BUSINESS
CHEMICAL INDUSTRY 2003 First-quarter results Sales soared 16% Earnings hardly moved Profitability was 4.3% Output declined slightly Prices were up 9.1%
% change from year-earlier quarter 20 Sales 15 10 H
5 0
NOTE: All sales, earnings, and profit-margin data are based on the 25 chemical companies in the table on page 21. SOURCES: Federal Reserve Board (production data). Department of Labor (prices data)
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.1 11 LJI
I
2002
2003
WILLIAM J. STORCK, C&EN NORTHEAST NEWS BUREAU
"T
MIXED,
20 0 -20
-60 2001
Some companies had big increases, others big losses, leaving total earnings almost unchanged ROUBLESOME,
40
-40
-15
CHEMICAL EARNINGS ALL OVER THE PLACE and "better than they might have been" are all ways that one could describe earnings performance in the chemical industry First-quarter earnings were troublesome because they came nowhere near matching the large sales increases posted by many firms; mixed because some companies posted reasonable gains, others saw declines, and a few showed losses; and better than they might have been because companies were able to raise prices enough to at least partially offset escalating raw material and energy costs. The 25 chemical companies regularly sampled by C&EN posted total earnings of $1.33 billion, down just 0.2% from the
% change from year-earlier quarter 60 Earnings
same quarter in 2002. But sales showed real life, jumping 15.6% to $30.8 billion as volumes grew for some products and companies increased prices. Thus, the aggregate profit margin for the firms fell to 4.3% from 5.0%. The economic fundamentals for the chemical industry were as mixed as the industry results. The quarter's production of all chemicals, including pharmaceuticals, fell 0.5% from the same three months last year, according to seasonally adjusted data from the Federal Reserve Board. Output in the important basic chemicals segment declined 1.9%. Selling prices, however, jumped 9.1% for all chemicals, according to Labor Department statistics, while basic chemical prices more than doubled that rate, surging 19.4%.
m 2001
-0.2
2002
2003
According to Commerce Department figures, the higher prices raised the value of chemical shipments significantly in the quarter. The shipments value for all chemicals for the first quarter rose 10.0% from the comparable quarter the year before. If pharmaceuticals are excluded, the value for all other chemical shipments increased 13.3%, nearly in line with the 15.6% sales increase seen for C&EN's 25 companies. In addition to rapidly rising selling prices, companies received bottom-line help as the value of the dollar fell against foreign currencies. In the long term, this lowering of the dollar against other major currencies means that chemical exports will become more attractive. In the short term, however, companies are already seeing the positive effects of the decline on their results as money earned overseas means more dollars on the income statement when the currency is exchanged for greenbacks. It was costs, however, that put the damper on earnings. Dow Chemical put a number to the rising costs that offset the price increases. As raw material and feedstock prices rose 70%, this added $1.2 billion in costs to the company over the same quarter in 2002, according to Chief Financial OfficerJ. Pedro Reinhard. Despite the dramatic run-up in costs, Dowwas one of the chemical companies with earnings
TOP 10 RANKINGS Chemical industry leaders for first-quarter 2003 SALES RANK 2003
1 Dow Chemical 2 DuPont 3 PPG Industries 4 Rohm and Haas 5 Air Products 6 Eastman Chemical 7 Praxair 8 Monsanto 9 Crompton 10 Solutia
EARNINGS RANK $ MILLIONS 2002
$8,081.0 7,008.0 2,071.0 1,613.0 1,578.1 1,442.0 1,337.0 1,147.0 649.8 596.0
1 2 3 4 5 6 7 8 9 10
DuPont Praxair Air Products PPG Industries Dow Chemical Rohm and Haas Monsanto Cabot Cytec Industries Lubrizol
$ MILLIONS
RANK 2002
$615.0 130.0 113.6 87.0 85.0 82.0 72.0 38.0 28.9 28.6
1 2 3 4 7 6 5 9 11 8
PROFITABILITY EARNINGS AS % OF SALES
Cabot Praxair DuPont Cytec Industries Cambrex Air Products Monsanto Albemarle Lubrizol Rohm and Haas
10.8% 9.7 8.8 7.9 7.5 7.2 6.3 6.1 5.6 5.1
RANK 2002
3 2 5 10 1 4 7 6 8 9
NOTE: Based on 25 companies listed on page 21.
