BUSINESS
EARNINGS INCREASE AGAIN FOR MANY FIRMS Overall, U.S. chemical makers continued solid earnings growth in the second quarter WILLIAM J . STORCK, C&EN NORTHEAST NEWS BUREAU
T
HE SECOND QUARTER OF 2 0 0 5
was another good period for the U.S. chemical industry. Prices for chemical products continued to climb. Production was up from year-earlier levels, although growth slowed somewhat from the first quarter. And demand for products rose, helped by exports. The result was that earnings from continuing operations, excludingunusual items, for 24 of the 25 companies surveyed increased 457% over second-quarter 2004 to $371 billion as sales rose 12.7% to $42.5 billion. The average profit margin for the group was 8.7%, up from 6.8% ayear earlier. Ferro is excluded from the totals because it is reporting earnings only for the current period while an investigation into its ac-
counting in prior years continues. Thus, comparisons with 2 0 0 4 are not possible. The second-quarter performance im-
provement for the group was slightly less than that of the first quarter, so the improvement in the first six months of the year is higher than for the second quarter alone. In the first half, earnings for the firms reporting comparable data for 2005 and 2004 jumped 54.3% to $751 billion on a 12.9% increase in sales to $84.0 billion. Profitability for the period was 8.9%, compared with 6.5% in first-half 2004. The only downside for the chemical industry— albeit a big one—was that higher costs for raw materials and energy continued to put pressure on profit margins. Dow Chemical Chief Financial Officer J. Pedro
CRITERIA FOR C&EN EARNINGS ANALYSIS C&EN's quarterly report on financial performance of the U.S. chemical industry contains data from 25 major U.S. basic chemical companies and from five petroleum 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 whose
molecular composition has been changed during manufacture. Hence, these include traditional categories of basic petrochemicals and inorganics, organic intermediates and inorganic compounds, polymers such as plastics and fibers, and agricultural chemicals and specialty derivatives. In listing earnings, the report gives after-tax income for continuing operations, excluding significant nonrecurring and extraordinary items.
TOP 10 RANKINGS Chemical industry leaders for the second quarter... SALES RANK 2005
1 2 3 4 5 6 7 8 9 10
EARNINGS $ MILLIONS
$11,450.0 Dow Chemical 7,511.0 DuPont 3,339.5 Huntsman 2,656.0 PPG Industries 2,078.-4 Air Products Rohm and Haas 2,007.0 Praxair 1,919.0 Eastman Chemical 1,752.0 1,106.0 Engelhard 1,066.0 Lubrizol
RANK 2004
1 2 3 4 5 6 8 7 9 11
Dow Chemical DuPont PPG Industries Praxair Air Products Rohm and Haas Huntsman Eastman Chemical Lubrizol Engelhard
$ MILLIONS
RANK 2004
$1,172.0 904.0 231.0 209.0 190.6 179.0 169.5 130.0 63.8 63.5
2 1 3 4 5 6 25 7 13 8
$ MILLIONS
RANK 2004
$2,479.0 1,871.0 417.0 404.0 365.9 357.0 338.0 285.0 137.1 121.5
2 1 4 3 5 25 6 9 7 8
PROFITABILITY EARNINGS AS RANK % OF SALES 2004
Sigma Aldrich DuPont Praxair Dow Chemical FMC Corp. Air Products Rohm and Haas PPG Industries Eastman Chemical Terra Industries
14.1% 1 3 12.0 2 10.9 9 10.2 6 9.3 4 9.2 10 8.9 8 8.7 19 7.4 16 6.6
... and for the first six months of 2005 SALES RANK 2005
1 2 3 4 5 6 7 8 9 10
EARNINGS $ MILLIONS
$23,129.0 Dow Chemical DuPont 14,942.0 Huntsman 6,688.8 PPG Industries 5.U9.0 4,081.7 Air Products 4,029.0 Rohm and Haas 3,746.0 Praxair 3,514.0 Eastman Chemical 2,132.7 Engelhard Lubrizol 2,036.1
RANK 2004
1 2 3 4 5 6 8 7 9 11
Dow Chemical DuPont PPG Industries Praxair Air Products Huntsman Rohm and Haas Eastman Chemical Sigma Aldrich Engelhard
PROFITABILITY EARNINGS AS RANK % OF SALES 2004
Sigma Aldrich DuPont Praxair Dow Chemical Air Products FMC Corp. Rohm and Haas Eastman Chemical PPG Industries Cabot
16.2% 1 12.5 2 10.8 3 10.7 10 9.0 4 8.6 12 8.4 8 8.1 19 7 8.1 6.7 6
NOTE: Based on the companies listed on page 20.
