BUSINESS The two largest companies on the list, Dow Chemical and DuPont, were among the firms with lower earnings. Dow^s earnings fell 10.6% to $1.21 billion on a 2.9% rise in sales to $12.0 billion. Earnings at DuPont declined 10.3% to $867 million, while sales were down by 0.5% to $739 billion. Nevertheless, profitability remained high at both companies. Dow posted a profit margin of 10.1% compared with 11.6% in the comparable 2005 quarter, while DuPont's profit margin of 11.7% was down from 13.0% in the year-earlier period. Both companies put a brave face on the declines. At Dow, Chief Financial Officer Geoffrey E. Merszei, says: "This was a quarter in which we again benefited from our strategy, with an increase in {earnings before income taxes] of our combined performance businesses mitigating a decline in our basics portfolio. And while turnarounds during the quarter impacted volume, and U.S. sales slowed at the start of the year on the expec-
CHEMICAL EARNINGS DECLINE SLIGHTLY Lower demand and rising costs continue to hamper results at 25 firms WILLIAM J. STORCK, C&EN NORTHEAST NEWS BUREAU
W
HILE THE FOURTH QUARTER
of2005 proved difficult for U.S. chemical companies, with earnings rising just slightly above year-earlier results, the first quarter of 2006 was even worse: C&EN's group of 25 firms posted an aggregate earnings decline—the first the industry has seen since the third quarter of 2003. When all of the results were in, the companies had a total earnings decline of 2.7% to $4.0 billion. Sales were bolstered largely by price increases to a total of $49.6 billion, a 5.1% increase from the comparable period in 2005. Earnings are from continuing operations, excluding extraordinary and nonrecurring items. As a result, profitability suffered. The aggregate profit margin for the combined companies fell to 8.1% from 8.7% in the same period a year earlier. This outcome, however, was a big improvement from last year's fourth quarter, when the total profit margin, battered by the aftermath of the Gulf Coast hurricanes, was just 6.1%. Disasters aside, there was a weakness in many industry fundamentals in thefirstquarter. According to the Federal Reserve Board, total U.S. chemical production declined 1.5% from the same period a year earlier. Within that, the important basic chemicals sector saw output drop a whopping 7.8%. Prices, though, continued to increase, rising 8.9% for all chemicals, according to Labor Department data. Meanwhile, the average producer price index for basic chemicals in the quarter jumped 14.4%. Despite the decline in production in the quarter, the increase in prices raised the dollar value of chemical shipments, or what companies actually sell to customers. The Department of Commerce reports that shipments of all chemicals in the first quarter rose 6.2% to $142.6 billion. Shipments of chemicals excluding pharmaceuticals, a product basket that is more in line with the mix of products at the 25 companies, rose 77% to $107.7 billion. Although chemical earnings were down WWW.CEN-0NLINE.ORG
overall, the majority of firms had earnings increases in the quarter. Seventeen of the companies saw earnings rise, with two, Celanese and H.B. Fuller, showing tripledigit growth. The remaining eight had lower earnings than in the first quarter of 2005. This includes Terra Industries, where earnings went from $4.4 million in first-quarter 2005 to a loss of $25.3 million in the first three months of this year.
RESULTS Big chemical companies were largely responsible for first-qu arter earnings declines SALES
EARNINGS8
($ MILLIONS)
CHANGE FROM 2005
PROFIT MARGINb
SALES
2006
EARNINGS
8.8%
8.4%
5.7 1.9 5.1 7.7
4.8 1.2 8.2 2.6
-9.3 45.3
-19.0
2.9 4.8
3.3 6.9
2.9
-10.6 -10.3 -27.7
10.1 11.7
11.6 13.0
6.2
8.8
4.7 4.4 5.9 5.0
5.7 9.1 1.8 6.0 4.2
2.4 4.8 6.1 1.6 8.1
5.6 5.2 5.7 1.7 7.7
11.1
10.3
$2,317.2 607.4 317.8 627.0 1,652.0
$204.0 34.4
6.1
5.5
32.0 127.0
19.0 11.8
Chemtura Cytec Industries Dow Chemical DuPont Eastman Chemical
915.8 819.4 12,020.0 7,394.0 1,803.0
26.8 39.5 1,214.0 867.0 112.0
Engelhard FMC Corp. H.B. Fuller Georgia Gulf Hercules
1,455.3 594.1 348.3 567.9 527.3
69.1 69.0 15.3 33.7 26.4
42.9
Huntsman Corp. Lubrizol Lyondell Chemical Nalco Holding PPG Industries
3,187.7 983.5 4,757.0 849.4 2,638.0
76.6 47.1 290.0 13.7 213.0
-4.8 16.0
-59.1
7.1 9.2 5.8
14.2
Praxair Rohm and Haas Sigma-Aldrich Stepan Terra Industries
2,026.0 2,083.0 443.1 289.6 398.9
225.0 207.0 71.5
10.9
4.2
9.6
19.1 30.2 16.1 44.8
-25.3
-11.4
nm
$49,622.7
$3,999.1
T0TALc
2005
21.4% 41.6 69.4 -25.6 234.2
15.7% 19.1
Air Products Albemarle Arch Chemicals Cabot Celanese
-0.5
2.3
7.5 -1.3 -12.0
5.1
3.0 10.8
5.1%
1.5
18.3 38.0 135.4 -12.9 25.1
6.8 0.7 11.5
-2.7%
11.6
9.9
7.9
16.1
15.4
1.5 def
1.1 0.7
8.1%
8.7%
a After-tax earnings from continuing operations, excluding significant extraordinary and nonrecurring iterns, b After-tax earnings as a percentage of sales, c Percentages calculated from combined earnings, def = deficit. nm = not meaningful.
