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Anyone reading the newspaper over the past few months must have the feeling that the U.S. economy is nothing but trouble. Heading the list is the subprime mortgage debacle, which has trapped many home buyers in mortgages they can't afford. Housing prices are down by more than 4%, and sales of both new and existing homes have sunk.
In addition, the U.S. automobile industry, although recovering somewhat from its nadir, is still reporting lower-than-hoped-for sales. The Federal Reserve Board's interest rate cuts have had little effect on overall rates and have practically been ignored by Wall Street and the highly volatile stock market.
To these disappointments add rising oil and gasoline prices, which raise costs for the chemical industry and can cut consumer spending, as well as the dollar's decline against other major currencies. One might conclude that chemical companies are walking up to a precipice.
But take a look at third-quarter results from 25 major U.S. firms that derive at least 50% of their sales from chemicals. These companies had aggregate sales of $48.0 billion in the July-through-September period, up 9.4% from the comparable three months last year. At the same time, earnings rose 14.6% to $3.58 billion. This is the largest percentage gain for sales since third-quarter 2006 and the biggest increase in earnings since the fourth quarter of last year.
In addition, the aggregate profit margin for the group, although lower than in the first and second quarters of this year, was 7.5%, up from 7.1% in third-quarter 2006.
For the first nine months of the year, earnings for the group rose 10.2% to $11.5 billion on sales of $143.0 billion, a 7.7% increase over last year. The aggregate profit margin increased to 8.1% from 7.9% in the first three quarters a year ago.
The fundamentals backing this growth were not terribly strong, but they were adequate. The Labor Department's average seasonally adjusted producer price index for all chemicals, which includes pharmaceuticals, rose in the third quarter to 216.6 (2002 = 100), up 3.9% from the same period last year. The index for basic industrial chemicals, the largest chemical sector, also rose 3.9%, to 227.9.
Chemical production was lackluster, with the Federal Reserve Board's index for the whole sector increasing just 0.4% from last year to 112.5 (2002 = 100). Basic chemicals did much better, however, with a 3.5% improvement to 120.1.
The value of shipments of all chemical products made in the U.S. fell 0.4% to $158.7 billion for the three-month period. Excluding pharmaceuticals, though, results in a 2.6% increase in shipments for the remainder of the chemical sectors to $118.0 billion, according to Commerce Department data.
Despite the weak fundamentals, only three of the companies surveyed—Albemarle, Eastman Chemical, and H.B. Fuller—had declines in sales in the quarter. Although there were no losses in the group, six firms had lower earnings: Albemarle, Arch Chemicals, Cabot, Dow Chemical, Huntsman Corp., and Stepan.
Excluding the few companies with declining results, the range of growth in sales and earnings was large. Sales increases ranged from 1.4% at Cytec Industries to 55.5% at the fertilizer maker Mosaic. Earnings growth was even broader, from just 0.9% at Rohm and Haas to a surge of 674.8% at another fertilizer company, Terra Industries.
Terra's 27.7% growth in sales to $593.7 million and 674.8% increase in earnings to $79.8 million came mostly on higher selling prices for nitrogen fertilizers. Prices for ammonia, ammonium nitrate, and nitrogen solutions rose 8%, 11%, and 61%, respectively, the company said. Improved selling prices and sales volumes reflected strong demand, driven by significantly more U.S. acres of planted corn and increased dealer demand to ensure adequate supplies for the 2008 spring planting season.
Mosaic's quarterly earnings improved 180.3% to $305.5 million on 55.5% sales growth to $2.00 billion. According to the company, inventories of phosphates and potash fertilizers held by North American producers continue to decline, and supplies remain tight. At the end of August, combined inventories of diammonium and monoammonium phosphate were at their lowest level in over 15 years, and potash inventories had declined 42% compared with a year earlier. The $196.5 million difference between Mosaic's earnings last year and this year was the largest dollar increase among the companies.
Profitability for the two fertilizer companies improved significantly compared with the third quarter last year. Mosaic had a profit margin of 15.2%, placing it at number one on the C&EN list, up from sixth place a year earlier. And Terra's 13.4% profit margin placed it third, up from 23rd place in third-quarter 2006.
To find the third-highest earnings growth in the quarter after the fertilizer companies, one must drop to Lubrizol, where earnings grew a much smaller but respectable 40.3% to $72.8 million on an 8.8% increase in sales to $1.12 billion.
Lubrizol Chief Executive Officer James L. Hambrick noted the company delivered good top-line growth in which international sales improvement more than offset weak demand in North America. "Our substantial improvement in operating income, despite the challenging environment, reflects both broad business sector diversification and good geographic balance," Hambrick said.
