Business News

Rohm and Haas Company Reports Second Quarter Results

Friday 25. July 2008 - Sales up 17 percent driven by growth outside North America; Adjusted EPS higher despite rising costs and deteriorating U.S. building and construction markets

Highlights for the Quarter:

Sales of $2,567 million, up 17 percent from the prior-year period, including 7 percent growth from demand and acquisitions combined.
Adjusted earnings per share, excluding restructuring, asset impairments and the impact of the divestiture of the company’s stake in UP Chemical Company, were $0.82, up 8 percent versus the prior-year period.
Continued strong adjusted earnings growth from Electronic Technologies, Performance Materials and Salt.
Steady progress in the company’s Vision 2010 implementation for accelerating profitable growth.

Rohm and Haas Company (NYSE:ROH) today reported second quarter 2008 sales of $2,567 million, a 17 percent increase over the same period in 2007, with Electronic Materials and the chemical businesses outside North America delivering strong growth. Real growth of 7 percent, consisting of 4 percent demand and 3 percent from acquisitions, was the largest driver of sales growth in the quarter. In addition, currency and selling price accounted for 6 percent and 4 percent, respectively, of the sales increase. The company reported second quarter 2008 earnings from continuing operations of $147 million, or $0.75 per share, compared to $161 million, or $0.75 per share, for the second quarter of 2007. This quarter’s results include a $0.23 per share gain from the divestiture of the company’s stake in UP Chemical Company as well as a $0.30 per share charge related to the restructuring actions announced last month. Adjusted earnings per share, excluding restructuring, asset impairments and the impact of the divestiture of the company’s stake in UP Chemical Company, were $0.82, up 8 percent versus the prior-year period.

“We demonstrated strong sales momentum in the second quarter, particularly in Electronic Materials and the chemicals businesses outside North America,” said Raj L. Gupta, chairman and chief executive officer of Rohm and Haas Company. “We have made good progress against our Vision 2010 strategy for accelerating profitable growth through pricing actions and a realignment of our geographic footprint and support services, despite the challenge of an increasingly difficult economic and business environment.”

Gupta added, “Looking to the future, we are excited about the potential of a stronger, faster growing and more profitable company. The announcement of the definitive agreement for The Dow Chemical Company to merge with Rohm and Haas places us at the heart of change for the specialty chemicals and advanced materials industries.”

 



2nd Quarter
In millions except per-share amounts

 
2008
 
2007
 
% Change

Sales

$2,567
 
$2,190
 
17%
Earnings from continuing operations

$147

$161

(9)%
Diluted earnings per share from continuing operations

$0.75

$0.75

0%
Earnings from continuing operations excluding restructuring, asset impairments and impact of divestiture in UP Chemical

$160

$165

(3)%
Diluted earnings per share excluding restructuring, asset impairments and impact of divestiture in UP Chemical

$0.82

$0.76

8%
Weighted average common shares outstanding – diluted

196.5

216.9

(9)%






 

SECOND QUARTER 2008 FINANCIAL SUMMARY

Business and Regional Performance

Business results for Q2 2008 are presented on an adjusted basis below, where earnings for both periods exclude restructuring and asset impairment charges as well as the impact of the divestiture of the company’s stake in UP Chemical Company. A reconciliation to GAAP and adjusted earnings by segment is provided in the appendix.

Electronic Materials Group

The Electronic Materials Group comprises two reportable segments which provide materials for use in applications such as telecommunications, consumer electronics and household appliances. Sales for the Electronic Materials Group were $536 million in the second quarter of 2008, up 34 percent over the same period in 2007, reflecting the impact of acquisitions in Display Technologies as well as solid organic growth of Electronic Technologies.

Adjusted pre-tax earnings for this Group were $101 million, up 7 percent from 2007, reflecting strong profit growth for Electronic Technologies, partially offset by operating losses in Display Technologies.

Electronic Technologies

The Electronic Technologies segment is comprised of the company’s Semiconductor Technologies, Circuit Board Technologies and Packaging and Finishing Technologies business units. Sales for the segment of $460 million were up 16 percent versus the second quarter of 2007, driven by strong growth in Asia for all business units. Sales in the second quarter excluding precious metals pass-through sales were up 15 percent.
— Semiconductor Technologies sales grew 13 percent, reflecting strong demand and favorable currencies, particularly in the Asia Pacific Region.

 
— Circuit Board Technologies sales increased 20 percent as compared to the same period last year, with solid growth in the Asia Pacific Region more than offsetting declines in North America.