C & E N / MAY 22, 2006
21
BUSINESS tation of lower prices, we saw demand pick up again in March, and that momentum has continued into the second quarter." DuPont Chief Executive Officer Charles O. HollidayJr. says: "We knew it would be a difficult operating environment in the first quarter, and I am very encouraged by the better-than-expected performance of our company. We are fully committed to
came from Huntsman Corp. CEO Peter R. Huntsman chose to make a comparison with the previous quarter. "Our results in first-quarter 2006 show marked improve ment as compared to the hurricane-impact ed results achieved in the fourth quarter of 2005," he says, noting that sales volumes improved across most product lines as endmarket demand continues to grow in North
Eastman Chemical, which had 35% earnings growth in final quarter of 2005, saw its fortunes turn in the first quarter of this year as earnings fell 277% from yearearlier levels to $112 million. The decline came on a 2.3% increase in sales to $1.80 billion. The decline was due primarily to lower polymers segment earnings, which fell to $170 million from $84.0 million in the comparable 2005 quarter. The company's raw material and energy costs increased by about $100 million compared with those in first-quarter 2005, and results also were affected by about $19 million in costs as sociated with operational disruptions at Eastman's Longview, Texas, facility.
CRITERIA FOR C&EN EARNINGS ANALYSIS C&EN's quarterly report on financial per formance of the U.S. chemical industry contains data from 25 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
growing revenue, controlling costs, and improving returns on assets across all of our businesses." Additionally, Holliday says, "We are raising our full-year earnings outlook in light of our first-quarter performance and the progress we have made in successfully implementing initiatives to accelerate share holder value." The largest measurable percentage de cline in earnings for the quarter—59.1%, compared with the year-earlier p e r i o d -
CHEMICAL INDUSTRY 2006 First-quarter results
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.
America, Europe, and Asia. But all is not perfect. "As we have indi cated in the past, we are frustrated with the valuations that the market appears to place on our differentiated businesses," Huntsman notes. "We continue to evaluate available options for improving shareholder value, and as previously announced, we are ag gressively pursuing the sale of certain of our base chemicals and polymers assets and/or a spin-off of these segments."
% change from year-earlier quarter
AMONG COMPANIES with gains for the quarter, Celanese, a company new to the C&EN list, took the prize. Earnings at the firm more than tripled, rising 234.2% to $127 million as sales increased 11.8% to $1.65 billion. Profitability at the company jumped to 7.7% from 2.6%. "Our results demon strate the strength of our integrated hybrid structure as our downstream businesses delivered improved performance year-overyear," CEO David N. Weidman says. "We are focusing our portfolio, expanding glob ally, and relentlessly pursuing cost improve ments to deliver on our commitments and create value for our shareholders." Also new to the list of 25 firms is Lyondell Chemical, which enters the group as the third-largest company. Up until now, year-to-year comparability had been
% change from year-earlier quarter 80 Earnings —
1.
60 Sales rose 5.1% from year earlier Earnings declined 2.7% Profitability averaged 8 . 1 % Production fell 1.5% Prices rose 8.9%
40 20 0
NOTE: All sales, earnings, and profit-margin data are based on the 25 chemical companies on page 21. SOURCES: Federal Reserve Board [production data], Department of Labor [prices data]
After-tax earnings as % of sales 12 Profit margin 10
• •
II M • π 11 m
IMIIH
-20 2004
2005
2006
% change from year-earlier quarter 6 Production
2004
2005
2006
% change from year-earlier quarter
4
Π 1 y ι I N I ΙΓ
I
2
0
111 η 11111 η 11111111 2004
22
C & E N / MAY 2 2 , 2006
2005
2006
2004
2005
2006
WWW.CEN-0NLINE.ORG
TOP 10 RANKINGS Chemical industry leaders for first-quarter 2006 SALES RANK 2006
1 2 3 4 5 6 7 8 9 10
$ MILLIONS
Dow Chemical DuPont Lyondell Chemical Huntsman Corp. PPG Industries Air Products Rohm and Haas Praxair Eastman Chemical Celanese
EARNINGS RANK 2005
$12,020.0 7,394.0 4,757.0 3,187.7 2,638.0 2,317.2 2,083.0 2,026.0 1,803.0 1,652.0
1 2 3 4 5 7 6 8 9 10
PROFITABILITY
$ MILLIONS
Dow Chemical DuPont Lyondell Chemical Praxair PPG Industries Rohm and Haas Air Products Celanese Eastman Chemical Huntsman Corp.
