BUSINESS
CHEMICAL EARNINGS IN FOURTH QUARTER Results were hard hit by effects of hurricanes; DuPont was a big factor in poor growth WILLIAM J. STORCK, C&EN NORTHEAST NEWS BUREAU
T
veyed by C&EN mentioned the storms in their earnings commentary, and they were cited a combined 50 times as a factor in the firms' results. DuPont alone mentioned them 11 times. The result was that combined earnings from continuing operations, excluding special items, at the 23 companies increased just 0.9% compared with fourth-quarter 2004 to $2.31 billion, while sales rose 7.5% to $38.1 billion. This dropped the aggregate profit margin for the group to 6.1% in the 2005 quarter from 6.5% in the same period the year before. The modest rise in sales and earnings put the brakes on what looked to be an extremely good year for the chemical indus-
HE FOURTH QUARTER OF 2 0 0 5
was a three-month period that many in the U.S. chemical industry might like to forget. After posting double-digit earnings growth for eight consecutive reporting periods, the companies C&EN regularly surveys, on average, hit a wall. A major factor was the lingering effects of the hurricanes that hit the Gulf Coast in late August and in September, causing plant closures, disrupting the transportation system, and driving down demand, especially for basic organic chemicals. The aftereffects of Hurricanes Katrina and Rita were such a big factor during the quarter that 16 of the 23 companies sur-
try. Cumulative results for the nine months ending in September showed sales up 12.5% and earnings increasing 48.0% over the first three quarters of 2 0 0 4 . W h e n the fourth-quarter results were added in, the full year was not as outstanding as the first nine months, but still very strong: Earnings increased 28.6% from 2004 to $11.9 billion as sales rose 10.5% to $153.6 billion. Naturally, with plants shut down, production was hit hard in the fourth quarter. Using the average of the Federal Reserve Board's industrial production index for the quarter, output of all chemicals, including pharmaceuticals, fell 3 3 % when compared with the index for fourth-quarter 2004. This decline followed a 2.1% year-to-year drop in the third quarter. For the full year, total chemical production was down 0.2%. Basic chemicals, with their large concentration along the Gulf Coast, were especially hard hit, with output falling 16.3% in the fourth quarter after a 12.9% decrease in the previous three months. For all of 2005, basic chemical output was 6.8% below that of 2004. Meanwhile, prices continued to rise. The Labor Department's producer price index for chemicals jumped 8.8% for the quarter, after an 8.2% increase in the July through :„.-..:.
.,.,.:-.:,,.,,..:•.....
TOP 10 RANKINGS Chemical industry leaders for the fourth quarter. SALES RANK 2005
1 2 3 4 5 6 7 8 9 10
$ MILLIONS
Dow Chemical DuPont PPG Industries Air Products Praxair Rohm and Haas Eastman Chemical Engelhard Lubrizol Chemtura
PROFITABILITY
EARNINGS
$11,917.0 5,827.0 2,505.0 2,089.6 2,020.0 2,012.0 1,729.0 1,271.8 1,031.6 876.1
RANK 2004
1 2 3 4 6 5 7 8 10 9
$ MILLIONS
Dow Chemical Praxair Air Products Rohm and Haas PPG Industries DuPont Eastman Chemical Engelhard Sigma-Aldrich FMC Corp.
$993.0 220.0 180.7 176.0 143.0 125.0 73.0 65.1 64.6 42.7
RANK 2004
1 4 5 6 3 2 9 7 8 11
Siqma-Aldrich Praxair Rohm and Haas Air Products Dow Chemical FMC Corp. Albemarle PPG Industries H.B. Fuller Engelhard
EARNINGS AS % OF SALES
RANK 2004
15.7% 10.9 8.7 8.6 8.3 8.2 5.8 5.7 5.6 5.1
1 2 6 3 5 9 13 4 19 12
...and for the full year 2005 SALES RANK 2005
1 2 3 k 5 6 7 8 9 10
Dow Chemical DuPont PPG Industries Air Products Rohm and Haas Praxair Eastman Chemical Engelhard Lubrizol Chemtura
PROFITABILITY
EARNINGS
$ MILLIONS
RANK 2004
$46,307.0 26,639.0 10,201.0 8,251.1 7,994.0 7,656.0 7,059.0 4,597.0 4,039.2 3,898.4
1 2 3 4 5 6 7 8 10 9
$ MILLIONS
Dow Chemical DuPont PPG Industries Praxair Air Products Rohm and Haas Eastman Chemical Sigma-Aldrich Engelhard Lubrizol
$4,273.0 2,329.0 776.0 732.0 725.6 700.0 484.0 251.6 246.3 196.1
RANK 2004
1 2 3 4 5 6 9 8 7 11
Siqma-Aldrich Praxair Dow Chemical Air Products Rohm and Haas DuPont FMC Corp. PPG Industries Eastman Chemical Cabot
EARNINGS AS % OF SALES
RANK 2004
15.1% 9.6 9.2 8.8 8.8 8.7 8.0 7.6 6.9 5.7
1 2 9 4 8 3 10 6 16 5
NOTE: Based on 23 companies listed on page 25.