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C & E N / AUGUST 2 2 , 2005
19
BUSINESS
RESULTS Earnings improve for all but two chemical companies SALES EARNINGS3 1$ MILLIONS)
SECOND-QUARTER 2005 FIRST-HALF 2005 CHANGE FROM 2004 PROFIT MARGINb SALES EARNINGS3 CHANGE FROM 2004 PROFIT MARGINb SALES EARNINGS 2005 2004 1$ MILLIONS) SALES EARNINGS 2005 2004
Air Products Albemarle Arch Chemicals Cabot Chemtura
$2,078.4 502.8 411.3 545.0 602.3
$190.6 29.0 24.5 29.0 19.4
9.8% 53.9 13.6 10.8 3.6
16.9% 50.3 11.4 -29.3 185.3
Cytec Industries Dow Chemical DuPont Eastman Chemical Engelhard
813.4 11,450.0 7,511.0 1,752.0 1,106.0
43.3 1,172.0 904.0 130.0 63.5
92.7 16.3 -0.2 4.5 -0.2
28.9 75.4 12.3 103.1 5.0
5.3 10.2 12.0 7.4 5.7
483.6 565.6 387.9 584.2 538.6
10.8 52.8 16.2 10.2 30.0
na 5.9 6.8 11.9 5.5
na 23.9 44.6 -65.7 6.4
Huntsman Corp. Lubrizol Nalco PPG Industries PolyOne
3,339.5 1,066.0 863.3 2,656.0 583.4
169.5 63.8 11.2 231.0 31.3
21.3 48.0 16.6 9.3 4.6
Praxair Rohm and Haas Sigma Aldrich Stepan Terra Industries
1,919.0 2,007.0 444.0 278.4 490.0
209.0 179.0 62.5 6.2 32.3
Ferro FMC Corp. H.B. Fuller Georgia Gulf Hercules
TOTALc
$42,495.1 $3,710.3
9.2% 5.8 6.0 5.3 3.2
$4,081.7 1,012.7 712.6 1,072.0 1,192.1
$365.9 54.2 28.1 72.0 49.7
8.9% 56.1 18.3 8.1 4.9
20.3% 51.4 -0.4 -8.9 -28.4
8.0 6.8 10.7 3.8 5.5
1,377.3 23,129.0 14,942.0 3,514.0 2,132.7
82.1 2,479.0 1,871.0 285.0 121.5
64.5 20.8 -4.2 7.4 -0.7
22.9 118.0 5.8 174.0 9.7
6.0 10.7 12.5 8.1 5.7
8.0 5.9 11.3 3.2 5.2
2.2 9.3 4.2 1.7 5.6
na 8.0 3.1 5.7 5.5
936.1 1,118.0 740.9 1,229.6 1,043.7
16.7 95.6 22.7 48.9 50.5
na 7.5 8.7 20.7 5.9
na 69.2 44.6 0.8 15.0
1.8 8.6 3.1 4.0 4.8
na 5.4 2.3 4.8 4.5
nm 105.8 366.7 23.5 45.6
5.1 6.0 1.3 8.7 5.4
def 4.3 0.3 7.7 3.9
6,688.8 2,036.1 1,613.9 5,149.0 1,160.1
357.0 116.1 22.2 417.0 44.7
24.4 56.9 11.0 9.7 6.1
nm 80.3 nm 27.9 154.0
5.3 5.7 1.4 8.1 3.9
def 5.0 def 6.9 1.6
19.7 11.4 27.4 17.8 35.2
19.4 51.7 4.9 62.6 80.4
10.9 8.9 14.1 2.2 6.6
10.9 6.6 17.1 1.6 4.9
3,746.0 4,029.0 843.8 542.6 918.8
404.0 338.0 137.1 9.4 41.7
19.5 10.9 17.7 18.5 35.1
19.2 45.7 12.5 20.5 15.5
10.8 8.4 16.2 1.7 4.5
10.8 6.4 17.0 1.7 5.3
12.7%
45.7%
12.9%
54.3%
8.7%
8.6% 5.9 6.1 8.3 1.2
6.8%
$84,026.4 $7,513.4
9.0% 5.4 3.9 6.7 4.2
8.9%
8.1% 5.5 4.7 8.0 6.1
6.5%
a After-tax earnings from continuing operations, exc:luding significant extraordinary and nonrecurring items, b Afte;r-tax earnings as a percentage of sales, c Excludes Ferro, for which 2004. data were not supplied. Perceintages calculated from combined sales and earnings, def = defficit. na = not available, nm = not meaningful.
