Weak demand, weak earnings, and a weak outlook were the resounding themes across the chemical companies’ earnings reports in the third quarter, 2023. Inventory de-stocking and lower prices have continued to impact the industry, leading to challenging market conditions.
In this episode of The Chemical Show, host Victoria Meyer reflects on the third quarter 2023 earnings reports in the chemical industry. She discusses the challenges faced by companies, such as weak demand, lower earnings, and inventory de-stocking, as well as the actions they are taking to respond to the market conditions.
Killer Quote: “2023 has been a challenging year, much more so than we expected at the beginning of the year.” -Victoria Meyer
Join us to learn more about the following this week:
- Breaking down 3Q23 Earnings Reports
- How earnings reports are interpreted
- Keyword of third quarter earnings reports is “Weak”: weak demand, weak earnings, and weak outlook
- Inventory and forecasting continue to be a challenge
- Compression in buy-sell cycle
- Strategies companies are using to manage their balance sheets
- Focus on cash generation through commercial discipline
- Expectations for Q423
- Lessons learned from industry leaders
Victoria highlights the importance of commercial discipline, continued investment in strategic projects, and the recognition and optimization of high-value products. She also touches on the need for better forecasting and communication between suppliers and customers.
Additional Links:
Episode 118: Unpacking 2Q23 Chemical Earnings: Sluggish Economies, Inventory Destocking, and Future Outlooks
Ep 120: Commercial Discipline: Unlocking Business Resilience in Challenging Times
This episode is sponsored by Clariant. Are you grappling with the lightning pace of regulatory and compliance changes in the printing inks industry? Do you want to know more about PFAS, supply chain transparency and extended producer responsibility? Check out Episode 137 of The Chemical Show to learn about PTFE-free solutions with Clariant and NAPIM.
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Listen to Victoria Break Down the 3rd Quarter 2023 Earnings Reports Here:
Cash Management: Insights from 3rd Quarter 2023 Chemical Industry Earnings Reports
Hi, this is Victoria Meyer. Welcome back to The Chemical Show. Today, I am sharing insights and reflections from third quarter 2023 earnings reports. There is no doubt that 2023 has been a challenging year, much more so than we expected at the beginning of the year. Things like inventory, de-stocking, lower prices and earnings, and really an overall challenging market influenced by interest rates, energy, and a number of things. What I did for this episode is, I’ve looked at reports from both publicly held companies and I’m also bringing in insights from a variety of private companies whose leaders I’ve spoken with recently.
I’m looking at three things. Number one, how did they perform? Number two, what did these companies say about their performance? Which is actually really interesting. You learn a lot about a company’s mindset and culture when you look at what they’re saying about their performance. Then three, the actions that they are taking in response to the markets and the challenges that they’ve had this year and what we can learn from them, which you can learn from and apply to your business.
You’ll recall that mid year, with the second quarter’s earnings reports, many companies recast their expectations for 2023 overall, and started to forecast and give indications of much lower returns than they originally projected for the years. There’s a couple of reasons behind this, and when you think about where companies were a year ago when they were setting these budgets and these targets, we were coming off of two strong years. From the second half of 2020 into the second half of 2022. That’s when we really started to see the decline in the third and fourth quarter of 2022. Many companies expected an uptick in 2023 and that this was going to be a temporary reset in the second half of 2022. The reality is, as we’ve all discovered, that is not the case. So many companies have adjusted their full year outlook down.
They’re taking very tactical actions and decisions about how they’re running their business in order to maximize profits and return cash. What I think is interesting is that even with those reforecasts, it still did not prevent several companies from missing their third quarter earnings reports. I’d love to be a fly on the wall as they talk about this with their board and their shareholders about why those misses happened.
You’ll recall that I did a similar episode last quarter. So when I reflected on the second quarter 2023 earnings, my word for those earnings reports and my general observation was challenging. That was the resounding theme that was coming through in the second quarter earnings reports. If you want to hear more about 2Q23, check out Episode 118 of The Chemical Show. You’ll listen to what I had to say at that point about what was going on mid year with chemical companies.
If I had to sum up 3Q23 in a word, that word would be weak. Weak demand, weak earnings, and a weak outlook. That was a recurring theme across companies when I looked at earnings reports, why did we move from challenging to weak? I actually think this is a bit of an acceptance of where the year is. Not that companies aren’t doing their best to exercise commercial discipline and commercial excellence. But we’re accepting and we’re recognizing that it’s weak. So if I take the analogy of a fighter, you start out strong and feisty. I think we started out the year strong, feisty, and hopeful. Mid-year we recognize this challenge, and now we’re feeling that it’s weak and really just looking for survival and wondering when this year will be over.
Another word that I’ve used recently to describe 3Q23 is tepid. It actually showed up in an earnings report too. You’re going to hear about that more later. I saw a video broadcast, which is available on YouTube and also on the particular company’s website, that I described to several people I know as, really tepid and just weak. Word of the third quarter earnings reports is weak, that’s the one thing to remember about the highlights and lowlights as we look at the third quarter 2023 earnings reports.