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C & E N / MAY 1 9, 2003
HTTP://WWW.CEN-ONLINE.ORG
After-tax earnings as % of sales 10 Profit margin
% change from year-earlier quarter 2 Production
> change from year-earlier quarter
I..I Iill. i :£HB 2001
2002
2003
growth higher than its sales increase. Sales at Dow increased 28.2% to $8.08 billion, whereas earnings jumped 37.1% to $85.0 million as volume increased 7.0% and prices rose 21.0%. At just 1.1%, however, profitability barely budged compared with the 1.0% profit margin of last year's first quarter. OF THE 25 companies surveyed, 11 had increases in earnings from continuing operations, excluding unusual items, ranging from 2.4% at Praxair to 118.2% at Arch Chemicals. Nine had earnings declines, ranging from 4.0% at Lubrizol to 85.6% at FMC Corp. And five companies had losses in the quarter, the largest of which was a $16.8 million deficit at I M C Global. In comparison, for the first quarter of 2002 all the companies were in the black. Many of the companies with large percentage increases, such as Arch, grew from low earnings numbers in first-quarter 2002. Arch had $2.4 million in earnings in the first quarter this year, compared with just $1.1 million last year. The profit margin at the company increased to 1.0% from 0.5%. This low margin did not prevent Chief Executive Officer Michael E. Campbell from feeling good about the company's progress: "Strong sales of advanced new products drove growth in Arch's sales and earnings during the quarter. We continue to successfully seize upon significant growth opportunities in our treatment products and microelectronics materials segments." While Arch had the largest percentage increase, D u P o n t had the best dollar growth in earnings, up $63.0 million, or 11.4%, to $615 million. This was on a 14.1% rise in sales to $7.01 billion. "Our sales growth in the first quarter reflects strong volume increases in each of our five growth platforms and DuPont Textiles & Interiors," CEO Charles O. Hollidayjr. says. "This broad-based volume growth, combined with particularly strong results in pharmaceuticals, agriculture and nutrition, and safety and protection, offset the imHTTP://WWW.CEN-ONLINE.ORG
2001
2002
2003
pact of higher pension, energy; and raw material costs in the first quarter. Our businesses performed well, maintaining their momentum even better than expected through the end of the quarter." Not so fortunate was F M C with its 86.5% decline in earnings to just $1.9 million on flat sales of $434.0 million. CEO William G. Walter says: 'As expected, the first quarter, which is typically our weakest, proved to be especially tough this year.
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Ifear-over-year earnings performance suffered from higher interest expense, higher energy costs, and the continued difficult market environment in our industrial chemicals businesses, particularly phosphorus chemicals. These difficulties masked an outstanding performance in our specialty chemicals segment." Pretax earnings were down 58% for FMC's industrial chemicals, whereas specialty chemicals rose 34%.
