Summary of Conference Call on Chemicals Sector Industry Overview - The focus of North American investors is on the Chemicals sector, particularly regarding earnings risk for fiscal years 2025 and 2026 EBITDA [1] - There is skepticism about the sector's ability to achieve top-line inflection and double-digit earnings growth in FY26 [1] Key Points Discussed 1. **Volume Development**: - Feedback from the Global Material Conference indicated that volumes in end markets and regions have not improved since the end of Q2 [1] - Order book visibility is approximately two weeks [1] 2. **Earnings Growth Concerns**: - Investors are worried about the consensus EBITDA growth of 10% year-on-year for FY26, especially in the absence of volume recovery in H2 2025 [1] - Potential drivers for earnings growth include the impact of German fiscal stimulus, the EU Chemical Action Plan, and petrochemical capacity [1] 3. **Path to Normalized Earnings**: - A tightening of upstream supply/demand is expected, likely by late 2027/28, which could be exacerbated by capacity closures [1] - Companies are expected to focus on self-help and portfolio improvement in the interim [1] 4. **Consolidation Potential**: - Investors inquired about the potential for consolidation in the sector due to liquidity decline for many companies over the past three years [1] - Concerns were raised about the sustainability of volume growth for Ingredients & Gases [1] Stocks of Focus - **Diversified and Specialty Subsector**: - Key stocks include Solvay (benefiting from Chinese capacity closures and rare earths), Syensqo (margin recovery and non-core asset disposals), and BASF (FY26 earnings risk and coatings disposal) [2] - Defensive nature and margin improvement potential of Gases were acknowledged, but concerns about over-ownership of Air Liquide and Linde by long-only investors were noted [2] - **Consumer Chemicals**: - Focus on DSM-Firmenich (ANH disposal announcement), Symrise (pet food OSG recovery), Croda (turnaround strategy), and Novonesis (sustaining ~7% OSG and margin expansion) [2] - Lack of investor interest in Akzo Nobel, Covestro, Givaudan, fertilizers, and most mid-cap names in the sector was observed [2] Financial Performance Insights - The Chemicals sector is down 1.8% year-to-date and down 8.3% on a 12-month basis [51] - Top performers year-to-date include Bayer (+49.3%), JMAT (+41.4%), and Umicore (+32.8%) [51] - Worst performers include Symrise (-20.9%), Victrex (-32.2%), and Synthomer (-62.7%) [51] Price Trends and Spreads - **Downstream Prices**: - pMDI prices remained flat, but spreads increased by 1% as Benzene prices decreased by 1% [44] - TDI prices are flat, with spreads up by 1% as Toluene prices decreased by 2% [44] - Polycarbonate prices and spreads remained flat, while acrylic acid prices and spreads also remained flat [45] - **Upstream Prices**: - Naphtha prices decreased by 1% in Asia and 14% in the US over the last week [47] - Ethylene prices increased by 1% in Asia but decreased by 1% in the US [47] - Propylene prices remained flat, while butadiene prices were also flat [48] Conclusion - The Chemicals sector faces significant challenges regarding earnings growth and volume recovery, with investor sentiment reflecting caution. Key stocks are under scrutiny, and the potential for consolidation may shape future dynamics in the industry.

Core Insights - Caterpillar Inc. (CAT) reported a net volume increase of $237 million in Q2 2025, marking a recovery after six consecutive quarters of volume declines [1][8] - The Energy & Transportation (E&T) segment contributed significantly with a $326 million increase, offsetting declines in Construction Industries and Resource Industries [1][8] - Despite ongoing challenges, the second-quarter recovery indicates potential stabilization in the market [4][8] Company Performance - The Construction Industries segment has experienced negative volume growth for seven consecutive quarters, while Resource Industries has seen declines for eight quarters [2] - In 2024, CAT faced a total volume decline of $3.5 billion, followed by an additional $1.1 billion decline in Q1 2025, primarily due to sluggish demand and inventory drawdowns [3] - The company expects moderate year-over-year sales growth in Q3 2025, supported by improved volumes across all segments [4] Industry Context - Industry peers such as Terex Corporation and Komatsu Ltd. are also facing challenges, with Terex reporting six quarters of negative organic growth and Komatsu expecting a flat to 5% decline in demand for construction and mining equipment [5][6] - Ongoing macroeconomic uncertainty and tariff pressures have negatively impacted demand across the sector [4] Stock Performance and Valuation - CAT shares have increased by 19.7% year-to-date, outperforming the industry average of 19% and the S&P 500's 6.8% growth [7] - The current forward 12-month price/earnings (P/E) ratio for CAT is 21.35X, compared to the industry average of 20.21X [10] - The Zacks Consensus Estimate indicates a 14.2% decline in earnings for 2025, with a projected revenue drop of 2.4%, but a rebound is expected in 2026 with earnings growth of 13.8% [11]