Brisk Rebound For Chemical Earnings

One year after the economic crisis walloped earnings in the chemical industry, results for the first quarter show that a sharp recovery is under way. Demand has not yet reached pre-recession levels, but chemical executives are telling investors that they expect robust growth to continue through 2010.

The 24 firms tracked by C&EN reported that earnings soared 167% from last year’s first quarter on a jump in sales of 26%. Industry watchers had been expecting earnings to grow significantly compared with early last year, when the recession hit its lowest point. Still, many firms’ results beat analyst expectations by a wide margin.

One of the standouts in the first quarter was Dow Chemical, which posted earnings per share of 43 cents, 13 cents better than the consensus expectation. Dow’s sales jumped 48% compared with last year’s first quarter, and earnings almost tripled to $594 million.

Dow’s chief executive officer, Andrew N. Liveris, took advantage of the strong quarter to boast about the performance of the firm’s new portfolio, which now includes the businesses of Rohm and Haas. “We believe the outperformance in the first quarter represents a pivotal point in demonstrating the earnings power of the new Dow,” he said in a conference call with analysts. He referred to “the new Dow” four times in the 60-minute call.

The Dow performance and specialty businesses enhanced by Rohm and Haas had a strong quarter. Recovery in the electronics market helped the firm’s electronic and specialty materials segment increase sales volumes by 31% compared with last year’s first quarter. Volumes were up by 16% in the coatings and infrastructure segment as demand took off in emerging markets.

But basic plastics added the most to Dow’s first-quarter earnings. Sales of $3.0 billion represented a 49% increase over the 2009 quarter, thanks to 5% higher volume and 44% higher prices. In its earnings report the firm gave most of the credit to its polyethylene business, which benefited from low production costs in North America and a weak dollar that powered exports. Those advantages resulted in double-digit sales growth in Asia-Pacific and Latin America.

The low production costs were due to favorable natural gas prices in the U.S., pointed out P. J. Juvekar, a chemicals analyst for Citigroup, in a report to investors. “Basic plastics vastly exceeded our expectations,” he wrote about Dow.

The basic plastics segment represented more than 40% of Dow’s quarterly earnings before income taxes, depreciation, and amortization, but Liveris says he would still like to move his company’s capital elsewhere in the long term. “The fact that this business is earning this much money has made the business more valuable, and we are definitely taking our time in structuring the right deal,” he said in the analyst call.

DuPont, meanwhile, made its largest gains in electronic and performance materials, driven by strong global demand for photovoltaics, semiconductors, autos, and consumer products. But business grew across the board. Strong demand boosted total sales to $8.5 billion, up 24% compared with the year-ago quarter, while earnings shot up 131%. The company’s earnings per share of $1.24 topped consensus expectations by 18 cents.

In a conference call with analysts, DuPont CEO Ellen J. Kullman said the firm would surpass $1 billion in photovoltaic material sales in 2011, one year ahead of plan. She also reported that DuPont is benefiting from continued recovery in the automotive market and said the firm estimates that global auto assemblies will increase 13% in 2010 compared with last year.

More than half of DuPont’s pretax operating profit for the quarter came from its agriculture and nutrition business. Higher seed prices and volumes in North America boosted sales by 6% compared with the year-ago quarter. “We have tremendous momentum in our seed business, particularly in North America, where sales in this region topped $3 billion in 2009,” Kullman said. She added that the company expects to gain one to two points of global seed market share in 2010.

A strong agricultural season will also benefit fertilizer firms after a weak 2009 that saw earnings erode. In the first quarter, Mosaic reported increased earnings from improved demand for phosphate and potash fertilizers and lower phosphate raw material costs.

CF Industries told shareholders it expects U.S. corn acreage to increase compared with last year. The firm, which finally succeeded in acquiring Terra Industries for $4.7 billion in April, said many customers have delayed purchases to the second quarter. The $117 million in operating earnings the firm reported do not include $123 million to pay Terra’s breakup fee to Norwegian fertilizer firm Yara, which had struck an earlier deal to buy Terra.