RANK 2005
$1,214.0 867.0 290.0 225.0 213.0 207.0 204.0 127.0 112.0 76.6
1 2 3 5 4 8 7 17 9 6
Sigma-Aldrich DuPont FMC Corp. Praxair Dow Chemical Rohm and Haas Air Products PPG Industries Celanese Eastman Chemical
EARNINGS AS % OF SALES
RANK 2005
16.1% 11.7 11.6 11.1 10.1
1 2 5 4 3 9 7 10 20 6
9.9 8.8 8.1 7.7 6.2
NOTE: Based on the companies listed on page 21.
problematic when analyzing the firm's data. Lyondell had 14.2% earnings growth to $290 million, double its 7.1% sales increase to $4.76 billion. The company's profit margin increased to 6.1% from 5-7%. Of the future, CEO Dan R Smith says, "Volatility and current high prices in the energy markets continue to present challenges, but OIL
strong business conditions ultimately should prevail, positioning Lyondell's chemical products for another strong year." Celanese and Lyondell have replaced Ferro and PolyOne in C&EN's survey of chemical company earnings. Other companies are predicting a good year on the basis of their first-quarter results.
COMPANIES
High Costs Cut Chemical Earnings
F
irst-quarter results from chemi-
lis and higher margins in chlor-alkalis and
cal operations at five U.S. oil com-
polyvinyl chloride, resulting from higher
panies were nothing to get excited
sales prices that were partially offset by
about, with three showing relatively modest earnings gains and the other two post-
higher energy and feedstock costs. Chemical earnings were up 12.0% at
ing declines. As a group, the five companies saw their total chemical earnings fall 15.9% from the first quarter last year to $1.51 billion in the first quarter of 2006. The oil companies traditionally give no information regarding chemical sales. Oddly, the two declines came from the largest company and the s m a l l e s t ExxonMobil and Sunoco. Earnings from chemical operations at ExxonMobil de-
FIRST QUARTER $ MILLIONS
2006
2005
CHANGE
Chevron $153.0 $137.0 11.7% ConocoPhillips U9.0 133.0 12.0 ExxonMobil 949.0 1,282.0 -26.0 Occidental Petroleum 248.0 15.9 214.0 Sunoco 14.0 33.0 -57.6 TOTAL3 $1,513.0 $1,799.0 -15.9% a Percentages calculated from combined earnings.
clined 26.0%, from what the company said was its best quarter for chemicals
ConocoPhillips to $149 million. The in-
ever, to $949 million. The decline was pri-
crease from the first quarter last year
marily due to reduced margins.
came largely from improved olefin and
Sunoco's chemical earnings dropped 57.6% to just $ U million. The decrease,
polyolefin margins and the recognition of a business interruption claim. It was in part
the company said, resulted mainly from
offset by lower margins for aromatics and
lower margins for both phenol and poly-
styrenics.
propylene and higher expenses, including fuel and utility costs.
At Chevron, earnings from chemicals totaled $153 million, an 11.7% increase
Of the three companies with higher
from the year-earlier quarter. Again, the
chemical earnings, Occidental Petroleum
improvement came from higher margins
led with a 15.9% rise to $248 million. The
in olefins and polyolefins and for additives
improvement came, the company says,
sold by Chevon's Oronite subsidiary for
from increased volumes in chlor-alka-
use in fuels and lubrication oils.
WWW.CEN-0NLINE.ORG
One of them is FMC Corp., which had a 38.0% increase in earnings to $69 million as sales rose 7.5% to $594 million. "With our strong first-quarter performance, we have raised our full-year 2006 outlook for earnings, before restructuring and other income and charges, to $535 to $5.55 per diluted share," CEO William G. Walter says. Diluted earnings per share is the value reached if all convertible securities were converted or all warrants or stock options were exercised. "Through the balance of the year, we expect to realize the ongoing benefits of higher selling prices in industrial chemicals, lower interest expense, and continued profitable growth in agricultural products and specialty chemicals, though unfavorable currency translation and higher energy and raw material costs are expected to persist," he adds. For all of 2006, Praxair expects to see continued year-over-year growth of about 10% and diluted earnings per share in the range of $2.74 to $2.82, representing 13-17% growth over 2005. CEO Dennis H. Reilley says, "We expect strong growth in 2006 and 2007 as projects in our backlog come onstream and new applications technologies take hold." In the first quarter, Praxair's earnings rose 19.1% to $225 million. Sales improved 10.9% to $2.03 billion. At Rohm and Haas, CEO Raj L. Gupta expects 3-4% demand growth due to higher sales in key markets such as electronic materials and coatings, even though the outlook for global demand and input costs remains uncertain. At the same time, the company is focused on improving sales mix, managing selling prices, mamtaining growth in emerging markets, and improving manufacturing efficiency. "As a result," Gupta says, "we expect full-year sales growth in the 3-5% range, yielding annual sales of approximately $8.3 billion and full-year earnings in the $3.15- to $3.30-per-share range." • C & E N / MAY 22, 2006
23
