business
CHEMICAL EARNINGS JUMP Higher demand and prices spur increase in the bottom line at major chemical companies, despite higher raw materials costs William J. Storck C&EN Northeast News Bureau
T
his year's first quarter was a good one for U.S. chemical producers. An expanding economy and greater efficiencies of production helped to overcome higher feedstock costs resulting from the run-up in oil prices. For 25 chemical companies regularly surveyed by C&EN—firms with more than 50% of their sales from chemicals— earnings rose a combined 17% over the year-earlier period. The first quarter marked a high point in what is hoped to continue as a recovery from the economic malaise that began at the end of 1995. For instance, this is the first time that the companies have put together two quarterly earnings increases in a row since first-quarter 1998, which finished a string of four very modest quarterly increases. And it is the first time since the fourth quarter of 1995 that the group had a double-digit rise in earnings. That earlier quarter had marked a string of huge upswings in earnings, at one point getting as high as 90% for the group. However, the lineup of companies now is very different from the one that marked the last double-digit rise. At that time, some companies that are now tracked were not even born. For instance, Arch Chemicals was still part of Olin, and Solutia was the chemicals and fibers segment of Monsanto, which has now disappeared and is part of Pharmacia. Also on the list then were other companies that no longer exist, such as Betz Laboratories before it acquired W.R. Grace's Dearborn division and then, itself, was acquired by Hercules. On the list as well was Morton International, subsequently merged into Rohm and Haas; Loctite, which went to Henkel; and Arco Chemical, acquired by Lyondell. Oil and gas companies, which were 14
MAY 22, 2000 C&EN
the particular beneficiaries of the recent increase in oil prices, saw a huge earnings increase in 2000's first quarter. For six companies surveyed by C&EN, earnings increased a combined 183%. Diversified companies that are major chemical producers had a much more modest increase in earnings—11% for the 11 companies surveyed. During the first quarter, chemical
sales and earnings were pulled along by the robust U.S. economic growth in which gross domestic product expanded at a healthy annual rate of 5.4%, down from an unsustainable 7.3% in the fourth quarter of 1999. The result was good chemical industry fundamentals all the way around. Chemical prices, which have shown little increase in the past four years, have finally started to move. According to government data, prices for chemicals and allied products increased 4.9%. But prices for the cyclical industrial chemical segment, which makes up a little more than 40% of chemicals and allied products, jumped 8.3%. The same pattern occurred in output of chemicals. Production of chemicals and allied products rose 5.7% for the first quarter, and output for basic organic and inorganic chemicals plus synthetic materials was up 9.7%. Demand growth was much closer for
Most chemical companies showed strong earnings growth FIRST-QUARTER 2000 Sales
Earnings3
9.0% 11.1 6.0 7.6 8.7
78.2 32.1 415.0 898.0 68.0
-2 1 22 21 19
-7 14 26 20 98
10.2 8.9 7.7 11.8 5.6
10.7 7.9 7.4 11.9 3.4
194.8 959.0 321.2 403.7 364.9
1.0 32.8 9.5 31.4 24.2
-4 -2 -2 125 6
-91 8 2 1,156 29
0.5 3.4 3.0 7.8 6.6
5.4 3.1 2.8 1.4 5.4
390.2 785.0 620.8 436.2 231.0
28.4 57.0 48.2 30.1 23.7
17 -1 -7 -3 15
-8 -8 -32 -9 71
7.3 7.3 7.8 6.9 10.3
9.3 7.8 10.6 7.4 6.9
1,230.0 1,735.0 846.0 167.4 1,617.0
114.0 123.0 51.0 4.3 97.0
10 1 30 2 15
21 12 -19 -30 26
9.3 7.1 6.0 2.6 6.0
8.4 6.4 9.7 3.7 5.5
$28,089,0
$2,394.8
8.5%
8.3%
Ethyl FMC H. B. Fuller Georgia Gulf W.R. Grace Great Lakes Chemical Hercules IMC Global Lubrizol NL Industries
TOTAL c
1999
9.9% 12.1 5.8 7.7 9.5
769.0 360.4 5,381.0 7,593.0 1,217.0
Praxair Rohm and Haas Solutia Stepan Union Carbide
Profit marginb 2000
18% 23 -4 24 21
$ 133.2 28.5 12.9 41.0 12.3
Crompton Cytec Industries Dow Chemical DuPont Eastman Chemical
Earnings
7% 13 -2 23 10
$ 1,347.2 235.5 220.7 534.0 129.0
Air Products Albemarle Arch Chemicals Cabot Cambrex
Change from 1999 Sales
($ millions)
14%
17%
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 of reporting companies.