At FMC, earnings increased 31.2% to $53.0 million on a 9.5% sales increase to $626.6 million. As at Mosaic and Terra, agriculture came into play. "Our record third-quarter results were on plan, with another quarter of strong agricultural products performance across all regions, continued volume growth and pricing improvement in specialty chemicals, and the return of industrial chemicals' profit momentum," said CEO William G. Walter.
DuPont, the second largest U.S. chemical company behind Dow Chemical, saw earnings rise 30.1% to $566.0 million on 5.8% higher sales of $6.68 billion. "We increased sales outside the U.S. 11% and grew worldwide agriculture and nutrition segment sales 21%," said CEO Charles O. Holliday Jr.
Dow, on the other hand, reported a 15.0% decline in earnings to $807.7 million, despite a 10.0% increase in sales to $13.6 billion. "This was another sound quarter for Dow," said CEO Andrew N. Liveris. "We posted record quarterly sales with substantial growth in Europe, Asia-Pacific, and Latin America; we achieved solid price increases across every business and every geographic region; we saw sound volume improvements in all but one of our operating segments; and our equity earnings were once again outstanding."
If the fundamentals were so good, why were earnings lower? Geoffrey E. Merszei, Dow's chief financial officer, provided two reasons in a conference call with securities analysts. "First, as expected," he said, "we saw higher operating expenses as we moved forward with our strategy to invest for growth. We supported newly acquired businesses, we increased investments in innovation, and we enhanced our market capabilities for long-term growth. And second, to a lesser extent, we had the negative impact of some plant outages."
Merszei also noted the impact of higher feedstock and energy costs, which were up almost $400 million over last year's third quarter. "This quarter," he said, "Dow's feedstock and energy bill topped $6 billion for the first time in the company's history. And consider this: In 1999, we paid just $6.1 billion for the entire year—and this includes purchases for both Dow and Union Carbide. Looked at another way, the cost of feedstock and energy has climbed from consuming 23% of our net sales, to 44% year-to-date."
Dow's earnings decline, however, was not the largest percentage drop. Cabot's earnings fell 32.6% to $29.0 million, even as sales rose 7.7% to $675.0 million. Profits were down in all segments of the company.
Albemarle's earnings fell 2.6% to $59.1 million on a 3.9% sales decline to $584.0 million. Strong performance in the company's catalysts and fine chemicals business segments was offset by margin declines in its polymer additives segment. "As we enter the fourth quarter, we are seeing some sequential improvement in polymer additives sales," noted CEO Mark C. Rohr. "However, inflation pressures and global customer uncertainty require us to keep focused on execution to deliver another successful year."
Other companies are looking forward as well. For the fourth quarter, DuPont expects that strong sales growth outside the U.S. will continue to exceed the effect of lower demand from U.S. housing and automotive markets. In 2008, DuPont expects strong revenue growth in emerging markets and significant earnings growth in its agriculture and nutrition segment. Its current outlook for 2008 shows earnings growth of 5–10% above its anticipated 2007 earnings of $3.15 to $3.20 per share.
Looking to the fourth quarter, Eastman Chemical CEO Brian Ferguson said: "We anticipate normal seasonality will reduce demand sequentially [from the third quarter] in most of our businesses and product lines during the quarter. As a result, we expect fourth-quarter 2007 earnings per share to be similar to fourth-quarter 2006 earnings per share of $1.00, excluding gains and charges related to strategic decisions in both periods."
Rohm and Haas CEO Raj L. Gupta anticipates strong sales and earnings performance from developing economies and the firm's electronic materials business. "However," he said, "this year is proving much more challenging than anticipated at the start of the year as a result of weaker U.S. building and construction markets and the recent and pronounced increase in raw material, energy, and freight costs. We are taking urgent and necessary actions to respond to these ongoing cost increases."
It is difficult to predict the magnitude of the additional raw material costs the company will face for the rest of the year, Gupta said, so Rohm and Haas is not providing earnings guidance. He does say full-year sales are expected to be up about 7%.
Because the third calendar quarter is the fourth quarter of Air Products & Chemicals' fiscal year, that firm is focusing on 2008. "We are targeting our fifth consecutive year of double-digit earnings growth in fiscal 2008," said CEO John E. McGlade, "based on a strong project workload around the world and continued growth in global manufacturing." The company anticipates 2008 earnings per share in the range of $4.50 to $5.00, representing year-over-year earnings growth of 10–14%.
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