INSIGHT: Pulling back to earlier profitability levels

06 August 2010 17:08  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS)--Many chemical companies are pushing back towards the levels of operation they achieved towards the peak of the cycle before the credit crisis and global economic crisis. Demand is such that they are running flat in some businesses, but volume output has generally still some way to go to make up for the steep drop to the slump.

Clearly the stability, or rather the sustainability, of demand is still an issue. Dealt a heavy blow by the recession and, in some instances, the cessation of activities around the turn of 2008-2009, matching supply to market growth remains an issue.

But the second-quarter financial reporting season has shown just how far most have come from the pits of the second quarter of 2009.

Those three months were difficult, to say the least, for all producers. Credit was tight and markets severely depressed. Chemicals output was constrained. But there were signs of growth and a return of some confidence that would strengthen as the year progressed.

This year began hesitantly but by March/April, production was being ramped up to meet rising volume demand. Relatively high prices were also underpinning sales and returns.

What cannot be forgotten, however, are the costs that have been taken out of businesses and the control put on working capital. Companies continue to run lean. A just-in-time approach  as far as is possible when operating continuous processes that have to be optimised for feedstock and energy consumption, product output and emissions to the environment  persists.

Those factors have helped lift underlying margins  the ratio of earnings before interest, tax, depreciation and amortisation (EBITDA) to sales and operating profits to sales  by a considerable degree. But as the improvements across a selection of the larger firms in the industry show, there is still a way to go.

Most firms have bounced back from the difficult period in 2009 and have been encouraged by the gains made in recent months. Volume demand has been strong in emerging economies but has also recovered in North America and, to a lesser extent, in Europe.

The margin gains from individual firms’ operating segments has been impressive and for some, more so than for others. The table below shows just how successful companies have been largely at cutting costs and integrating recent acquisitions.

BASF stands out as a strong performer in this regard. The recovery in margins at DuPont is impressive.

Dow suffered in the second quarter form outages at important manufacturing facilities, one in particular which caused problems in its performance coatings businesses.

The company was heavily penalised by the financial markets, however, when its earnings missed estimates by just two cents a share. Others, such as DuPont and Eastman Chemical, had beaten the consensus by a considerable degree.

Chemical companies will continue to be judged not simply on the volumes of sales and the prices they can squeeze out of product markets, but on the way that operating efficiencies and the integration of acquired businesses are implemented.

The return to a much healthier level of profitability has been impressive, but any analysis of the most recent flurry of results is tinged with concern over just where these businesses are headed. Managing an increasingly profitable path through this period is challenging.

EBITDA margins

 

Q2 2010

Q2 2009

Q2 2008

BASF

17.7

12.6

18.6

Dow Chemical

14.3

5.3

21.2

DuPont

22.7

17.2

21.2

AkzoNobel

15.7

14.7

14.4

PPG1

14.7

10.8

11.7

Sherwin Williams1

12.1

11.9

11.5

DSM

14.3

8.9

15.6

Huntsman2

11.0

5.0

7.2

Eastman Chemical1

14.9

10.5

9.4

Footnote: 1 - Operating profit margins; 2 - adjusted EBITDA margin

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For more on the companies in the table, visit ICIS company intelligence
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By: Nigel Davis
+44 20 8652 3214



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