25 September 2008 00:00 [Source: ICB]
Using company year-on-year and absolute financial performance measures and ratios, ICIS is pleased to announce that US fertilizer producer Mosaic has taken top spot
DURING 2007, it did not always feel like another strong year for chemicals and sense often belied reality.
The sector's largest companies produced strong, if not stellar, results, based on expanding sales. The industry was certainly edging off the plateau of earnings on which it had basked for close to three years.
And it was the sharp rise in commodity prices, particularly the price of oil, that most aptly characterized the challenges presented by the year, as well as the first half of 2008.
But against an increasingly difficult backdrop, sector companies continued to win out. Demand growth dimmed in important end-use markets in the US, most notably housing construction and automotive, but companies were armored against the downturn by still healthy business in Asia, Latin America, and Central and Eastern Europe.
Questions were often asked of the trend for demand but it held up remarkably well.
Sector companies also did well in passing on higher raw material, energy and, latterly, transport and other costs to customers in higher prices. The price/volume game was hard fought - and in many cases hard won.
The ICIS Top 100 chemical company review - published at the beginning of this month - charted the financial performance of the leading 100 companies in the sector by sales.
In this issue of ICIS Chemical Business, we look at the most recent full-year financial performance in much more detail and tease out the Top 10 financial performers in the sector.
Based on key measures and ratios, this analysis has pinpointed a satisfyingly diverse range of high-performing companies from the most recent financial year, and has pinpointed a clear performance leader.
AND THE WINNER IS ...
US-based fertilizer and crop protection products maker Mosaic is the ICIS Company of the Year.
This company, more than any other, has capitalized on the fast run-up in commodity pries in 2007-2008, and its financials have strengthened markedly.
The ICIS award goes to a worthy winner that has booked a tremendous increase in net profits for its most recent financial year, which ended on May 31, 2008, built on a spectacular increase in sales.
The ICIS analysis scrutinizes financial measures and ratios that encompass year-on-year financial performance, as well as absolute financial strength. We look at measures based on sales, profits and efficiencies.
Mosaic scored highly in the year-on-year and the performance analysis. Its sales increase, by 70% to $9.8bn (€6.9bn) was built to a great extent on significantly higher fertilizer prices but also on much stronger demand.
The company is the leading global producer of diammonium phosphate (DAP). The ex Tampa price, charted by global market intelligence service ICIS pricing, climbed from around $200/tonne to $1,200/tonne in a 12-month period in 2007/08. And Mosaic has been particularly adept at turning high product prices to its added advantage.
The company's gross margin for the year shot up to 32.2% from 16%, and net profits increased to $2.08bn from $419.7m in 2007/08. Mosaic's earnings per share (EPS) skyrocketed to $4.67 from $0.95.
Given the rate of cash flow generation ($2.5bn), it is hardly surprising that the company paid down $1bn of long-term debt in the financial year. Its debt rating was upgraded in June 2008.
The company at the end of July this year talked of the "extraordinary" demand outlook for both phosphate and potash. Farm economics were profitable, it said, despite higher input costs.
Crop nutrients had never looked so good, Mosaic said. Global demand for crop nutrients is growing at double the rate of the past 10 years, according to forecasts released in May by the International Fertilizer Industry Association."We delivered outstanding financial results by every measure and in every segment during fiscal 2008, and intend to build upon these results in fiscal 2009," Mosaic's president and CEO, Jim Prokopanko, said on release of the latest full-year financial results. "The fundamental driver of our business - the need for more food - continues unabated. Through balanced application of crop nutrients, farmers increase yields and help produce more food for people around the world."
Commodity fertilizer prices may be coming off their recent peak, but the agrochemical players look set for another strong year in calendar 2008.
Mosaic combines the businesses of IMC Global and Cargill Crop Nutrition. It operates 16 phosphate rock mines and plants, five potash production facilities and one nitrogen production plant, and moves the products down the value chain through a global distribution system.
OTHER TOP PERFORMERS
The ICIS analysis is based on the most recent full-year financial data for more than 100 chemical producers.
And among this group of companies are the industry's major focused and diversified players in commodities, petrochemicals, plastics, specialties and agrochemicals.
The top 10 performers in the sector are: Mosaic, Saudi Arabia's SABIC, Canadian firms PotashCorp and Agrium, US-based ExxonMobil Chemicals, Taiwan's Formosa Chemicals and Fibre Corp., Switzerland's Syngenta, Brazil's Braskem, South Korea's LG Chem and France's Arkema.
