Issue Date: October 31, 2011
Earnings Are Up Despite Slowdown
Earnings growth in the third quarter was strong for the chemical industry, belying a global economic recovery stuck on hold. Company reports show that rising prices fueled most of the earnings gain. The pricing trend began early in the year in an effort to make up for higher raw material and energy costs but recently has also helped to counter slowing, and, in many cases, contracting sales volumes.
At Dow Chemical and DuPont, higher sales in emerging markets also helped to counter flat or negative volumes in developed countries. “Our investments in emerging regions enabled us to capitalize on growth where it is happening most rapidly, even as developed regions paused in their economic recovery,” Dow CEO Andrew N. Liveris told investors.
Both positive and negative trends were on display in Europe, DuPont CEO Ellen J. Kullman pointed out in a conference call with analysts. “There are parts of Europe that are in or near recession, and our own results for the third quarter indicate a very mixed bag,” she said. “Volumes in Western Europe were down, while volumes in developing Europe, Middle East, and Africa were up.”
DuPont’s earnings of $655 million represented a 79% jump over last year’s third quarter, and the firm’s earnings per share of 69 cents beat analysts’ consensus expectations by a 13-cent margin. The result was due to strong growth in agriculture and nutritional products as well as higher prices for titanium dioxide, a business with tight supply, according to David Begleiter, research analyst for Deutsche Bank. “We believe DuPont shares are an attractive option in a low-growth environment,” he wrote in a note to investors. DuPont’s mid-2011 acquisition of Danisco added 4 cents per share to earnings for the quarter.
Still, the company’s financial statement showed lack of growth in several key businesses. Volumes of electronic chemicals shrank by 8%, partly as a result of inventory overhangs for photovoltaics. DuPont sold 7% by volume less of its performance materials and 1% less of its performance chemicals compared with last year’s third quarter. In all businesses, prices were up dramatically; the biggest increase was 29% for performance chemicals, which includes TiO2.
Dow raised earnings 18% to $729 million compared with last year’s third quarter, but the firm’s earnings per share of 62 cents fell just short of analysts’ expectations of 63 cents. Volumes in its performance materials and coatings businesses were down, while growth was low or flat in most other segments except for agriculture, which saw 18% growth. Like DuPont, Dow raised earnings mainly through higher prices—17% overall.
In contrast to the chemical makers, industrial gases firms Air Products & Chemicals and Praxair saw solid growth in volume for the quarter. Praxair reported strong demand from end markets including manufacturing, metals, and energy and chemicals, and in all geographies except Europe.
In Germany, BASF had a strong quarter for revenues, which were up 12% to $24 billion, but net income shrank 4% to $1.7 billion compared with the third quarter of 2010. The firm attributed the difference to a pause in oil production in Libya. Overall, growth slowed in the third quarter. “BASF’s customers planned more cautiously, reduced inventories, and partially delayed orders in expectation of possible falling prices,” the company explained.
CEOs reminded investors that the fourth quarter is normally the slowest time of year for the chemical industry, meaning that sales volumes and factory utilization will likely erode further. But they also sounded positive about what 2012 will bring. One example cited by Kullman is automotive manufacturing. “Global auto builds are expected to be up 5% in the fourth quarter, with positive momentum in 2012,” she said. “And while there may be destocking in the fourth quarter, the underlying demand signals point to volume growth next year.”
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