Looking at The Reports
Number one, the headline from Lanxess maybe says it all. Persistently weak demand impacts the third quarter, and there’s a number of reasons for that. Inventory de-stocking continues, I think we expected that by this point in the year the destocking would be done. That’s clearly not happening or some people have projected now that we’re at the end and that we’re at a flat point. I don’t know. We thought that at the end of the second quarter as well. So stay tuned.
I think at some point the pantries are depleted and people are going to have to start buying again. Companies that have more diversified business and markets saw more balance. So we’ve actually seen really mixed results when you look across the industry. Some of this is dependent on the focused markets and regions that companies are playing in and selling into. For instance, Lyondell Bissell openly recognized that the results were boosted by an exceptional quarter for Oxyfuel’s margins, which helped their intermediates business. At the same time, polymers not so much.
In fact, here comes the word. They describe this tepid polymer demand, which I think most people in the polymers markets would agree with that. Innospecs talks about having a balanced portfolio delivering strong improvement. Again, recognizing that the benefit of playing in with different products in different markets has provided balance. Then Bruntag, to bring a distributors point of view into it, had really great and strong cash generation. We’re going to talk more about cash later based on their diverse portfolio and recognize that there was a mixed performance picture across divisions and regions.
The key to this and the key to creating a more balanced quarter and balanced results is, of course, balance and diversification. We’ve seen that and that’s coming through loud and clear when you look at companies earning reports and what they’re saying. The other big thing that came through loud and clear in third quarter earnings reports is a real focus on cash management and cost control. We talked about this a little bit in the second quarter reports. This should be of no surprise. When markets are tough, you start preserving cash. In fact, one of the things people talk about is disciplined capital management and a framework to manage that.
Eastman, interestingly, talked about decisive actions to reduce inventory. That’s one of the things that they credit their reasonably okay financials for the third quarter on. Now, again, back to this whole inventory story, good news and bad news, if you’re relying on companies to buy your product you’re hoping that their inventories are flattened. If you’re managing your cash outflow, aggressive actions to reduce inventory, which has the benefit of reducing working capital and just having less money tied up is a good thing. That all ties around to commercial discipline and commercial discipline is really the key for 2023, for the markets that we’re in today and going into 2024 as well.
The fourth thing that comes through is really inventory and forecasting challenges. Continued de-stocking, again, I referenced this a little bit earlier. Some companies are projecting that we’re at the end of this de-stocking period. Others have basically acknowledged that they’re just not sure. The de-stocking has taken place, they are hopeful that we’re at a flat point and coming back up, and that we’re at peak de-stocking.
What I think is going to be interesting, is as we go into Q4 you and I both know many companies are really managing their balance sheet tightly as it gets to the year end. So I think we’re going to continue to see low inventories and companies either de-stocking or frankly, just not buying. That’s the other piece that we’re hearing, forecasting. Both public and private companies have lamented the lack of forecasting or poor forecasting and what some would say is less forward planning from their customers. The flip side of this is what we’re also hearing and I’ve heard from a number of companies, that companies are waiting longer to take purchase decisions.
So on the one hand, it may seem like poor forecasting. It is because, as a seller, you would love to have a great forecast from your customers so that you can manage your production, manage your inventories, and understand expectations. On the seller side and on the customer side, you’re caught in that pinch. So waiting as long as you can to make that purchase decision until you know it’s backed by a sale someplace else has been critical. What we’re seeing is really a compression of the buy-sell cycle. I think that’s one of the things I’ve seen consistently across businesses and markets is a compression of that buy-sell cycle. Frankly, because nobody wants to be sitting on inventory that they’re not certain about where it’s going and how it’s moving. Being opportunistic from both a buyer and seller perspective has also played a key role in the third quarter, probably leading up to it through this whole year.
So from Grace Matthews Fall Outlook, and I will link their assessment into the show notes. They provide a great overview and obviously Grace Matthews is a little bit more focused on M&A, but they do look at the overall markets and what’s going on. They actually talked about companies taking the opportunity to enter RFQs and to take bids on products and on purchases. Using this market dislocation if you will, to be a bit more opportunistic and basically resetting their purchasing decisions. I’ve heard about that from elsewhere, and in fact, we talked about this a little bit at The Chemical Summit and about some of the challenges that brings to bear benefits on the buy side, sometimes a challenge on the sell side.
The other thing when I look at being opportunistic and this comes through in a bit of a subtle way, but it is a statement that I’ve read in a number of earnings reports, that several companies are citing projected benefits from new contracts and customers. So taking advantage of the market conditions and going places where they haven’t gone before. Bringing new contracts and new customers into place where they expect to realize benefits maybe in the 4th quarter, or more likely 2024.