CHEMICAL COMPANIES Sales surged, but earnings didn't, causing profit margins to slip SALES EARNINGS3 ($ MILLIONS)
$1,578.1 265.6 232.5 352.0 139.9
$113.6 16.1 2.4 38.0 10.5
649.8 367.0 8,081.0 7,008.0 1,442.0
11.9 28.9 85.0 615.0 -1.0
401.8 434.0 294.6 364.0 441.8
Great Lakes Chemical Hercules IMC Global Lubrizol Monsanto PPG Industries Praxair Rohm and Haas Solutia Stepan
Air Products Albemarle Arch Chemicals Cabot Cambrex Crompton Cytec Industries Dow Chemical DuPont Eastman Chemical Ferro FMC Corp. H.B. Fuller Georgia Gulf W.R. Grace
T0TALc
FIRST-QUARTER 2003 CHANGE FROM 2002 SALES EARNINGS
PROFIT MARGIN0 2003 2002
-4.8% -4.2 118.2 35.7 -30.0
7.2% 6.1 1.0 10.8 7.5
9.1% 7.2 0.5 9.6 11.3
0.8 15.4 28.2 14.1 16.7
75.0 69.0 37.1 11.4 nm
1.8 7.9 1.1 8.8 def
1.1 5.4 1.0 9.0 2.3
9.5 1.9 6.3 -1.7 -2.3
10.1 0.0 0.5 39.5 7.0
92.5 -85.6 12.5 nm nm
2.4 0.4 2.1 def def
1.3 3.0 1.9 0.2 3.0
334.0 441.0 552.1 508.2 1,147.0
0.9 13.0 -16.8 28.6 72.0
9.5 9.7 10.9 8.7 -6.1
-82.4 85.7 nm -4.0 -16.3
0.3 2.9 def 5.6 6.3
1.7 1.7 1.0 6.4 7.0
2,071.0 1,337.0 1,613.0 596.0 187.1
87.0 130.0 82.0 -8.0 2.3
10.5 8.5 16.8 14.6 3.3
-11.2 2.4 3.8 nm -39.9
4.2 9.7 5.1 def 1.2
5.2 10.3 5.7 0.8 2.1
$30,838.5
$1,325.0
20.2% 14.6 10.1 20.5 5.6
15.6%
-0.2%
4.3%
5.0%
a After-tax earnings from continuing operations, excluding significant extraordinary and nonrecurring items, b After-tax earnings as a percentage of sales, c Percentages calculated from combined sales and earnings. nm = not meaningful, def = deficit.
C & E N / MAY 19. 2003
21
BUSINESS OTHER CHEMICAL PRODUCERS Total sales and earnings rose in first quarter SALES EARNINGS3 ($ MILLIONS)
Ashland Engelhard Honeywell Kerr McGee Lyondell Chemical Millennium Chemicals Sigma-Aldrich 3M Vulcan Materials TOTAL
FIRST-QUARTER 2003 CHANGE FROM 2002 SALES EARNINGS
$1,692.0 830.4 5,399.0 1,127.2 989.0
-$34.0 46.9 274.0 127.3 -113.0
6% -17.1 3.8 41.2 46.7
nm -10.5% -27.1 1067.9 nm
415.0 334.7 4,318.0 550.4
-46.0 48.9 560.0 1.3
18.2 11.0 11.0 3.0
nm 14.8 15.0 -89.1
$15,655.7
$865.-4
9.0%
2.0%
PROFIT MARGIN0 2003 2002
def 5.6% 5.1 11.3 def def 14.6 13.0 0.2 5.5%
def 5.2% 7.2 1.4 def def 14.1 12.5 2.2 5.9%
a After-tax earnings from continuing operations, excluding significant extraordinary and nonrecurring items. b After-tax earnings as a percentage of sales, c Percentages calculated from combined sales and earnings. nm = not meaningful, def = deficit.