Reinhard put a number on this, telling securities analysts that energy and feedstock costs for the company were $900 million higher than in the second quarter of last year. In spite of that, U.S. chemical industry fundamentals seem to be pretty good. According to Labor Department data, the average producer price index for the second quarter for all chemicals increased 10.3% over the same period last year. And the index for basic chemicals, the largest industry sector and probably the one most affected by the cost increases, rose 17.8%. This, again, represents a slight slowing in growth from the first quarter, when the index for all chemicals was up 11.8% and that for basic chemicals rose 20.7%. Chemical output, according to the Federal Reserve Board, experienced that same slower growth as prices in the second quarter. The production index for all chemicals was up 2.7%, but for basic chemicals, it was down a slight 0.1%. In the first quarter, the index rose 4.6% for all chemicals and 3.6% for basic chemicals. 20
C & E N / AUGUST 2 2 . 2005
Demand was good for chemical products in the second quarter, according to Commerce Department figures. The value of all chemical shipments rose 6.2% to $133.2 billion while shipments of chemicals excluding pharmaceuticals rose 9.8% to $105.2 billion. The data on shipments were helped by chemical exports, which rose 9.0% for the quarter to $29.8 billion. Excluding pharmaceuticals, exports increased 10.1% to $23.2 billion. As a result of the economic and pricing strength, earnings increased for all but two of the companies surveyed. Cabot's earnings fell 29.3% to $29.0 million, despite a 10.8% increase in sales to $545 million. Chief Executive Officer Kennett F. Burnes says, iCWe are, of course, not pleased with our results for the quarter, as we underperformed our own expectations by roughly 20 cents per share." The company earned 43 cents per share. "The shortfall," Burnes adds, "was attributable to significantly higher feedstock costs in carbon black and costs related to
the ongoing labor situation at our Supermetals facility in Pennsylvania." Burnes notes, though, that volumes were strong in the quarter. The other company Georgia Gulf, saw earnings decline 65.7% to $10.2 million even as sales rose 11.9% to $584 million. "While the second quarter has typically been a seasonally strong quarter, our results included several items that significantly reduced our bottom line," CEO Edward A. Schmitt says. "The costs from our plant outages were higher than anticipated, and we also had to work through higher priced inventories and raw material purchase commitments. In addition, our customers reduced inventories as sales prices for several products fell throughout the quarter." AT THE OTHER END of the growth spectrum, four companies—Chemtura, Eastman Chemical, Lubrizol, and Nalco— turned in triple-digit earnings increases. Chemtura's earnings increased 185% to $19.4 million on a 3.6% sales rise to $602 million. Chemtura was formed from the WWW.CEN-0NLINE.ORG
OIL
COMPANIES
Chemical Operations Contribute Their Share Of Earnings hile everyone has been talking about the large five firms, saw earnings rise 34.1% in the quarter to $814 milamounts of money that oil companies are taking in lion, owing to improved margins partially offset by tower volfrom oil and gasoline operations, for five of these firms umes. Company data show volumes declined 4.9% to 6.59 milchemical operations are making their own contributions, allion metric tons. though on a smaller scale. Chevron and ConocoPhillips benefited from their Chevron Phillips Chemical (CPChem) joint venture. Chevron's chemicat These five firms saw chemical earnings grow 49.0% in the earnings for the quarter were $84.0 million, up 42.4% from the second quarter to a total of $1.22 billion compared with the same period a year earlier, primarily because of higher margins same quarter last year. For the first six months, their combined for commodity chemicals. Higher feedstock costs at the compaearnings were up 93.1% to $3.02 billion. Tops among these companies in terms SECOND QUARTER FIRST HALF of percentage growth for chemicals was 2004 CHANGE $ MILLIONS 2005 2004 CHANGE 2005 the smallest—Sunoco—with earnings rising Chevron $84.0 42.4% $221.0 $133.0 66.2% $59.0 150% to $30.0 million. Chief Executive OffiConocoPhillips 85.0 130.6 63.0 46.0 37.0 196.0 cer John G. Drosdick says of chemical op34.1 ExxonMobil 607.0 2,096.0 1,171.0 79.0 814.0 erations, "Margins, particularly for phenol 148.0 196.6 Occidental Petroleum 225.0 92.0 144.6 439.0 and related products, were much improved 24.0 162.5 Sunoco 30.0 63.0 12.0 150.0 TOTAL $1,216.0 $816.0 49.0% $3,015.0 $1,561.0 93.1% over the year-ago quarter." Occidental Petroleum also scored well, with earnings increasing 145% to $225 million. The company ny's Oronite subsidiary partially offset the growth at CPChem. notes that the improvement was due to higher margins in chloMeanwhile, ConocoPhillips' chemical earnings rose 37.0% to rine, caustic soda, and polyvinyl chloride resulting from higher $63.0 million.The increase, according to the company, reflects sales prices, partially offset by high energy and feedstock costs. higher margins from olefins and polyotefins, partially offset by ExxonMobil, which has the largest chemical operations of the lower volumes and margins from aromatics and styrenics.
