Chemtura Corporation (NYSE: CEM) sells chemicals that are ultimately used in a wide variety of contexts, from purifying pool water to protecting electronics from fire to killing insects. The company's chemicals are usually purchased as additives or ingredients by industrial manufacturers who make the final product. Since Chemtura is a diversified chemicals company, the price of inventories - raw materials is a key determinant of its profitability. The increase in commodities prices that gained momentum in 2007 has made raw materials increasingly expensive. For example, tin, an important chemical used in flame retardants, doubled in prices in FY2007. In the same time period, gross margin decreased by 5%. On the other hand, Chemtura has developed products that allow it to take advantage of rising "green issues" standards, such as clean-emission vehicle engines. Its chemicals are used in clean-emission vehicles as well as non-toxic flame retardant products. Since 2005, the company has focused on expanding in high-growth, low capital intensity market segments.
Chemtura sells chemicals and polymers used in agriculture, construction, consumer products, electronics, transportation, and industrial production. Polymers refers to a group of natural and synthetic materials that includes plastic. The company's products are divided into five business segments: polymer additives, performance specialties, consumer products, crop protection and other.
Polymer additives (FY07 $1,806M, 49% net revenue): sells chemical additives to the plastics, agricultural, fine chemical and oilfield industries. The company's chemical additives have roles such as limiting light degradation, improving resistance to flames, and protecting against insect infestations.
Performance specialties (FY07 $911M, 24%): sells specially-designed chemicals to manufacturers. These chemicals include petroleum additives, lubricants for refrigerators, and coatings for floor finishes.
Consumer products (FY07 $567M, 15%): sells chemicals directly to consumers for in-home and outdoor uses. These include water purification chemicals for pools and bathroom cleaners. These products are sold under many different brands.
Chemtura's customers are in the agriculture, construction, consumer, electronics, and transportation industries. Not one single customer represents more than 10% of the company's annual revenue.
While more than half of the company's total revenue comes from the United States and Canada, the company's management intends to expand in high-growth markets such as the former Soviet Republic, Eastern Europe and China.
|Year||US and Canada||Europe and Africa||Asia/Pacific||Latin America|
|% net revenue||53%||29%||14%||4%|
Since 2005, the company has acquired and divested various business segments in order to create a product line characterized by high growth, low capital intensity, and low costs. In 2007, the company divested its Organic Peroxides and Optical Monomers and Rubber Chemicals product lines, which explains the stagnation of the company's revenue growth in 2007. Combined with low gross margins, the series of corporate actions have resulted in charges that have caused the Chemtura to suffer net losses. Nevertheless, the realignment of the company's product line improved the company's gross margin.
Gross margin and the operating cash flow ratio are two key metrics used by the company's management to measure the company's financial health. Gross margin is an important metric in the diversified chemicals industry, especially in light of the [commodity boom], because it measures the volatility of the input costs. The operating cash flow ratio is obtained by dividing the company's current assets by its outflow of cash from operations. Since 2005, the company has gone through a series of mergers, acquisitions and divestures in order to cut down its core product line and to achieve profitability. The operating cash flow ratio measures the amount of cash expended on these corporate actions as well as the company's progress towards achieving profitability.
|Operating cash flow ratio||19%||16%||8%||-4%||-3%|
The commodity boom that began in 2007 has elevated Chemtura's raw material costs, sinking the company's gross margin by 5% (a 24% decrease from FY2005 to FY2007). The price of tin, a key raw material used to produce heat stabilizers, increased by 100% in FY2007. The price of natural fats and oils, used to manufacture surfacants (such as cosmetics), has also increased as a result of heightened demand for ethanol. The 57% increase in the average price of oil from 2007 to 2008 has squeezed margins on petroleum derivatives. Other increasingly expensive raw materials include phosphorus and alkyl metals. The company has attempted to pass on these high input costs to its customers. For example, in the summer of 2008, it raised the price of flame retardants by $0.30 per pound (a 9% increase). Nevertheless, an extended commodity boom makes raising product prices detrimental to sales growth, in addition to decreasing the gross margin. Net revenue decreased by 1.5% year over year in 2Q08 and gross margin decreased by 0.4%.
Chemtura's Polymer Additives business segment produces antioxidants that protect electronics, among products of other industries, from oxidation, flames and sunlight. For example, printed circuit boards used in the information technology industry and connectors used in the telecommunications industry benefit from Chemtura's flame retardant additives. In 2007, the segment accounted for 49% of net revenue. A weakness in the demand for electronics causes sellers in the industry to scale back their inventory, reducing the need for Chemtura's products. Therefore, the company's net revenue is affected by the health of the electronics industry. The electronics industry is high-growth but cyclical. For example, the industry collapsed during the Asian financial crisis in 1999, grew rapidly until 2001, and once again collapsed in the 2001-2002 recession. While the industry expanded rapidly following the 2001-2002 recession (the semiconductor market was worth $250B in 2006, compared to $200 in 2001), electronics makers are expecting lower sales beginning in the second half of 2008 as a result of the US-led economic downturn.
"Green" (environmentally conscious) standards such as requirements for cleaner engine emissions and improved flame retardancy provide organic growth opportunities for Chemtura. The company's Performance Specialties (24% of FY07 net revenue) and Consumer Products (15% of FY07 net revenue) sell lubricant/additives used for clean-emissions motor engines and flame retardancy additives in household goods. The number of registered green vehicles (hybrid cars) grew by 38% in 2007, and remain the fastest growing segment of the automotive industry, driven by rising gas prices.  Green flame retardants comprise of products that have not yet been found to be toxic to human beings. Many companies in the industry use chemicals such as bromide, which was found to be accumulating in breast milk. In 2008, the EU banned several types of brominated flame retardants. Chemtura offers a broad range of flame retardants based on varied chemicals, enabling the company's business segment to minimize the risk of being shut down by scientific/health-related discoveries. Other green consumer expectations include lowered greenhouse gas emissions. The company's additives decrease the amount of carbon dioxide released by idling engines, and makes pesticides cleaner to use.
The breadth of the company's products decreases the company's dependence on any one competitive market. However, Chemtura faces stiffer competition as its rivals expand globally and consolidate. Its three largest direct rivals are NewMarket Corporation, Solutia, Inc., and OMNOVA Solutions (OMN). Two important metrics in the industry are gross margin (measuring a company's profitability) and total current assets (measuring a company's ability to expand).
NewMarket (NEU) - NewMarket sells lubricants and fuel additives, and is Chemtura's largest competitor in this space. In FY2007, it was the only one company among the three that had a positive net income.
Solutia Inc. - Solutia sells performance chemicals, nylons, as well as chemicals to be used in thin-film solar cells.
|Current assets (MM USD)||$1,381||$495.04||$1,231||$148.50|
|YoY change in raw material costs (MM USD)||$73M||---||$182M||$20.3M|