Chemical industry 2000 first-quarter results Sales
Earnings
% change from year-earlier quarter
% change from year-earlier quarter
Sales improved 14% Earnings jumped 17% Profitability was 8.5% Production rose 5.7% Prices increased 4.9%
-10
1998
1999
1998
2000
1999
Profit margin
Production
Prices
After-tax earnings as % of sales 10Γ
% change from year-earlier quarter
% change from year-earlier quarter
1998
1999
2000
1998
1999
2000
1998
1999
2000
2000
Note: Sales, earnings, and profit-margin data are based on the 25 chemical companies listed on page 14. Production (from the Federal Reserve Board) and price (Department of Labor) data are for the chemicals and allied products sector.
the overall chemical segment and its in dustrial chemicals subset, with ship ments of chemicals and allied products rising 9.1% and those of industrial chem icals increasing 9.6%. Shipments were helped by exports— at least for most of the quarter. According to Commerce Department data, exports of chemicals in thefirsttwo months of the year—the most recent data available— were up 8% over the same two months in 1999. However, imports rose an even fast er 11%, driving the chemical trade surplus down 12%. Thus for those two months, domestic demand for chemicals and al lied products was up 11%. Domestic de mand is shipments less exports plus im ports and indicates the demand for all chemicals within the country. Not only did earnings increase for
most chemical producers, but so did profitability. The aggregate profit mar gin for the 25 chemical companies— earnings as a percent of sales—rose to 8.5% in the first quarter compared with 8.3% a year earlier. Earnings increased 17% to a total of $2.39 billion on a 14% improvement in sales to $28.1 billion. For oil and gas companies, earnings were up 183% to $5.24 billion on a 52% sales increase to $77.8 billion, almost doubling the aggregate profit margin to 6.7% in the first quarter from 3.6% a year earlier. The oil company results are a good place to look at petrochemical perfor mance since petrochemicals make up the bulk of the companies' total chemi cal earnings. Earnings from chemical operations at five of the oil companies
increased a total of 41% to $572 million for the quarter. Occidental Petroleum's chemical earnings of $142 million were almost 12 times higher in the first quarter than they had been in the same period the year be fore. Chevron's chemical earnings were up 36% to $68 million; Sunoco's increased 30% to $13 million; and Phillips Petro leum's increased 27% to $28 million. Chemical earnings for ExxonMobil, how ever, were up only 3% to $320 million. The 11 diversified companies chart ed by C&EN did not fare as well. For this group, sales rose 13% to $22.5 bil lion, but earnings rose slightly less— 11% to $1.43 billion. Thus, the average profit margin declined a bit to 6.4% from 6.5% a year before. However, chemical operations at these MAY 22, 2000 C&EN
15
business Chemical industry leaders for first-quarter 2000 Sales Rank 2000
1 2 3 4 5 6 7 8 9 10
Profitability
Earnings $ Millions
DuPont $7,593.0 Dow Chemical 5,381.0 Rohm and Haas 1,735.0 Union Carbide 1,617.0 Air Products 1,347.2 Praxair 1,230.0 Eastman Chemical 1,217.0 FMC 959.0 Solutia 846.0 Hercules 785.0
Rank 1999
1 2 3 4 5 6 7 8 12 9
I I i I I | ! I !