The main financials of this elite group can be found in the ICIS Top 100 analysis table published in the September 15 issue. The ICIS performance analysis is based on measures and ratios and an appraisal of key financial operating performance strength.
The Top 10 performers, not surprisingly, include a sprinkling of the world's larger fertilizer and agrochemical makers. The fertilizer producers benefited greatly from the sharp run-up in commodity fertilizer prices in 2007 and in the first half of 2008. The increase in sales for Mosaic and other major sector players bears witness to that.
The leading crop protection chemical producers also did well over the course of the year as planted areas increased on the back of higher food prices. Farmers needed more inputs as they produced more, higher-priced agricultural commodities both for human consumption and for the fast-growing biofuels market.
PETCHEMS ALSO PERFORM WELL
The ICIS Top 10 performers in 2007 includes two petrochemical giants, SABIC and ExxonMobil Chemicals, the latter by far the most profitable oil major offshoot in chemicals.
SABIC's sales grew by 46% in 2007 as it absorbed the US-based GE plastics business. Its significant operating margin of 33% was, however, down by 9%. ExxonMobil produced another strong set of financials in chemicals in 2007, although its business performance was coming off a plateau of strong earnings and earnings growth. Operating profits were down by 3.3% and its operating margin down by 11.4%.
Chemical companies were still capturing growth in 2007 and some were most effective at turning that growth into stronger profits and employee returns. Formosa Chemicals and Fibre Corp. demonstrated its ability to pass on higher raw material and energy costs in higher prices and benefited greatly form the rapidly expanding Asia petrochemical markets.
Braskem may be a relatively new name in the industry, but in six years, the company has become a global player. The company grew strongly in 2007. It has close to a 50% share in Brazil's polyvinyl chloride (PVC), polyethylene (PE) and polypropylene (PP) markets.
LG Chem, Korea's largest chemical producer, also benefited from the surge in product prices driven by the high cost of oil and naphtha petrochemical feedstocks. The company merged with affiliate LG Petrochemical in 2007 and is expected by analysts to continue to grow strongly in 2008 and benefit from merger-driven cost savings.
Additional ethylene capacity in 2007 also helped give the firm a boost.
Away from petrochemicals, Syngenta is clearly one of the leading chemical players to watch.
Its strong research and development (R&D) focus helps drive this agrochemicals major. Syngenta built on a significant 15% growth in sales to produce a net profit increase of 27% in 2007. Its EPS was up by 31%.
Syngenta CEO Mike Mack called 2007 "an outstanding year." Syngenta's global strength and broad product offering, a result of sustained investments in technology, Mack said, helped the company respond rapidly and effectively to the buoyant market environment.
Also in the Top 10 is Arkema, a medium-sized European chemical player that is doing a great deal right. Management is working to push efficiencies and create a more robust production profile.
Arkema's net income in 2007 was 2.7 times that posted in 2006. An increase in earnings before interest, tax, depreciation and amortization (EBITDA) of 26% was built on virtually flat year-on-year sales.
The Paris-headquartered group was let down in the analysis only by its still relatively low profit margins set against the 2007 industry average and employee ratios.
The fertilizer and agrochemical companies not surprisingly perhaps dominate the analysis, which is based on a comparison of five year-on-year performance ratios and four absolute measures of financial strength.
Linde did not appear higher in the analysis largely because of its relatively low sales and profit-to-employee ratios, even though it made progress over the year. Air Products also made progress in 2007.
The ICIS Top 100 global chemical companies on average performed well in 2007 and fiscal 2008, producing 11% year-on-year sales growth and a 12.2% expansion in operating earnings - earnings before interest and tax.
Sector companies continued to benefit from relatively strong demand growth across many businesses and geographical regions. From the middle of 2007, firms were, however, under pressure from the growing global credit crisis, low US housing construction demand and the weak US auto industry. The rapidly rising cost of oil also began to take its toll.
TOP FIRMS ALL OVER THE MAP
But the leading chemical companies continued to deliver stronger net profits, with some significant turnarounds. The most significant increases were shown by German specialty firm Cognis, Agrium, Mosaic, Braskem, W.R. Grace and specialty firm Lubrizol, both US, UK giant INEOS, Germany's Bayer, Arkema, LG Chem and France's Rhodia.
SABIC and Mosaic each delivered a net return of more than 21% and 18 companies produced a net return of more than 10% in 2007 or fiscal 2008. Returns for Braskem, W.R. Grace, Mosaic, INEOS, Arkema, Bayer, Lubrizol, Rhodia, LG Chem and Syngenta were lifted by more than 50% and markedly by the first few companies in the list.
