were up 28.9% to $43.3 million.

DuPont, the second largest company in the C&EN survey, showed earnings growth of 12.3% for the quarter to $904 million. Sales, however, were off a slight 0.2% to $7.51 billion. "Continued success with pricing and sales from new products were key to our strength in the quarter," CEO Charles O. Holliday Jr. says.

Dow continued its solid earnings growth with a 75.4% increase in the quarter to $1.17 billion. Sales were up 16.3% to $11.5 billion. Reinhard says the company made substantial progress through the quarter despite the headwinds of an inventory adjustment and the impact of higher feedstock and energy costs. He also notes that during the quarter, there were a number of unplanned outages, both at Dow facilities and at some of its joint-venture operations.

Looking to the future, Reinhart says, "The global economy remains healthy, with [gross domestic product] expected to grow between 3 and 3.5% in 2005--a sustainable rate that will translate into strong industrial production and solid demand."

THE LARGEST second-quarter sales growth among the companies was at Cytec Industries, which reported a 92.7% increase to $813 million. A major portion of this increase came from the company's acquisition of Surface Specialties, which had 2004 sales of about $1.45 billion, from Belgium's UCB Group. Cytec's earnings were up 28.9% to $43.3 million.

DuPont, the second largest company in the C&EN survey, showed earnings growth of 12.3% for the quarter to $904 million. Sales, however, were off a slight 0.2% to $7.51 billion. "Continued success with pricing and sales from new products were key to our strength in the quarter," CEO Charles O. Holliday Jr. says.

Dow continued its solid earnings growth with a 75.4% increase in the quarter to $1.17 billion. Sales were up 16.3% to $11.5 billion. Reinhard says the company made substantial progress through the quarter despite the headwinds of an inventory adjustment and the impact of higher feedstock and energy costs. He also notes that during the quarter, there were a number of unplanned outages, both at Dow facilities and at some of its joint-venture operations.

Looking to the future, Reinhart says, "The global economy remains healthy, with [gross domestic product] expected to grow between 3 and 3.5% in 2005--a sustainable rate that will translate into strong industrial production and solid demand."