Chemical earnings continue to fall The U.S. chemical industry must, by now, have that sinking feeling. Quarter after quarter, chemical companies continue to see earnings decline and, often, sales as well. The second quarter of 1999 was a continuation of that trend. Only six of the 15 largest chemical companies that had reported second-quarter results by the middle of last week showed stronger earnings than they had in the second quarter of 1998, with a spread that ranged from 2% increases at FMC and Lubrizol to a 27% rise at H. B. Fuller. (C&EN defines chemical companies as producers with more than 50% of their sales derived from chemicals.) The remaining nine companies had lower earnings than they had in the same three-month period of 1998. These declines in after-tax earnings from continuing operations, excluding significant unusual items, rangedfroma slightly lower 1% at Praxair to a 56% drop at Eastman Chemical. Eastman's 56% decline in earnings to $43 million came on a 4% sales decline to $1.12 billion. Lower prices were blamed for the sales decline and, in fact, the company said that physical volume of products sold actually increased 13% over the same period a year ago. Volume for Eastman was up in every segment and in every part of the world.
Union Carbide's second-quarter earnings decline almost matched that of Eastman, coming in 53% below last year's second quarter at $56 million. like Eastman, Carbide's sales decline was moderate— off just 3% to about $1.42 billion. Carbide's problems stemmed from a number of factors, according to Chairman and CEO William H. Joyce: "We were affected by rapidly rising feedstock costs early in the quarter that could not be passed on quickly enough through higher selling prices, plus we experienced weak partnership results. Licensing income, while still strong, declinedfromhigh levels realized in the first quarter." On the positive side, Joyce says, "fixed cost productivity and volume were excellent" Once past Eastman's and Union Carbide's precipitous falls, the earnings declines were more moderate, but still unsatisfactory. Fertilizer producer IMC Global had a 21% decline, with secondquarter earnings of $52.2 million. The company's sales were $765.4 million, 4% lower than last year's second quarter. All of that sales decline, which amounted to $28 million, and more came in the company's IMC-Agrico phosphates unit where lower prices and volumes in phosphate products reduced secondquarter revenues 14%, or $62.2 million, to $394.4 million. Other business units at IMC—except for potash, where revenues were essentially unchanged— showed good revenue and margin growth with salt sales up 18% and feed ingredient sales increasing 10%.
Only six of 15 chemical firms had increased earnings SECOND-QUARTER 1999 Sales
Earnings8
(S millions)
Air Products Cabot Cytec Industries Dow Chemical DuPont
Change from 1998 Sales
Earnings
1999
1998
8.4% 7.9 7.8 8.9 12.7
10.07 7.4 9.4 8.8 13.0
-56 2 27 23 -21
3.8 6.4 4.1 8.4 6.8
8.3 6.0 3.3 6.9 8.3
-6 2 -1 -5 -53
11.0 6.9 9.3 10.1 3.9
10.9 7.3 8.8 12.3 8.1
1% 13 -2 -5 9
-16% 19 -19 -4 6
43.0 68.9 14.3 31.4 52.2
-4 -5 2 1 -4
22.4 30.0 107.0 116.0 56.0
-8 7 -7 16 -3
$1,237.8 423.6 359.1 4,619.0 6,994.0
$103.6 33.4 28.0 410.0 886.0
Eastman Chemical FMC H. B. Fuller W.R. Grace IMC Global
1,122.0 1,070.4 348.2 373.0 765.4
Intl. Specialty Products Lubrizol Praxair Rohm and Haas Union Carbide
202.9 433.1 1,149.0 1,144.0 1,418.0
Profit marginb
a After-tax earnings from continuing operations, excluding significant extraordinary and nonrecurring items, b After-tax earnings as a percentage of sales.
