Nova Chemicals has just finished one of the strongest periods in its 12-year history but doesn't expect the rest of 2010 will be as good, due to a number of factors such as the emergence of new competition and a weakening economy.
The company, sold last year to a Middle Eastern state-owned enterprise, had US$51 million in net income in the second quarter as revenue from continuing operations increased by nearly 58 per cent to US$1.58 billion.
Nova makes chemicals, plastic resins and plastic products that are used in a variety of consumer and industrial goods such as hard plastic containers, soft plastic bags and polystyrene drinking cups.
The company, which has its major operations in Alberta and Ontario, said Tuesday that margins and demand for its products improved since the second quarter of 2009 when Nova lost $83-million with US$1 billion in revenue.
The second-quarter profit was mainly due to Nova's olefins/polyolefins business unit, which posted US$251 million of operating income, up from $81 million during the second quarter of 2009.
The company's share of the operating loss at its Ineo Nova joint venture was $5 million, compared with $6 million of operating income a year earlier.
And Nova's performance styrenics segment had a $1 million loss from continuing operations, compared with the $5 million operating loss reported a year earlier.
"Nova's business results for the first half of 2010 were exceptional, with strong earnings for olefins and polyolefins, including ethylenes, polyethylene and co-products. However, we are not counting on the second half of 2010 to be as strong," Nova chief executive Randy Woelfel told analysts on a conference call.
In the first half of the year, margins for ethylene improved rapidly due to a shortage of supply caused by unplanned shutdowns by some producers but that's won't continue, Woelfel said.
"The industry is now fully operational. Ethylene is no longer in the market and prices have declined from the peak."
The second half of the year also includes questions about the global economy in general, which could slow the strong growth of polyethylene consumption.
Nova is also cautious about additional supplies coming on stream in the Middle East and Asia, and their potential impact on global pricing, he said.
"So on balance, while we're encouraged by the market dynamics so far in 2010, uncertainties remain in the outlook."
In this environment, Nova's is working to manage costs, generate cash and focus on implementing its strategy, he added.
The third quarter financial report will also reflect more of the impact from a patent infringement battle with Dow Chemical, which won a jury verdict in its favour and against Nova in June.
"This outcome, while it impacts our net income for the quarter, does not diminish the strength of the operating results in our olefins and polyolefins business. The quarterly and half-year results were the highest we've had for several years and among the best in our 12-year history."
Woelfel said the trial judge had declined Dow Chemical's request for a permanent injunction to prevent Nova from selling some grades of its Surpass resin in the United States, noting that the patent expires in about a year and the grounds for appeal by Nova.
Chief financial officer Todd Karran said the company will set aside $85 million cash during the third quarter for a bond Nova has been ordered by the court to provide during the appeals process.
That will cover not only the US$61.8 million jury award based on U.S. sales of the targeted products to the end of 2009, but also $14.3 million in interest and US$8 million for sales and accrued interest in the first half of 2010.
Nova will also have to set aside provisions based on U.S. sales of the targeted products until the case is resolved or the Dow patents expire in September 201, Karran said.
"Pending the outcome of the appeal process, we will adjust the charge as appropriate."
The company's roots are in Alberta, where it continues to have major corporate offices, but for many years had its headquarters in Pittsburgh. Before that the company was spun off from the former Nova Corp. in the late 1990s as a stand-alone commodity chemicals producer when Nova sold its natural gas pipelines to TransCanada.
Last year, the company was bought by a state-owned investment company based in the Persian Gulf emirate of Abu Dhabi.