Issue Date: February 23, 2009
Fourth-Quarter Earnings Tank
CHEMICAL INDUSTRY observers will have trouble recalling a quarter worse than the fourth quarter of 2008. The 21 chemical companies tracked by C&EN saw earnings plunge 60.3% compared with the fourth quarter of 2007. Take out the two fertilizer companies and the rest of the group posted an out-and-out loss.
With the economic crisis in full swing, the industry experienced an unprecedented collapse in demand; executives struggled to rapidly cut costs amid an 11.9% average sales decrease from the year-ago quarter. The dark days of early 2001 look almost sunny in retrospect. During that recession, C&EN reported that first-quarter chemical earnings dropped 38%, while sales decreased only 2%.
Though signs of weakening started to emerge earlier in 2008, the extent of the recession really became clear in the fourth quarter. The broad-based decline reached chemical sectors that had avoided the impact of the downturn through the first three quarters and almost wiped out earnings gains for the year.
Industrial gas makers had been on their way to a strong year in 2008. But Air Products & Chemicals, for one, saw that momentum turn south quickly. After an increase of 6.6% in the third quarter, the firm's earnings shrank by 21.1% in the fourth quarter, driven down by sales that fell 8.8%.
Air Products' chief executive officer, John E. McGlade, wrote in a report to investors that the end of the year was "one of the weakest economic environments we've ever seen." He acknowledged that the long recession has finally hit his firm's customers: "It was evident that the shocks to the global economy have shattered consumer confidence, which has significantly impacted customers' operating rates across most of our end markets."
At the same time, the three firms all worked quickly to restructure in hopes of coming into line with lower demand. But layoffs and plant shutdowns are expensive. In total, the companies took more than $1 billion in charges for restructurings and asset impairments.
Without the write-down, Dow still posted an enormous $574 million quarterly loss. Its reported earnings per share, which include a $582 million charge, caught industry analysts by surprise. The loss equaled 62 cents per share, compared with a consensus expectation of a 6-cent gain for the quarter, according to Thompson Financial.
What should have been good news for Dow—declines in feedstock and energy prices—did nothing to help the company in the fourth quarter. Without strong demand, it will take several quarters for cheaper prices to be reflected in Dow's cost of inventory. Meanwhile, the company was forced to cut prices for basic plastics by 15% and basic chemicals by 6%, two large segments where it has low pricing power.
In addition, Dow saw sales volumes decline 17% during the quarter over all product lines. The negative trend accelerated from the third quarter, when the company blamed a 9% decrease in volume mostly on Hurricanes Gustav and Ike.
The company responded to the lower volumes by drastically cutting production. Its plant operating rate for the quarter was 64%, the lowest in more than 25 years. December's operating rate was only 44%, and the resulting higher fixed costs further compressed margins. In a conference call with analysts, Dow CEO Andrew N. Liveris said the problems with basics would continue. "I hate to be the harbinger of doom," he said, "but I will tell you, the basic chemical sector is going to have a terrible '09."
DuPont's volume decrease of 20% was similar to that seen by Dow. DuPont was able to increase prices by 7%, powered by the strength of its higher margin specialty products. Still, the company had an awful quarter, posting a $249 million loss before special charges and $629 million with the charges.
Reliance on higher margin chemicals could not rescue DuPont's earnings, says stock analyst Sergey Vasnetsov of Barclays Capital. As he points out in a report to clients, those specialty products "are used in a wide variety of consumer and industrial durables—the most volume-volatile segment of the economy."
Consumers and industries cut spending on durables sharply during the fourth quarter, according to the federal Bureau of Economic Analysis. Consumer expenditures for durable goods sank 22.4%, while industrial investment in equipment decreased 22.0%. Overall, the U.S. economy contracted at an annual rate of 3.8% in the fourth quarter.
DuPont even suffered a 16% drop in sales to emerging markets. "Previously, people said that Europe is okay, and Asia is a growth area," observes Laurence Alexander, a chemical stock analyst at Jefferies & Co. "Many were caught flat-footed with high levels of inventory when those regions slowed."
The third company to report a loss for the quarter was Celanese. The company's $54 million loss was due to volume declines in its industrial specialties, engineered materials, and acetyl intermediates product lines. However, revenue increased in its consumer specialties segment due to higher prices for artificial sweeteners and acetate tow for cigarette filters—comfort products that were not negatively affected by the economic downturn.
THE AGRICULTURE market was also unaffected by the shrinking economy. Growth in the segment started to accelerate rapidly in the fourth quarter of 2007 and continued throughout 2008. The two pure-play fertilizer companies tracked by C&EN, Mosaic and Terra Industries, saw earnings soar 143.7% and 135.7%, respectively.
The rosy results were entirely due to large price increases. Both companies reported that volumes were down and that the high prices are set to return to Earth. Mosaic's report to investors warned of softening market conditions, which the company blames on "lower grain and oilseed prices, a late North American harvest, congested distribution supply chains, and the global economic slowdown."
Agriculture and food also boosted earnings at FMC, which saw its earnings grow 66.7% compared with fourth-quarter 2007. The acquisition of ISP's alginates and food ingredients business helped FMC raise earnings 3% in its specialty chemical unit.
FMC stands alone among chemical companies in expressing optimism about 2009. It projects a 14% increase in earnings, based on expected strong performance for its agricultural products.
The other companies tracked by C&EN had few nice things to say about the year ahead. PPG Industries CEO Charles E. Bunch said in a report to investors, "Our early read on 2009 is that the first quarter and possibly the first half of the year is shaping up to be an even greater challenge than fourth-quarter 2008 due to further weakening demand." In the fourth quarter, PPG saw earnings fall 64.3% compared with 2007.
Bunch went on to describe the only tools left to chemical industry executives to deal with the economy. "We continue to evaluate further cost actions that may result in additional restructuring and related cost savings during the year," he warned.
Dow's Liveris told analysts in a conference call about company initiatives—one in October and one in December—to control costs. "The larger of the two interventions was December's where we announced a workforce reduction of 11%, the divestiture of nonstrategic businesses, the shutdown of 20 facilities, and the idling of 180 more." He said he may announce another round of cost-cutting measures in the next two or three months.
Jefferies' Alexander says chemical companies are not able to predict demand even in the very near future, though they anticipate customers that idled plants will come back on-line in February.
"Everybody is waiting for data points on new levels of demand after the Chinese New Year. Is the current inventory correction masking a higher level of demand, or is demand still deteriorating?" he asks. "Companies moving fast to shrink capacity is a good thing, but it is difficult to see if they are doing enough."
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