 
— Packaging and Finishing Technologies sales rose 20 percent versus last year, primarily driven by strong growth in precious metal sales and in process sales.

Adjusted pre-tax earnings for this segment of $107 million were up 11 percent from the second quarter of 2007, reflecting increased demand and favorable currencies, partially offset by higher metal costs and increased costs related to expansion efforts, including the new Asia Technical Center in Taiwan.

Display Technologies

In June 2007, the company acquired the assets of Eastman Kodak Company’s Light Management Films technology business, which produces advanced films that improve the brightness and efficiency of liquid crystal displays (LCD). On November 30, 2007, the company completed the formation of SKC Haas Display Films, a majority-owned joint venture with SKC, Inc., of South Korea for the development, manufacture and marketing of advanced optical and functional films used in the displays industry. On April 4, 2008, the company acquired Gracel Display, Inc., a leading developer and manufacturer of Organic Light Emitting Diode (OLED) materials. The new businesses, along with process-related materials also used in the displays industry previously included as part of the Semiconductor Technologies unit, form the Display Technologies reportable segment.

Display Technologies sales were $76 million in the quarter. The segment reported an adjusted pre-tax loss of $6 million in the quarter, compared to $11 million in the first quarter of 2008. This was in-line with expectations for improvement as the year progresses.

Specialty Materials Group

The Specialty Materials Group comprises three business units and represents the majority of the company’s chemical business, serving a broad range of end-use markets. Net sales for this Group of $1,508 million were up 15 percent, including approximately $85 million in the quarter from pricing actions as well as favorable currencies.

Adjusted pre-tax earnings for this Group were $153 million, down 14 percent from 2007, primarily resulting from high raw material, energy and freight costs, continued deterioration in the U.S. building and construction markets and moderating conditions in Western Europe, partially offset by higher pricing, strong demand from Rapidly Developing Economies and favorable currencies.

The results for Specialty Materials are reported under the three separate reportable segments as follows:

Paint and Coatings Materials

Sales for the Paint and Coatings Materials business were $659 million, an increase of 9 percent over the same period in 2007, largely driven by higher selling prices and the impact of favorable currencies. Strong demand growth in Rapidly Developing Economies coupled with progress made in implementing pricing actions offset continued moderating conditions in Western Europe and a 12 percent volume decline in the U.S. for the second quarter compared with the prior-year period.

Adjusted pre-tax earnings of $94 million in the second quarter of 2008 were down 10 percent compared to the same period last year, reflecting the impact of higher raw material, energy and freight costs, as well as lower demand in the US, partially offset by higher selling prices and demand growth in Rapidly Developing Economies.

Packaging and Building Materials

Packaging and Building Materials sales in the quarter were $515 million, up 11 percent over the same period in 2007, reflecting the impact of favorable currencies and higher pricing partially offset by lower demand. Demand remained strong in Rapidly Developing Economies, with further erosion in the U.S. and slowing conditions in Western Europe.

Adjusted pre-tax earnings of $36 million were down 28 percent versus the prior-year period, with higher raw material, energy and freight costs and decreased demand partially offset by higher selling prices and favorable currencies.

Primary Materials

Primary Materials sales were $692 million, an increase of 24 percent over the same period in 2007. Primary Materials results include sales to our internal downstream monomer-consuming businesses, along with sales to third-party customers of Monomers, Dispersants and Industrial and Household Polymers. Third-party sales increased 35 percent over the same period last year, reflecting increased demand, higher selling prices and favorable currencies. Captive volumes were down 6 percent in the quarter.

Adjusted pre-tax earnings of $23 million in the second quarter of 2008 were flat compared to the second quarter of 2007. Higher raw material, energy and freight costs and favorable currencies were offset by higher selling prices and the absence of operating issues experienced in the prior-year period.

Performance Materials Group

Sales for the Performance Materials Group were $332 million in the quarter, up 12 percent over the same period last year. The impact of favorable currencies, increased demand in Rapidly Developing Economies and higher selling prices more than offset weakness in North America.

Process Chemicals and Biocides sales were up 15 percent over the same period last year, driven by favorable currencies and strong demand in Rapidly Developing Economies.

Powder Coatings sales were up 11 percent compared to the comparable period in 2007, reflecting favorable currencies.

Adjusted pre-tax earnings for the Performance Materials Group were $34 million for the second quarter of 2008, up 36 percent versus the prior-year period. Increased demand, particularly in Process Chemicals and Biocides, higher selling prices and favorable currencies more than offset rising raw material, energy and freight costs.

Salt

Salt sales of $191 million were up 7 percent compared to the same period a year ago, driven by pricing management, improved mix and increased demand for consumer and industrial salt products.

