27 October 2003 00:00 [Source: ICB Americas]Third quarter results from major chemical companies are coming in mixed as firms struggled to overcome volatile raw material and energy costs, as well as lackluster economies in the US and Europe. Dow Chemical Company blew away Wall Street estimates on strong agrochemical earnings, while Methanex Corp. saw profits fall 45 percent. Nova Chemicals Corp. and Lyondell Chemical Company posted their fourth and fifth consecutive quarters of losses, respectively.
Dow Chemical surged ahead of Street expectations, posting third quarter earnings per share of 36 cents versus consensus estimates of 25 cents. Net income jumped 124 percent to $332 million on 13 percent higher sales of $7.98 billion as strong earnings in agricultural sciences and the performance plastics and chemicals segments overcame a 20 percent jump in feedstock costs versus the year-ago period. Shares of Dow rose $1.37 to $36.22 on the news.
"Dow's earnings for this and the previous quarter have shown that the restructuring efforts the company has been implementing for the past several years is finally bearing fruit," says Prudential Financial analyst Andrew Rosenfeld. "On the back of an additional $2.4 billion in higher raw material and energy prices year-to-date, Dow has substantially grown earnings in light of only 3 percent in volume growth."
"Volume growth was broad based across geographies and businesses," says chief financial officer J. Pedro Reinhard, "and when coupled with price improvements and a continued focus on significant cost reductions, the result was markedly better earnings and cash flow."
Volumes rose 4 percent and prices were up an impressive 8 percent. Prices were up in all segments and geographic regions, with the strongest gains in Asia Pacific and Latin America. Volumes were led by double-digit growth in Asia.
The agricultural sciences segment generated an operating profit of $27 million, versus a loss of $25 million in the year-ago period. New registrations in its spinosad insect control products in Asia and Europe helped results, as well as strong volumes in what is seasonally a slow period for ag chemicals.
Other segments showing profit growth included performance plastics (+42 percent), performance chemicals (+35 percent) and chemicals (+116 percent). Plastics earnings fell 9 percent but polyethylene volumes were particularly strong in Europe and Latin America.
Looking ahead, Dow sees chemicals demand increasing with improving economic conditions. However, high and volatile feedstock and energy costs as well as pricing pressure are clouding the earnings picture.
"With possible margin compression and a normal seasonal slowdown, it will be a real challenge for us to match third quarter results in the fourth quarter," says Mr. Reinhard. "However, we are confident that earnings will be substantially better than the fourth quarter a year ago as we continue to focus on disciplined cost control measures." Before the earnings release, analysts expected fourth quarter earnings of 25 cents per share-much lower than the 36 cents earned in the third quarter.
Lyondell Loss Smaller Than Expected
Lyondell Chemical Company posted an underlying third quarter loss of $39 million, versus a loss of $68 million in the second quarter and a $2 million loss in the year-ago period. The results marked Lyondell's fifth consecutive quarter operating in the red. The loss per share of 24 cents came in better than Street estimates of a loss of 33 cents. Proportionate sales rose to $2.72 billion-6 percent higher than in the second quarter and a 24 percent improvement over last year.
"Results during the quarter were generally as anticipated, as volumes returned to more typical levels for our core ethylene and propylene oxide based products," says president and CEO Dan F. Smith. "Early in the quarter we experienced some product price decay, but this reversed late in the quarter when pricing of several key products such as polyethylene began to increase. Methyl tertiary-butyl ether [MTBE] margins improved throughout the quarter."
The intermediate chemicals and derivatives segment generated $84 million in earnings before interest, taxes, depreciation and amortization (EBITDA) versus $48 million in the second quarter and $106 million in the year-ago period. Equistar Chemicals LP, in which Lyondell has a 70.5 percent stake, recorded $87 million in EBITDA versus $80 million in the second quarter and $147 million in the year-ago period.
Lyondell says the near-term outlook is clouded by volatile raw material and energy costs, as well as seasonal weakness in MTBE, likely to be compounded by phase-outs in California, New York and Connecticut. However, the company expects the start-up of its propylene oxide/styrene monomer plant in Rotterdam, the Nether-lands, in the fourth quarter.
Nova Misses Big
Nova Chemicals Corp. missed third quarter earnings estimates by a mile, posting a loss of 75 cents per share, versus the Street consensus of a 45 cent loss. The company lost $65 million in the quarter, versus a loss of $42 million in the second quarter of 2003 and a loss of $12 million in the year-ago period. The results mark the fourth straight quarterly loss for Nova. Sales were up 20 percent from the year-ago period to $967 million.
Compared to the second quarter, profits were reduced $9 million from the effects of a power disruption that shut down four sites in Ontario, Canada, for about 10 days in August, and $10 million from expenses related to the closure of a polyethylene line in Ontario (Story on p. 2). The company also missed profits from its former stake in Methanex Corp., which generated $12 million in earnings in the second quarter. Excluding these items, Nova's operating performance actually improved over the second quarter, notes the company.
"We saw clear month-over-month improvement in demand and margins through the period, which began with a very weak July," says president and CEO Jeff Lipton.
The olefins/polyolefins business posted a net loss of $8 million in the third quarter, versus a loss of $5 million in the second quarter and a profit of $8 million last year. Ethylene and polyethylene volumes fell, partly because of the power outrage.
The styrenics business lost $40 million in the third quarter, a slight improvement from the $42 million loss in the second quarter but much worse than the $19 million loss a year ago. Average prices fell from the second quarter but were largely offset by lower feedstock costs.
Methanex Net Falls 45 Percent
Methanex's underlying third quarter earnings fell 45 percent from the year-ago period to $32.1 million despite 13 percent higher sales of $335 million. Earnings were also down 36 percent from the second quarter. Earnings per share of 27 cents came in as expected. Unplanned shutdowns at its Chile and Trinidad facilities, as well as a planned turnaround at its Kitimat facility in British Columbia, Canada, reduced production by 190,000 tons, or 14 percent.
In the quarter, Methanex generated $73.6 million in cash from operating activities versus $69.7 million in the year-ago period. "We have produced another quarter of strong cash generation as we continue to operate in an environment of strong methanol prices," says CEO Pierre Choquette. "With limited new capacity expected to impact the market in the near term, we expect that any significant improvements in global economic activity or industry supply disruptions could lead to tighter market conditions."
Methanex continues to weigh alternatives to support its customer base in Asia after deciding not to proceed with a 1.3 million ton-per-year methanol facility in Western Australia in late September. Alternatives include building additional terminals in Asia to handle more volumes from Methanex facilities in Chile and Kitimat. The company is also considering the acquisition of equity stakes in plants and buying existing facilities to supply its Asian customers.
Over the next 16 months, Methanex says it will bring on production from its 63.1 percent-owned, 1.7 million ton-per-year Atlas plant in Trinidad, as well as its 840,000 ton Chile IV project. The company has decided against the restart of its 470,000 ton Medicine Hat, Alberta, Canada, facility after delaying the restart for months.
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