The ICIS Top 100 table shows the leading 100 companies in the sector by sales and some of their financials. After Mosaic, the companies that produced the strongest increase in sales were ChemChina (China National Chemical) and Norway's nitrogen giant, Yara.
SABIC's sales growth in 2007 was a significant 46%, following its acquisition of GE Plastics. Switzerland's Givaudan's significant sales gain follows its acquisition of UK flavors and fragrances maker Quest.
Operating profits increased by more than 60% for US-based Chemtura, Agrium, Mosaic, LG Chem, Solutia, of the US, Belgium's Tessenderlo, Arkema, Braskem, Syngenta and China's Shanghai Petrochemical.
A clear indicator of the health of the chemicals business in 2007 is the operating profits rise of more than 50% for 14 companies from the Top 100 analysis. The average increase in operating profits across the sector was 12.2%.
The strongest increases in operating margins (operating profits as a percentage of sales) for the year were achieved by Chemtura, Agrium, Mosaic, Arkema, Tessenderlo, LG Chem, Braskem, Solutia, Germany's Evonik Industries, Syngenta and Japan's Asahi Glass - each of more than 50%.
SABIC had by far the strongest operating margin in the industry in 2007, with Mosaic, not far behind for its performance in the financial year to the end of May 2008.
Margins were strong for US-based specialties maker Rohm and Haas, and for the industrial gas producers Linde and Praxair.
The ICIS analysis also considers closely companies' employee ratios, but taking into account the fact that some operations, most notably those owned by the oil and energy giants, report relatively few employees for the chemicals business.
The most significant gains in sales per employee in 2007 were shown by Mosaic, ChemChina, Formosa Chemicals & Fibre Corp, PotashCorp, South Africa's Sasol, Yara, Chemtura, Japan-based Showa Denko, and PPG Industries and Westlake Chemical, both of the US.
WHERE EMPLOYEES SHINE
The companies with the strongest growth in operating profits per employee were Chemtura, Agrium, Mosaic, Arkema, Tessenderlo, LG Chem, Braskem, Solutia, Evonik and Syngenta.
ICIS collects far more data than those used to analyze performance for the ICIS Company of the Year Award. Given strong EBITDA and operating profits in 2007, it is not surprising to see that companies generally spent more on capital projects and assets and, to a lesser degree, on R&D in 2007.
Table 3 shows the companies that reported the most significant increases in capital spending in 2007 and fiscal 2008. Among this group are some of the biggest spenders in the industry.
Germany's BASF invested heavily in 2007, recording capital spending, including acquisitions, for the year of $6.5bn. Iran's National Petroleum Co. reported the investment of a significant $2.3bn. China's Sinopec invested $2.2bn in chemicals, and US-based Dow Chemical $2.1bn, Japan's Mitsubishi Chemical $1.7bn and US-based DuPont $1.6bn.
The most significant increases in R&D spending in 2007 were shown by Germany's Merck KGaA, US-based Albemarle, Finland's Kemira, US-based Huntsman and Japan's Mitsubishi Chemical. The biggest R&D spenders in the sector were BASF, DuPont, Dow Chemical, Bayer (group including pharmaceuticals) and Mitsubishi Chemical.
The R&D to sales ratios vary widely across the sector, with the commodity players tending to devote less to new product or process research. The companies increasing R&D to sales the most in 2007 are shown in table 4. But the list does not include some of the smaller companies in the sector, such as Switzerland's Lonza, and US-based Albemarle, Cabot and PolyOne, which also pushed this ratio higher during the year.
1. STRONGEST SALES GROWTH IN 2007
|Company||Sales 2007 ($m)||Change (%)|
|Formosa Chemicals & Fibre Corp.||7,398||32.5|
|Israel Chemical Ltd.||4,100||25.8|
SOURCES: Company-supplied data; compiled by ICIS
2. INDUSTRY OPERATING MARGIN LEADERS
|Company||Operating margin 2007|
|Rohm and Haas||27.7|
SOURCES: Company-supplied data; compiled by ICIS
3. THE TOP 10 GROWTH IN CAPITAL SPENDING
|Company||Capital spending 2007 ($m)||Change (%)|
|ExxonMobil (chemicals only)||1,782||135.7|
|Petronas (petchems segment only)||246||95.2|
|Chevron Phillips Chemical Company||314||64.4|
SOURCES: Company-supplied data; compiled by ICIS
4. CHARTING RESEARCH AND DEVELOPMENT/SALES GROWTH
|Company||R&D/sales 2007||R&D/sales 2006||Change (%)|
SOURCES: Company-supplied data; compiled by ICIS
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