Pre-tax earnings for the Salt business in the quarter were $6 million, up $2 million versus the same period a year ago, reflecting improved operating efficiencies, pricing and expense control efforts, offset by increases in energy, freight and other materials costs.

Regional Performance

Sales grew across all regions, particularly in Asia and Latin America. Sales in Rapidly Developing Economies were up 42 percent for the quarter, representing 28 percent of total company sales versus 23 percent of the total a year ago.

 



2nd Quarter Sales
In millions

 
2008
 
2007
 
% Change

North America Region

$1,077
 
$1,047
 
3%
Europe, Middle East and Africa Region

$716

$582

23%
Asia Pacific Region

$659

$471

40%
Latin America Region

$115

$90

28%
TOTAL

$2,567

$2,190

17%






 
Rapidly Developing Economies (RDEs)

$730

$513

42%






 

* RDEs include all countries in the company’s defined Latin America Region; Central and Eastern Europe and Turkey; and the Asia Pacific Region excluding Japan, Australia and New Zealand.

Corporate

Corporate expense of $92 million was up from $84 million in the prior-year period. The increase year-on-year was largely due to higher interest expense, partially offset by the absence of spending for the company’s European Headquarters reflected in the prior-year period.

Income Statement Highlights

Gross profit of $630 million in the quarter was 4 percent higher than the same period in 2007, reflecting higher selling prices, the favorable impact of currencies, increased demand and acquisitions, which more than offset rising raw material, energy and freight costs.

Selling and administrative (S&A) expense was $294 million, up 6 percent over the same period last year, largely attributable to the impact of currencies and acquisitions.

Research and development expense of $80 million was up 10 percent from the same period last year, primarily reflecting the impact of acquisitions.

Interest expense for the quarter was $43 million, up $20 million from the same period in 2007, primarily reflecting the impact of debt issued to fund the company’s accelerated share repurchase agreement executed in the third quarter of 2007.

Income tax expense was $55 million, reflecting an effective tax rate of 26.4 percent, as compared to income tax expense of $57 million in the prior-year period, or an effective tax rate of 25.7 percent.

STRATEGY UPDATE AND OUTLOOK

Progress Update on Vision 2010 Strategy

The company made steady progress, despite rising costs and deteriorating conditions in U.S. building and construction markets, in the company’s Vision 2010 implementation for accelerating profitable growth. Recent developments include:
 
— Company Overall

— Initiated actions to preserve Vision 2010 goals through the realignment of the company’s manufacturing footprint and support services, resulting in a $0.30 per share charge in the quarter. In 2010, the company expects to deliver pre-tax run-rate savings of approximately $110 million, with slightly less than half of the benefit realized in 2009.
— Completed the $1 billion Accelerated Share Repurchase program announced on September 10, 2007, by retiring a total of 19.3 million shares, which represents 9 percent of shares outstanding at the beginning of the program.
— Electronic Materials
— Opened a $60 million immersion lithography facility in the U.S., supporting the research and development of advanced 193 nm lithography for the semiconductor industry.
— Completed the acquisition of Gracel Display, Inc., expanding the company’s Displays portfolio into OLED materials, an important part of the long-term roadmap for the industry.
— Divested the company’s stake in UP Chemical Company, representing a gain of $0.23 per share in the quarter; the company will continue to participate in the ALD (Atomic Layer Deposition) market independently.
— Specialty Materials
— Applied an indexed raw material and energy surcharge for Specialty Materials which is adjusted monthly to changes in key raw materials and energy costs.
— Continued to expand its manufacturing network in Rapidly Developing Economies, beginning operations at a new emulsions plant in Queretaro, Mexico and announcing plans to build an acrylic emulsions facility in Vietnam in 2009.
— Formed an acrylic acid joint venture with Tasnee Sahara Olefin Company in Saudi Arabia, securing a low-cost, reliable supply of monomers for Asia, and balancing the company’s global monomers footprint.
— Completed the acquisition of the FINNDISP polymer dispersions division of OY Forcit AB, strengthening the company’s position in Rapidly Developing Economies, particularly Russia and neighboring countries, and broadening its technology offering, primarily in high-performing products for low-temperature climates.
— Performance Materials
— Received EPA approval in the U.S. for Invinsa technology, with initial registrations granted in the U.S., Argentina and Chile.
 

Gupta added, “The external environment remains very uncertain and challenging. We are successfully navigating these challenges with proactive actions to deliver acceptable near-term results and are making necessary investments to stay on track with our Vision 2010 strategic plan.”