Of the companies with improved earnings, specialty chemical maker H. B. Fuller's 27% earnings growth, to $14.3 million, came on 2% higher sales, which totaled $348.2 million. Fuller President and CEO Albert Stroucken credits the company's restructuring. "We've made good progress in implementing our restructuring plan and are pleased to see the results of our efforts reflected in significandy improved earnings," he says. "However, while our earnings growth is gratifying, we recognize the need to generate greater sales growth throughout our operations and have been taking steps to place additional focus on this in the coming quarters." One of the earnings surprises for the quarter was industry leader DuPont Wall Street analysts were predicting that the company's earnings would be essentially unchangedfromthe year-earlier quarter, but when the results came in, earnings were up 6% to $886 million. Although earnings were off in DuPont's agriculture and nutrition segment and in its nylon and polyester businesses, other units did very well. Performance coatings and polymers earnings were up 25%, pigments and chemicals rose 15%, and pharmaceutical earnings jumped 96%. On the down side, the company notes continued sluggish economic conditions in Europe and South America and increasing raw materials costs. William Storck
Elf Atochem stakes claim to life as independent firm The merger battle between Elf Aquitaine and TotalFina is coming down to the fate of the two companies' chemical operations and how they ultimately will be treated. Last week, Elf took its case public. Jacques Puéchal, the chairman of Elf Atochem—the chemicals arm of Elf Aquitaine—admires large, broad-ranging, and independent chemical companies. So much so that he wants Elf Atochem to become one. In briefings to the press andfinancialanalysts in Paris last week, he made his case for taking that course. Puéchal's efforts are one of a host of actions that Elf Aquitaine is taking in a drive to win the hearts and minds of inAUGUST 2,1999 C&EN 7
^ g ^ ^ g l l l J. \Λ*)1Α~k vestors in its takeover bid-counterbid confrontation with TotalFina (C&EN, July 26, page 9). These actions include a no-layoff pledge by Elf designed to gain union support. The takeover proposals from the two companies are very similar when it comes to both parties' oil operations. But there is a conflict of philosophies in the proposals concerning the treatment of the combined chemicals operations. TotalFina argues that the chemicals unit should stay with an oil company in order to maximize synergies. Elf Aqui taine proposes the more drastic split of oil and chemical operations into two separate companies with the working ti tles of Oilco and Chemco. The question seems to come down to where chemical synergies are rooted: at the refinery, in which case TotalFina's proposal is the more economically sound, or at the cracker, which both Elf Atochem and TotalFina have. Elf Aqui taine executives question refinerychemical synergies; for example, the concept of feedstocks at below market prices, they contend, is a myth. Puéchal argues that for a chemical company to exist on its own it needs to be "responsible, in control of its destiny, judged on its own merits, like BASF and Dow, and enjoying the same assets." The new Chemco would be an independent entity, not an "adjustment variable" for a larger parent company. TotalFina has already suggested that if it wins the takeover battle, it will sell some chemical assets to help support oil and gas projects. Puéchal also envisions the integrated TotalFina and Elf Atochem chemical operations making up a well-balanced chemical portfolio, with nearly $16 billion in sales per year—a move that would catapult Chemco into the top five global players. Basic chemicals would account for about 30% of the business; specialty chemicals, 29%; performance polymers and derivatives, 27%; and fine chemicals, 14%. He points to the fine chemicals operations as the bridge between the specialty and commodity chemicals operations contributed by the two parties, holding everything together. Elf Aquitaine's argument has not convinced everyone. Some senior executives at other chemical companies as well as long-time industry observers in the press see major difficulties in creating such a large, free-standing company. Elf s and TotalFina's chemical oper8
AUGUST 2,1999 C&EN
work supports new ideas about approaches to cancer chemotherapy. In earlier work, scientists had found ways to transform normal mouse cells into malignant cells. And human tumor cells have been created by treating normal human cells with carcinogenic substances or X-rays, or by inserting the whole genome of a tumor-inducing virus into such cells. But the Whitehead Institute study is the first in which normal human cells have been made cancerous by the deliberate activation of a set of specific cellular pathways. Weinberg and coworkers find that several cellular pathways must be altered if malignant transformation of normal cells is to occur. The SV40 large-T antigen oncogene, which turns off two tumor-suppressor gene pathways, must Puéchal: seeking Independent chemicals be present. The ras oncogene, which directly induces the transformation proations seem to have little cohesiveness, cess, must be activated. And the enthey say. And, of course, the Elf Aqui- zyme telomerase—which can immortaltaine proposal flies in the face of the cur- ize cells and lead to tumor formation by rent fashion for "pure-play" companies maintaining the length of telomeres focusing exclusively on, say, polyolefins (chromosome end-caps)—must be expressed. The researchers have successor specialty chemicals. Elf Atochem staffers privately say fully transformed human epithelial and they are resigned to a merger. What fibroblast cells by incorporating these they fear is that, in the course of a nego- activities into the cells. tiated settlement of the bid, TotalFina The findings are significant because will insist upon a compromise that ac- they suggest that scientists are begincepts the splitting off of most of the ning to understand enough about the chemical businesses into a new compa- molecular biology of the cell to be able ny, but keeping petrochemicals with the to turn cancer on—and potentially off— oil company. That, says one staffer, at will. The cellular pathways used by would be the worst outcome of all since Weinberg and coworkers have all been the full chain of chemical products known to be cancer-related. It is the would be needed to attain all potential group's selection of the correct pathsynergies from the deal. ways and their combination into an efPatricia Layman fective cancer-inducing methodology that makes the work truly novel. "This result is a landmark for the field because a minimal defined set of genetic changes has been shown to convert normal mortal cells into cells that can form tumors and proliferate indefinitely," comments David R. Corey, associate professor of pharmacology and During life, human cells sometimes ac- biochemistry and a Howard Hughes quire mutations that make them turn Medical Institute assistant investigator into cancer cells. Despite long-standing at the University of Texas Southwestern efforts, researchers have not been able Medical Center, Dallas. "While it will be to identify the precise combination of interesting in the future to learn what molecular and genetic changes needed other combination of genetic alterations will produce the same result, the essento make human cells cancerous. But a collaborative group headed by tial requirement for maintaining telocancer researcher Robert A. Weinberg mere length is clear. The results supof the Whitehead Institute for Biomedi- port the hypothesis that interfering with cal Research, Cambridge, Mass., has telomeres should be a valid approach to now found a formula for doing just that chemotherapy." [Nature, 4 0 0 , 464 (1999)]. The group's Stu Borman
Normal human cells engineered to become malignant