Great Lakes Chemical's earnings decline was not far behind that of FMC, dropping 82.4% to $900,000, despite a 9.5% increase in sales to $334.0 million. "Productivity gains and our efforts to raise selling prices did not compensate for the sharply rising costs," according to CEO Mark P. Bulriss. "The raw material and energy costs along with unfavorable foreign exchange impacted our earnings roughly 15 cents per share in the quarter versus ayear ago." Bulriss expects to see a similar impact from these costs in the second quarter, but he says financial performance will improve substantially owing to the seasonality of Great Lakes's specialty chemicals business. Five companies—Eastman Chemical, Georgia Gulf, W R . Grace, I M C Global, and Solutia—had losses in the quarter. IMC, with its $16.8 million loss, notes that results were impacted by increased ammonia, natural gas, and sulfur raw material costs as well as by higher plant operating costs resulting from maintenance turnarounds and a phosphate rock mine shutdown. Ammonia and sulfur costs rose by 82% and 64%, respectively, while selling prices for diammonium phosphate increased by only $9.00 per ton, or 7%. While many companies often cut research as a means of raising earnings, PPG Industries seems to be bucking that trend. After seeing earnings decline 11.2% to $87.0 million in a 10.5% sales increase to $2.07 billion, as a result of rising costs and increasing pension and retiree benefit
costs, CEO Raymond W. LeBoeuf said, "For the reminder of the year, not only will we retain our commitment to research and development, we will also remain committed to generating cash and reducing debt while seizing opportunities to generate organic growth." Higher costs caused problems at some major petrochemical producers. Lyondell Chemical and Millennium Chemicals—partners in Equistar Chemical—both showed losses in the period: Millennium's was $46 million and Lyondell's, $113 million. However, Millennium's titanium dioxide business showed an operating profit of $21 million in the quarter, more than double the $10 million recorded in firstquarter 2002. Chemical operations at oil companies also got hit. Sunoco posted a loss of $4.0 million in its chemical operations compared with earnings of $2.0 million 12 months earlier. Although selling prices for both polypropylene and phenol increased during the quarter, the company notes, recovery in the marketplace lagged raw material cost increases and resulted in lower average margins. At ChevronTexaco, chemicals earned $3 million in the period, down 80% from first-quarter 2002 for the same reasons as Sunoco: Raw material cost increases outran increases in selling prices. However, ExxonMobil's chemical earnings were up 1174% to $2870 million as volumes increased 4% and the company ben-
"Productivity gains and our efforts to raise selling prices did not compensate for the sharply rising costs."
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C & E N / MAY 19, 2003
efited from favorable exchange rates and improvements in non-U.S. profit margins. And Occidental Petroleum's earnings from chemicals from continuing operations rose 12.9% to $35.0 million. The company credits higher sales prices for polyvinyl chloride, chlorine, and ethylene dichloride. However, these higher prices were partially offset by higher energy and raw material costs and lower selling prices for caustic soda. Obviously, what chemical companies and other producers are looking for is a return to more normal oil and gas pricing, and stability in other areas as well. DuPont expects the global economic recovery to resume its moderate pace later in 2003, but for the second quarter it expects significantly higher energy-related raw material costs. However, the company expects its businesses to perform well in the marketplace, with both volume growth and price increases. DoVs Reinhard says: "The challenges have not diminished. We anticipate somewhat slower economic growth in the second quarter." He notes that sales in April started slower, which may be the result of the Easter holiday schedule, the dampening effects of high energy costs, or China's temporary withdrawal from some markets. FURTHER OUT, Reinhard says, "the expected lower feedstock and energy costs going forward, combined with the monetary and fiscal stimulus in the U.S., should result in increased economic growth in the second half of the year. Global industry operating rates should continue to show gradual improvement for each of the major building blocks—ethylene, chlorine, and styrene—as the year progresses." At Ferro, CEO Hector R. Ortino says, "Overall market demand has improved, but the rate of recovery and sustainability is still subject to improving global economic conditions." He notes that a recovery in Europe seems to be lagging North America and Asia-Pacific, but says, "Despite this challenge, we remain confident we will experience significant earnings growth in 2003 due to an improved cost structure and the full-year impact of the actions taken in 2002 to further integrate the dmc 2 business." And Praxair CEO Dennis H. Reilley predicts: "We expect results for the rest of the year to improve as energy markets stabilize and our U.S. operating margins improve. However, I am cautious on the long-term picture for economic growth, but still expect Praxair to continue to grow our sales and earnings through growth initiatives." • HTTP://WWW.CEN-ONLINE.ORG