WWW.CEN-0NLINE.ORG
C & E N / F E B R U A R Y 2 7 , 2006
23
BUSINESS September period. For all of 2005, the index for total chemicals was up 9.6%. But this was nothing compared with the increases for industrial chemicals, which rose 10.0% in the fourth quarter following an 11.0% increase in the third period and 14.1% for the full year. Analysts at Merrill Lynch noted this trend, especially in ethylene. "Earnings
Department, totaled $140.3 billion, up 37% from the same period 12 months earlier. Ex cluding pharmaceuticals, the shipments val ue for all other chemical industry segments combined was $1057 billion, an increase of 6.7% over the prior-year period. For the full year, shipments of all chemi cals totaled $549.0 billion, a 5.5% increase over 2004. Excluding pharmaceuticals,
CRITERIA FOR C&EN EARNINGS ANALYSIS C&EN's quarterly report on financial per formance of the U.S. chemical industry contains data from 23 major U.S. basic chemical companies and from five petro leum companies, each of which has more than $1 billion in annual chemical sales. To be included in the table of basic chemical companies, a company must have at least 50% of its sales in chemicals. In referring to chemical sales, C&EN means sales of chemicals for which the
fell below expectations for the ethylene producers in Q4," they wrote. "Volumes were weaker than expected due to linger ing hurricane-related outages and weak de mand in December as converters reduced purchases in anticipation of lower prices in Q12006." Despite lower production, the increase in prices was enough to raise the value of chemi cal shipments for the quarter. Shipments of all chemicals, according to the Commerce
CHEMICAL INDUSTRY 2005 Fourth-quarter results Sales rose 8% from 2004 period Earnings increased just 1 % Profitability averaged 6.1% Production fell 3.3% Prices improved 8.8%
molecular composition has been changed during manufacture. Hence, these include traditional categories of basic petrochem icals and inorganics, organic intermedi ates and inorganic compounds, polymers such as plastics and fibers, and agricul tural chemicals and specialty derivatives. In listing earnings, the report gives af ter-tax income for continuing operations, excluding significant nonrecurring and extraordinary items.
shipments of the remainder of the chemical industry rose 9.8% to $411.3 billion. Considering these rather impressive growth rates, the chemical industry should have done better in the fourth quarter. And it would have were it not for DuPont. DuPont suffered greatly in the quarter with a 2.9% decline in sales to $5.83 billion and a 66.3% plunge in earnings to $125.0 million. Without DuPont, combined sales for the other 22 companies increased 9.6% to % change from year-earlier quarter 20
7c)
2005
change from year-earlier quarter
6 U
1111 • 1111
C & E N / F E B R U A R Y 2 7 , 2006
2005
2004
10
5
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-L 2004
2005
2005
% change from year-earlier quarter 151 Prices
2
I IIIUIII I 2004
24
20
2004
8
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10
2
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60 10
After-tax earnings as % of sales 12 Profit margin
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% change from year-earlier quarter |1Earnings 800 8
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15
NOTE: All sales, earnings, and profit-margin data are based on the 23 chemical companies on page 25. SOURCES: Federal Reserve Board [production data), Department of Labor (prices data)
k
ANOTHER MAJOR chemical company that reported a decline in earnings was PPG Industries, whose earnings fell 24.3% to $143.0 million on a 3.9% increase in sales to $2.51 billion. The company estimates that the hurricanes knocked about $17 mil lion off after-tax earnings because of lower sales volumes. Chief Executive Officer Charles E. Bunch says, "We faced notable headwinds this quarter and during the entire year, in cluding the economic fallout from the hur ricanes, historical peaks in energy costs, and demanding conditions in some of the mar kets we serve. Despite these challenges, we achieved record annual and fourth-quarter sales, which were supported by aH-time-high chlor-alkali pricing." Bunch also took the opportunity while discussing earnings to announce a restruc turing plan. "In addition to the annual cost reductions that we consistently deliver," he
1 00 100
I^ale7 Sales
5
6
$32.3 billion, and earnings improved 13.9% for the remaining firms to $2.19 billion. DuPont's problems were largely hurri cane related. The company says the current quarter net income reflects the impact of prolonged disruptions to power, logistics, and production and sales resulting from Hurricanes Katrina and Rita, in addition to unplanned production outages at three of the company's plants that are located in Brazil, the Netherlands, and the U.S. Quar terly income also reflects lower sales of crop production chemicals and higher costs.