For most of the firms in C&EN’s survey, the return of manufacturing activity drove growth in the first quarter. The Institute for Supply Management, which publishes the Purchasing Managers Index, reports that “manufacturers continue to see extraordinary strength in new orders.”

Cytec Industries saw its earnings grow by a factor of 12 compared with last year. “Selling volumes in our specialty chemical and building block segments increased from improved demand across all regions when compared with the high levels of destocking which took place in the prior-year quarter,” Cytec CEO Shane Fleming remarked. Like many executives, he stressed that last year’s cost-cutting measures also helped improve profit margins.

Restocking helped PPG Industries increase sales by 12%. CEO Charles E. Bunch said higher year-over-year sales volumes in industrial coatings were due to demand in automotive and general industrial applications. The firm boosted earnings 266% to $117 million for the quarter.

Eastman Chemical enjoyed a 39% growth in sales compared with the first quarter of 2009, powered in large part by increased demand for coatings raw materials. Higher volumes led the company to increase its capacity utilization, leading to lower unit costs.

Higher demand in global tire and automotive markets drove Cabot’s business in carbon black used to make rubber to a volume increase of 28%. Overall, the firm saw sales increase by 52% compared with last year’s first quarter, the largest jump in the C&EN survey.

Customer restocking and increased manufacturing activity boosted Lubrizol’s sales 30% over last year’s quarter, and earnings improved 126% to $163 million. Laurence Alexander, a chemicals analyst at Jefferies & Co., said the firm will use its strong balance sheet for bolt-on acquisitions and suggested that Lubrizol should bulk up its advanced materials business.

Lubrizol wouldn’t be alone looking for acquisitions. This year has seen a significant turnaround in deal activity, according to Young & Partners, an investment banking firm serving chemical and life sciences companies. Tight credit markets contained deal-making in 2009 for all but the highest rated corporations, remarks Peter Young, president of Young & Partners. But the first quarter of 2010 brought $4.5 billion in acquisitions, 10 times more than in last year’s quarter (see page 11).

One example of a big deal that could happen in 2010, Young says, is Air Products & Chemicals’ attempt to take over Airgas for $7.0 billion. But Young cautions that activity could slow if credit markets are harmed by the debt problems of Greece, Portugal, and Spain or by a crisis in commercial real estate.

Still, most economists expect growth to continue. T. Kevin Swift, chief economist for the American Chemistry Council, a trade group, wrote in a report that “most leading indicators of global industrial production suggest further recovery, although the pace will moderate in the second half of 2010.”

Even in the U.S., which lagged Asia and Latin America at the start of the recovery, auto and housing markets seem to be improving. According to the U.S. Census Bureau, housing permits issued in March were 8% higher than in February and 34% above the March 2009 estimate. J. D. Power & Associates recently increased its North American automotive production forecast for 2010 to 11 million units. It says the second quarter will see manufacturing improve by 56% from the 2009 quarter.

A big driver for improved manufacturing activity is consumer confidence, which increased in the U.S. in March and April after taking a big dip in February. According to the Conference Board, a business membership organization, consumer surveys show a more positive outlook on business conditions and the labor market. In fact, the U.S. economy added 290,000 jobs in April, including 44,000 in manufacturing, according to the Department of Labor.

In the chemical industry, growth in earnings during the rest of 2010 will likely be hampered by higher costs, as demand for energy and raw materials ramps up along with the global recovery. At DuPont, executives predict that costs for the year will rise by 5%, whereas the firm had enjoyed 2% lower costs in the first quarter. Still, DuPont increased its full-year earnings guidance to $2.50 to $2.70 per share from an earlier estimate of $2.15 to $2.45.

DuPont’s Kullman told analysts that the firm’s strong first quarter was the result of the past “six quarters’ worth of efforts in terms of restructuring, fixed and variable cost productivity, working capital productivity, and most importantly, staying close to our customers and markets. We’ve effectively repositioned the company for the recovery that’s under way right now.”