W
merger of Crompton and Great Lakes Chemical, but because the merger didn't take place untilJuly 1, the results are from Crompton alone. Eastman's earnings rose 103% to $130 million as sales increased 4.5% to $1.75 billion. The increase, according to CEO J.
CHEMICAL INDUSTRY 2005 Second-quarter results
Brian Ferguson, was a result of"strong performance throughout the company due to a number of factors, including solid economic growth as well as the actions we have taken to improve our profitability" Lubrizol's earnings for the quarter were up 106% to $63.8 million as a result of im) change from year-earlier quarter
proved prices and product mix, the acquisition ofNoveon, favorable currency translations, lower expenses, higher shipment volumes, and a lower tax rate. Earnings at Nalco jumped 367% to $ 11.2 million as sales rose 16.6% to $863 million. "Raw and other purchased material % change from year-earlier quarter
100
Sales
Earnings
Sales rose 13% from 2004 period Earnings were up 46% Profitability was 8.7% Production improved 2.7% Prices continued double-digit growth NOTE: All sales, earnings, and profit-margin data are based on the chemical companies on page 20. SOURCES: Federal Reserve Board (production data], Department of Labor (prices data)
2003
Production
Profit margin
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2004
2005
% change from year-earlier quarter
After-tax earnings as % of sales
2003
2004
2005
2003
2004
2003
2004
2005
% change from year-earlier quarter Prices
2005
2003
2004
2005
C & E N / AUGUST 2 2 , 200 5
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cost increases stabilized but are up about $40 million from the same period last year," CEO William H.Joyce says. "Price increases contributed about $36 million to sales." Nalco is an old name newly returned to C&EN's sample of companies, as is Celanese. Huntsman also has taken a place on the list. The appearance of these companies on the list is a result of the disappearance of Great Lakes and of Monsanto, which no longer derives more than 50% of its sales from chemicals. Cambrex also has been dropped, as a result of C&EN's raising its minimum annual sales figure to qualify for listing to $1 billion from an almost 30-year-old floor of $200 million in yearly sales. Prices were also a big factor at Rohm and Haas, where earnings improved 51.7% to $179 million as sales increased 11.4% to $2.01 billion. CEO Raj L. Gupta says, "Our performance reflects the ongoing emphasis on implementing price increases to recover extraordinarily high raw material and energy costs while mamtaining tight control over our expenses."
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THE LARGEST second-quarter sales growth among the companies was at Cytec Industries, which reported a 92.7% increase to $813 million. A major portion of this increase came from the company's acquisition of Surface Specialties, which had 2 0 0 4 sales of about $1.45 billion, from Belgium's UCB Group. Cytec's earnings were up 28.9% to $433 million. DuPont, the second largest company in the C&EN survey, showed earnings growth of 12.3% for the quarter to $904 million. Sales, however, were off a slight 0.2% to $7.51 billion. "Continued success with pricing and sales from new products were key to our strength in the quarter," CEO Charles O. Hollidayjr. says. Dow continued its solid earnings growth with a 75.4% increase in the quarter to $1.17billion. Sales were up 16.3% to $11.5 billion. Reinhard says the company made substantial progress through the quarter despite the headwinds of an inventory adjustment and the impact of higher feedstock and energy costs. He also notes that during the quarter, there were a number of unplanned outages, both at Dow facilities and at some of its joint-venture operations. Looking to the future, Reinhart says, "The global economy remains healthy with {gross domestic product] expected to grow between 3 and 3.5% in 2005—a sustainable rate that will translate into strong industrial production and solid demand." •
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