.il lin
•ill llll 2004
2005
WWW.CEN-0NLINE.ORG
RESULTS Chemical companies showed a wide range of earnings growth or decline in the fourth quarter FOURTH-QUARTER 2005 SALES
EARNINGS3 CHANGE FROM 2004
($ MILLIONS)
Air Products Albemarle Arch Chemicals Cabot Chemtura
$2,089.6 588.2 278.3 587.0 876.1
Cytec Industries Dow Chemical DuPont Eastman Chemical Engelhard
787.5 11,917.0 5,827.0 1,729.0 1,271.8
SALES
$180.7 5.0% 34.0 30.4 -3.2 15.1 22.0 18.6 8.6 -11.1
EARNINGS
FULL-YEAR 2005 PROFIT MARGINb 2005
2004
SALES
EARNINGS3 CHANGE FROM 2004
($ MILLIONS)
SALES
EARNINGS
PROFIT MARGlNb 2005
2004
13.0% 73.5 nm -37.1 120.5
8.6% 5.8 def 3.7 1.0
8.0% 4.3 def 7.1 0.4
$8,251.1 2,107.5 1,305.1 2,215.0 3,898.4
$725.6 1U.4 32.2 127.0 143.0
6.9% 39.2 16.4 11.7 0.2
U.8% 51.1 86.1 -14.8 185.4
8.8% 5.4 2.5 5.7 3.7
8.2% 5.0 1.5 7.5 1.3
74.8 9.0 -2.9 4.3 25.9
-9.3 20.7 -66.3 35.2 11.5
3.4 8.3 2.1 4.2 5.1
6.5 7.5 6.2 3.3 5.8
2,925.7 46,307.0 26,639.0 7,059.0 4,597.0
142.6 4,273.0 2,329.0 484.0 246.3
70.0 15.3 -2.6 15.0 11.1
14.9 65.8 -2.7 120.0 3.8
4.9 9.2 8.7 6.9 5.4
7.2 6.4 8.8 3.6 5.7
42.7 1.7 23.3 9.2 18.7 -12.2 18.9 -1.7 34.9 12.2
26.3 113.8 -22.4 -6.4 5.8
8.2 5.6 3.6 3.8 3.4
6.6 2.9 4.1 4.0 3.6
2,150.2 1,512.2 2,273.7 2,068.8 4,039.2
171.9 61.6 95.5 93.6 196.1
4.8 7.3 3.1 3.6 29.9
43.5 73.0 -9.8 3.4 46.6
8.0 4.1 4.2 4.5 4.9
5.8 2.5 4.8 4.5 4.3
26.4 993.0 125.0 73.0 65.1
FMC Corp. H.B. Fuller Georgia Gulf Hercules Lubrizol
522.2 413.2 518.9 502.2 1,031.6
Nalco Holding PolyOne PPG Industries Praxair Rohm and Haas
863.6 606.8 2,505.0 2,020.0 2,012.0
28.8 12.5 143.0 220.0 176.0
7.2 11.4 3.9 13.1 7.9
39.8 -40.8 -24.3 21.5 27.5
3.3 2.1 5.7 10.9 8.7
2.6 3.9 7.8 10.1 7.4
3,312.4 2,450.6 10,201.0 7,656.0 7,994.0
70.7 62.3 776.0 732.0 700.0
9.2 8.1 7.2 16.1 9.5
36.2 42.6 10.5 5.0 38.1
2.1 2.5 7.6 9.6 8.8
1.7 1.9 7.4 10.6 6.9
Sigma-Aldrich Stepan Terra Industries
410.5 270.1 513.4
64.6 -0.1 3.3
16.7 12.8 44.8
18.1 nm -86.2
15.7 def 0.6
15.5 0.3 6.8
1,666.5 1,078.4 1,939.1
251.6 13.5 51.4
18.3 15.2 28.5
8.0 31.1 12.2
15.1 1.3 2.7
16.5 1.1 3.0
10.5%
28.6%
TOTALc
$38,141.0 $2,311.2
7.5%
0.9%
6.1%
6.5%
$153,646.9 $11,893.3
7.7%
6.7%
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 earnings, def = deficit, nm = not meaningful.