DuPont Dow Chemical Air Products Rohm and Haas Praxair Union Carbide Crompton Eastman Chemical Hercules Solutia
$ Millions
Rank 1999
$898.0 415.0 133.2 123.0 114.0 97.0 78.2 68.0 57.0 51.0
1 2 3 4 5 7 6 11 10 9
Earnings as % of sales
Albemarle DuPont NL Industries Crompton Air Products Cambrex Praxair Cytec Industries Georgia Gulf IMC Global
12.1% 11.8 10.3 10.2 9.9 9.5 9.3 8.9 7.8 7.8
Rank 1999
2 1 15 3 7 8 9 10 25 4
Note: Based on 25 companies listed on page 14.
diversified companies generally did well— at least for those that report chemical results. For instance, at Olin, chlor-alkali sales rose 20% to $80.2 million, and the company erased a $12.8 million operating loss—sales minus costs of goods sold and selling and administrative expenses—in chlor-alkalies during thefirstquarter of last year to post operating income of $4.8 million in the same period this year.
At BF Goodrich, which has placed its performance materials on the block, operating profit from this essentially chemicals unit rose 15% to $34.1 million despite a 2% decline in sales to $1.39 billion. And at PPG Industries, chemical sales rose 16% to $389 million and operating income more than doubled—jumping 105% to $74 million—as a result of significantly
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MAY22,2000C&EN
higher commodity prices coupled with improved sales volumes. One exception, however, was at Honeywell—formerly AlliedSignal—where, despite a 4% increase in sales of its performance materials unit, operating income fell 36% to $95 million as higher raw materials costs cut into profits. Higher raw materials costs were a factor at the 25 chemical companies as well. But in most cases, the firms were able to overcome the increased costs. Just nine of the companies had declining earnings in the quarter. Of the 16 companies that showed rising earnings, the increases ranged from a low of 2% at H. B. Fuller to a high of 1,156% at Georgia Gulf, which includes earnings in the first quarter from its purchase of Condea Vista's polyvinyl chloride operations. As a result, Georgia Gulf also had the largest increase in sales, 125% to $404 million, giving it $31.4 million in earnings. Eastman Chemical almost doubled its earnings in the first quarter to $68.0 million on a sales increase of 19% to $1.22 billion. This raised the company's profit margin to 5.6%fromjust 3.4% a year earlier. The company reported strong volume growth worldwide in both its chemicals and polymers segments. Earnest W. Deavenport Jr., Eastman's chairman and chief executive officer, says, "We can clearly see the results of our cost-reduction efforts and the good volume growth for most of our products. Even though raw materials costs increased more than selling prices, we were able to improve operating earnings by $45 million over first-quarter 1999 before nonrecurring items." The company notes that acquisitions accounted for 6% of revenue and 5% of volume for the firstquarter results. The percentage increase in earnings
was a more modest 29% at W.R. Grace, where earnings were $24.2 million on a Earnings almost tripled at oil companies. 6% sales increase to $365 million, raisand rose moderately at diversified firms ing profitability to 6.6% from 5.4%. The company notes that substantially all of FIRST-QUARTER 2000 its sales increase can be attributed to Profit margin Change from 1999 Sales Earnings improved volumes. Negative foreign 1999 2000 Earnings Sales ($ millions) currency impacts on sales in Europe OILANDGASCOMPA NIES and Latin America were largely offset by 4.4% 9.7% 294% 77% $1,106.0 $11,356.0 Chevron price-mix improvements. 4.2 6.1 42 108 3,350.0 55,081.0 ExxonMobil The company's chairman, president, 1.6 20.6 2,150 79 180.0 875.6 Kerr-McGee and CEO, Paul J. Norris, says, "Our def 10.5 nm 87 264.0 2,508.0 Occidental Petroleum businesses generated earnings increas0.2 5.6 92 6,675 271.0 4,800.0 Phillips Petroleum es from strong sales volumes in cata0.6 2.1 458 65 67.0 Sunoco 3,187.0 lysts and building materials, continued growth in construction chemicals, and 3.6% 6.7% 52% TOTALc 183% S5,238.0 $77,807.6 the success of our productivity initiaDIVERIFIED MANUFAC TURERS tives. The programs we put in place over 0.4% 317% 1% $ 25.0 $ 1,522.0 Ashland 1.6% the past year are driving performance." 