Chemical Firms Eke Out Earnings

Early earnings reports for the second quarter show it was another bleak period for the chemical industry as stalled demand continued to be an anchor on sales. The silver lining, analysts say, is that ambitious cost-cutting programs helped many companies beat earnings expectations.

At Air Products & Chemicals, revenues of $2.0 billion were down a steep 28.1% from the year-earlier period. The company blamed weak volumes, lower prices, and the stronger dollar. Earnings were down 23.7%, yet due to lower operating costs, earnings per share were $1.05, about 7 cents higher than consensus estimates.

As part of its earnings release, Air Products announced that it will cut 1,150 positions, or about 6% of its global workforce, and close some manufacturing facilities. The layoffs are in addition to 1,400 job cuts in December 2008.

But the earnings report showed some cause for optimism. “While we are still seeing the impact of the global recession on our volumes, we’ve seen signs of improvement during this quarter in some of our end markets, particularly in electronics and Asia,” Air Products CEO John E. McGlade said. Sales of electronics and performance materials were up by 23% compared with the first quarter of 2009.

Continued low sales also hit DuPont’s results. The firm reported that sales volumes sank 19%, contributing the lion’s share of an overall 22.4% drop in revenues compared with last year. And low capacity utilization dragged down earnings by 48.2%.

“The magnitude of its volume contraction was massive and larger than expected,” JPMorgan chemicals analyst Jeffrey J. Zekauskas wrote in a report about DuPont. He added that “expense reduction and raw material benefit were also considerable, resulting in earnings per share higher than consensus expectations.”

Sounding cautiously positive, DuPont CEO Ellen J. Kullman told analysts in a conference call that she feels the worst of the recession has passed. “Many of our markets showed improvement in the second quarter, with an apparent end to destocking across several supply chains,” she reported. “Our coating, electronics, and performance materials business segments all had sequential volume improvements.”

The cost-cutting moves DuPont already announced will continue. The firm pledged to reduce fixed costs in 2009 by $1 billion, and it has chalked up $600 million in cuts so far. And the company plans to stay lean. Kullman said that half of the contractor positions eliminated at DuPont will not come back.

Aggressive cost management also saved the day at paints and coatings maker PPG Industries. Although both sales and earnings were down significantly from last year’s second quarter, both measures improved compared with this year’s first quarter. The $3.1 billion in second-quarter revenues was a large improvement on the $2.8 billion booked in the first quarter, and profit margin increased from 1.1% to a more respectable 4.8%.

Lower potash sales volumes hurt Mosaic, suggesting that the era of sky-high profits for fertilizer makers may be on the wane. The company’s earnings tanked by 83.0% compared with last year. According to Goldman Sachs agriculture and chemicals analyst Robert A. Koort, fertilizer firms held prices too high and ended up stuck with large inventories. But, he said, “a rebound in corn followed by a price drop to a level that sufficiently drives restocking could resuscitate enthusiasm” of investors.