said, "we arefinalizingplans to take severance and restructuring actions to further streamline our operations that would result infirst-quarter{2006} charges in the range of $50 {million} to $70 million." Fertilizer producer Terra Industries had the largest earnings decline in terms of per- I centage for the quarter, down 86.2% to just $33 million, despite a 44.8% increase in sales to $513.4 million. The company noted higher North American and U.K. natural gas costs and effects of the two hurricanes. These were partially offset by higher selling prices for nitrogen products and the contributionsfromthe acquired Mississippi Chemical operations. Besides DuPont, PPG, and Terra, six other companies saw earnings decline for the quarter: PolyOne fell 40.8% to $12.5 million; Cabot was down 37.1% to $22.0 million; Georgia Gulf, 22.4% to $18.7 million; Cytec Industries, 9.3% to $26.4 million; Hercules, 6.4% to $18.9 million; and Stepan, which had a loss of $100,000 compared with positive earnings of $600,000 in the fourth quarter of 2004. I WWW.CEN-0NLINE.ORG
One other company had a loss for the quarter. Arch Chemicals posted a deficit of $3.2 million, but this was an improvement over the $13.9 million loss it suffered in the final quarter a year earlier. Sales at Arch were up 15.1% to $278.3 million. It was not all earnings declines and losses for the chemical companies. Industry leader Dow Chemical had a 20.7% gain in earnings to $993.0 million as sales increased 9.0% to $11.9 billion, increasing its profit margin to 8.3%, thefifthhighest among the 23 firms, from 7.5% a year earlier. Dow CEO Andrew N. Liveris says, "This was a tremendous quarter at the end of an outstanding year for Dow. In 2005, we achieved record earnings; we reduced net debt by more than $2.4 billion; and for the third year in a row, with institutionalized financial discipline and operational excellence, we recovered lost margin. The fact that we did this in the face of high and volatile feedstock and energy costs bears testimony to the quality of our people and the strength and consistency of our strategy." In the quarter, pretax earnings exclud-
ing unusual items increased 39% for Dow's performance plastics to $364 million, 4% for performance chemicals to $191 million, 102% for agricultural products to $83 million, and 5% for plastics to $622 million; but they fell 34% for its chemicals segment to $272 million. INDUSTRIAL GAS companies performed above average in the quarter. Praxair posted $220.0 million in earnings for the quarter, up 21.5% from fourth-quarter 2004. Sales at the company increased 13.1% to $2.02 billion. CEO Dennis H. Reilley says, "We delivered record results in all of our markets through successful implementation of new growth initiatives while continuing to supply the highest level of service to our customers." Praxair saw sales grow 11% in North America, 12% in Europe, 33% in South America, and 10% in Asia. Fellow gas producer Air Products & Chemicals had slower, but still good growth in the quarter as earnings increased 13.0% to $180.7 million on sales growth of 5.0% C & E N / F E B R U A R Y 2 7 , 2006
25
BUSINESS OIL
COMPANIES
Chemical Operations Had Mixed Results
M
ost of the headlines concerning earnings at U.S. oil c o m -
coPhillips, fell as a result of income tax adjustments that more than
panies in the fourth quarter stressed the large growth in
offset improved margins for its commodity chemicals.
their bottom line, and there was some reason for this. In-
Partner ConocoPhillips, on the other hand, reported earnings
dustry leader ExxonMobil saw its total earnings j u m p 22.6% over
f r o m continuing chemical operations of $114.0 million, a 37.3% in-
the year-earlier quarter to $10.3 billion. This is a bigger number
crease over the 2004 period. The increase came f r o m higher m a r -
than the quarterly sales for all but one of the chemical companies
gins, particularly for olefins and polyolefins, as w e l l as recovery
in C&EN's sample.
f r o m the impacts of the hurricanes.
Occidental Petroleum's total earnings were up 55.3% to $1.15
And finally, Occidental Petroleum's chemical earnings were up
billion, Chevron's were up 20.5% to $4.14 billion, ConocoPhil-
36.8% to $171.0 million, thanks to contributions f r o m the c h l o r - a l -
lips' increased 52.5% to $3.78 billion, and Sunoco's rose 66.8% to
kali operations acquired f r o m Vulcan Industries and higher m a r -
$287.0 million. But these companies saw much lower growth, if not declines, in their chemical operations. The reasons were much the same as they were for the chemical companies. Earnings f r o m ExxonMobil's chemical business declined 32.9% in the fourth quarter to $835.0 million, according to the company, as a result of increased feedstock costs. And sales volumes were down 6.6% f r o m
CHEMICAL EARNINGS, $ MILLIONS
Chevron ConocoPhillips ExxonMobil Occidental Petroleum Sunoco
FOUR TH QUARTER 2004 CHANGE 2005
2005
FULL YEAR 2004 CHANGE
$314.0 249.0 3,428.0 624.0 94.0
-5.1% 29.7 -0.7
$1,199.0 $1,568.0 -23.5% $4,895.0 $4,709.0
3.9%
$71.0 114.0 835.0 171.0
8.0
$75.0 -5.3% 83.0 37.3 1,245.0 -32.9 125.0 36.8 40.0 -80.0
$298.0 323.0 3,403.0 777.0 94.0
24.5
0.0
last year's fourth quarter to 6.3 million metric tons. Sunoco, the smallest of the five oil companies surveyed and the one with the smallest chemical oper-
TOTAL3
a Percentages are calculated from combined earnings.