3.8 5.0 43 9 58.0 1,165.1 Engelhard Industry leader DuPont, despite a 5.2 5.1 8 9 18.4 Ferro Corp 360.6 good earnings increase, did not fare as 6.6 -4 5.1 1,738.2 23 89.5 BF Goodrich well in profitability improvement. The 4.7 1.8 -55 18 Goodyear 63.6 3,536.5 company reported an earnings increase 8.4 7.9 15 8 506.0 Honeywell 6,044.0 of 20% to $898 million as sales grew 21% 10.2 14 10.8 7 3M 437.0 4,052.0 to $7.59 billion. DuPont's profit margin 0.7 5.3 819 362.4 Olin 19 19.3 declined slightly to a still solid 11.8% from 0.1 1.7 3,780 69 19.4 1,119.7 Phelps Dodge 11.9% last year. DuPont did very well in 7.9 8.3 22 16 174.0 2,087.0 PPG Industries foreign markets, with sales increasing 4.9 -1 7 4.5 23.3 Vulcan Materials 515.0 33% in the Asia-Pacific region and 30% in Europe. TOTALc 6.5% 6.4% 11% 13% $1,433.5 $22,502.5 At Dow Chemical, earnings grew 26% a Earnings from continuing operations, excluding significant extraordinary and nonrecurring items, b Earnings as a percentage of sales, c Percentages calculated from combined sales and earnings of reporting companies, nm = not to $415 million on sales growth of 22% to meaningful, def = deficit. $5.38 billion, giving the company a profit margin boost to 7.7% compared with 7.4% a year earlier. The company noted that the nearly $1 billion increase in Ground rules for C&EN earnings analysis sales resulted from a 10% increase in C&EN's quarterly report on financial whose molecular composition has volume and 12% growth in prices. Volperformance of the U.S. chemical in- been changed during manufacture. ume was up in most segments, led by dustry contains data from 25 major Hence, these include traditional catedouble-digit growth in performance U.S. basic chemical companies and gories of basic petrochemicals and inchemicals, performance plastics, and from 17 oil and diversified companies, organics, organic intermediates and plastics. The highest volume gains were each with more than $200 million in inorganic compounds, polymers such annual chemical sales. as plastics and fibers, as well as agoutside North America, with increases To be included in the table of basic ricultural chemicals and specialty of 26% in Asia-Pacific, 12% in Europe, chemical producers, a company must derivatives. and 10% in Latin America. have at least 50% of its sales in In listing earnings, the report gives Other companies could not overcome chemicals. after-tax income for continuing operarising costs. One of these was Solutia, In referring to chemical sales, tions, excluding significant nonrecurwhich saw earnings fall 19% to $51.0 milC&EN means sales of chemicals ring and extraordinary items. lion on a 30% increase in sales to $846 million. John C. Hunter, chairman, president, and CEO, says, "As expected, the rapid es- menting on the second quarter and be- and our continued transition to greater calation of petrochemical raw materials yond, says, "We look forward to healthy growth of high-value-added products, costs had a significant adverse effect on the volume growth in all our businesses and we remain committed to delivery of profitability of our integrated nylon seg- improving margins as feedstock and en- strong double-digit earnings-per-share ment during the quarter. As uncertainty ergy prices stabilize." growth in 2000." At the company's ancontinues in petrochemical markets, sucAt DuPont, Chairman and CEO nual meeting, Holliday set a specific cessful implementation of price increases Charles O. (Chad) Holliday Jr. says, "In growth target of 17 to 20%. remains critical to restore margins." the face of a business environment that Eastman's Deavenport says, "As busiUncertainty is something not seen includes higher raw materials costs, ness conditions improve and raw materiat other companies when speaking of higher interest rates, and negative cur- als costs stabilize, the lower cost structhe rest of the year. At Dow Chemical, rency impacts, we are intensely focused ture and growth in volume will give us leJ. Pedro Reinhard, executive vice presi- on execution. Based on our efforts in verage to continue to improve financial dent and chief financial officer, in com- pricing, the momentum in productivity, performance in 2000 and beyond."^ 8
b
MAY 22, 2000 C&EN
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