The other thing that we’re seeing and this is coming through in a number of places is asset rationalization and restructuring. So many companies in their earnings reports reflected on permanent shutdowns of suboptimal or less strategic manufacturing sites. This came through with Celanese, Engevity, Chemours, and others. My friend, John Richardson at ICIS, has been talking about this and the likely need for capacity rationalization in certain markets. Really focused in on polymers in his case, due to capacity overbill.
We’re seeing this recognition and there’s a lot of sassy names for various transformation and restructuring programs that people are putting in place. They’re claiming big earnings, 100 million here, 200 million there. Maybe your company doesn’t have that much to give and so it’s going to be a different number. But we’re seeing the middle of a number of transformation and restructuring programs taking place. With some of those same companies that I mentioned already that are shutting down assets, but others as well.
Quiet quitting seemed to be the first thing we talked about a couple of years ago. Now we’re into maybe quiet firing. There has definitely been some so called retirement programs packaging people out to reduce workforce and ultimately reduce cash flow and overall fixed costs. So we are in maybe early to mid days of this, I think we’re going to continue to see more particularly as we get to year end with real expectations that these really manifest fully in 2024.
At the Chemical Summit, which occurred just a few weeks ago, we polled attendees about the one thing they wish their customer would do differently in supporting and serving their suppliers. I’ve already hit on one of these things. First and foremost, better forecasting. So this semi-opportunistic lack of forecasting which has taken the place of this compressed by sell-cycle. What do suppliers want? Suppliers want better forecasting, of course. I gotta be honest, for the entirety of my career the number one thing I hear all the time is, “We wish our customers would forecast better. We wish we would have better forecasting.” So this is an ongoing opportunity and challenge. I do think it’s possible that AI, machine learning and some of the digitization tools that we put in place will improve this if we allow them to. So that’s an interesting one.
Number two, communication and transparency. Suppliers are looking for better communication from their customers. We often talk about it the other way. So customers highly value communication from their suppliers. Hey guys, suppliers also highly value communication and transparency from their customers. To me, this is a really critical aspect of teamwork, partnership, and collaboration.
Then the third piece was no e auctions. So when I saw this, I actually left them like, are people still doing this? I thought this was done and dead, yet now it’s alive and well. The challenge with this is, it is really hard to create true value, true partnership, and true collaboration when customers are boiling it down to a very transactional decision. Now, in the backdrop of what we’re looking at here in 2023, where companies are focused in on cost management, commercial discipline, commercial excellence, e auctions, RFQs, being very tight and rigorous makes sense. From just a sheer cash perspective, it’s got to be balanced though. It’s got to be balanced so that you’re not missing the rest of the value equation as the markets develop today and tomorrow. I’m actually including a graphic about those things that suppliers wish their customers would do differently here.
What Can We Learn?
Looking ahead to quarter four, what is the expectation when you look at the statements, the earnings reports, and the other things that companies are talking about? Number one, normalizing. I think there is a belief that we are flattening the curve, that the earnings deceleration is slowing, that the inventory de-stocking is slowing and maybe is gone. There is a belief that peak de-stocking has occurred already. And then I think there’s this aspect of just wanting to get through the year.
So flipping over to, what can we learn from companies approaches to the challenges of 2023. Number one, commercial discipline, so an aggressive cash focus. It’s interesting. Some companies are really using those words. Aggressive cash focus, and management of the details. It’s almost this aspect of, no detail is too small. If you want to hear more about commercial discipline, I actually recorded an episode on this after second quarter cause we were starting to hear from companies then as well. It’s Episode 120: The Importance of Commercial Discipline in Unlocking Resilience in Challenging Times. We’re still in challenging times. Go take a listen to that episode.
The second piece is continued investment in strategic projects. So I referenced earlier a comment about disciplined capital management, which also implies that there is continued investment in these strategic projects. What falls into the strategic project category? IT projects, digitization, in some cases it’s new builds and continued investment in assets. We’re certainly seeing that from a number of companies that are doing that.
Then the third one is really innovation. Innovation in business models, and innovation in products. When we look at where we are in a broader context, the chemical industry is continuing on a sustainability path and we’re not going to get to peak sustainability without innovation. So we’re still seeing tremendous investment in that area.
The fourth thing that we can learn from companies approaches to the challenges of 2023 is recognizing value and optimizing high value products. So I talked about this a little bit in my second quarter summary. This is really about figuring out where the greatest value and use is, and making sure that you are optimizing sales of those products and figuring out what customers really value. Everybody is obviously tightening up and being more disciplined as we’ve already talked about. So figuring out where you create the most value allows you to maximize cash and maximize your earnings.
That’s it for today’s episode of The Chemical Show. I would love to hear what you thought. What are you seeing as you look at what’s happened in the third quarter and the reports of third quarter earnings? How is your company and your business tackling Q4 and 2024, which is right around the corner? Shoot me an email or send me a DM on LinkedIn, I would love to hear from you. In the meantime, keep listening, keep following, keep sharing, and we will talk to you again soon.