ations, had an earnings decline of 80.0% to just $8.0 million. Margins and volumes for polypropylene and phenol, two of the company's major chemical products, declined;
gins in chlorine, caustic soda, and polyvinyl chloride as a result of
average margins were down 2.3 cents per lb, and total sales vol-
higher selling prices, partially offset by higher raw material costs.
umes were 9% below the 2004 fourth quarter. Higher expenses, in part due to natural gas prices, also contributed to the decline. Chevron's chemical operations earned $71.0 million in the quar-
noco's full-year chemical earnings were unchanged at $94.0 m i l -
ter, down 5.3% f r o m the comparable 2004 period. Its earnings f r o m
lion, while ConocoPhillips' were up 29.7% to $323.0 million, and
Chevron Phillips Chemical, the joint venture it owns with Cono-
Oxy's chemical earnings rose 24.5% to $777.0 million.
to $2.09 billion. Sales of gases were up 8% to $1.56 billion on higher volumes in Asia, stronger pricing in North America, as well as higher natural gas cost contractual passthroughs to customers. Down the road from Air Products, Philadelphia-based Rohm and Haas had $176.0 million in earnings, up 27.5% from the year-earlier quarter on a 79% sales increase to $2.01 billion. CEO Raj L. Gupta says the fourth quarter "demonstrates that the pricing strategies we have adopted continue to enable us to recover unusually high raw material and energy costs. We have been successful in executing portfolio management strategies to shed underperforming businesses and move toward more technically advanced, higher growth and margin products." W h i l e most people in the U.S. were complaining about the high price of oil, the refinery business helped Albemarle, which scored a 73-5% increase in earnings to $34.0 million as sales rose 30.4% to $588.2 million. The increase in sales, according to the company, was primarily the result of strong sales in its catalysts segment due to higher 26
For the full year, Chevron's chemical earnings were down 5.1% to $298.0 million and ExxonMobil's were off 0.7% to $3.40 billion. Su-
C & E N / F E B R U A R Y 27, 2006
sales in refinery catalysts. Continued pricing improvements in some businesses in pofymer additives and fine chemicals also helped. C E O Mark C. Rohr says: "We faced many challenges in 2005, and our team met them very successfully. We implemented pricing initiatives as well as specific cost reduction measures to meet the increasing pressure of inflated raw material and energy costs." Rohr also says, "We believe we have positioned ourselves for growth and financial stability, and we are poised to accomplish a very positive and rewarding 2006." Other chemical executives are also optimistic about this year, apparently viewing the hurricane-influenced third- and fourthquarter results as an aberration that they hope will not happen again. Eastman Chemical's CEO, J. Brian Ferguson, says the company is off to a good start in the quarter, led by a strong base of earnings, which consists of the fibers; coatings, adhesives, specialty polymers, and inks; and specialty plastics segments. He warns, however, that Asian imports of polyethylene
terephthalate polymers into North America and challenging market conditions in certain propylene derivatives "are expected to be headwinds." In addition, Ferguson says, "we anticipate continued high and volatile raw material and energy costs." Dow's Liveris says: "Our outlook for 2 0 0 6 is positive, both for the chemical industry and our company, despite the uncertainty and volatility in feedstock and energy costs. We expect that worldwide demand for chemical and plastic products will continue to grow, led by Asia-Pacific, Latin America, and other emerging geographies, with solid contributions from North America and Europe. As we have been saying for some time, we believe 2006 will be an even better year than 2005." DuPont is not so sure, at least about the first quarter. The company says that results for the agriculture and nutrition segment are forecast to be below last year's first quarter, based on an expectation of lower volumes in crop protection chemicals, competitive pressures, and a shift in seasonal revenues between the first and second quarters. • WWW.CEN-0NLINE.ORG
