Ferro sets sights on specialty chemicals With its acquisition of Keil Chemical last month, Ferro Corp. made a further step in its plans to carve out a bigger niche for itself in specialty chemical markets. Specialty chemicals—which at Ferro include primarily heat and light stabilizers and ultraviolet absorbers for use in plastics, as well as fungistats and other additives for paint and other chemical products—accounted for only 9% of Ferro's total sales ($256 million) last year. Keil, which makes halogenated hydrocarbons and sulfur-containing compounds for use as additives in cutting oils and industrial lubricants at Hammond, Ind., and also has developed some fire retardants for plastics, will help lift Ferro's specialty volume to about $35 million this year. Ferro board chairman Harry T. Marks, who looks to such specialty products as one of Ferro's best avenues for maintaining the company's growth, adds that Keil "will enable us to extend the scope of our specialty chemicals activities into product areas in industrial and plastics fields not previously served by Ferro." Mr. Marks' yen to diversify is understandable. A decade ago, Ferro's sales were increasing at a rather undramatic clip of 6 to 7% a year. Earnings had been in a rut for several years. Ferro's traditional product line was a decidedly unglamorous item with an even less glamorous name: frit. Its sales were tied closely to cyclical demand for major home appliances and seemed threatened by the inroads of new, more sophisticated products, such as plastics. Obviously, Ferro didn't need a high-priced management consultant or a bright young Harvard business school graduate to suggest that diversification into more promising areas might be its best strategy. And that's exactly what Ferro did, launching an acquisition and development program that has led it to take over about 25 smaller companies in the U.S. and abroad since 1960 and pushed it into such promising fields as glass fibers (through a license from OwensCorning Fiberglas), industrial composite materials, specialty ceramics and refractories, additives for polymers, and factory-built housing. What is the outcome? Sales in the past 10 years have been growing at an annual rate of about 12%, net income by 17%. After-tax profit margins have widened to 6.2% of sales in 1973 from 4.0% in 1963. Return on average net worth jumped to 17.4% from 9.0% 10 years earlier. Ferro moved onto the Fortune list of the top 500 industrial firms a couple of years ago, and among that select group of blue chips ranks within the top 25% in growth of earnings and return on stockholders' equity. Clearly, then, its record suggests a 10
C&EN August 12, 1974
Marks: acquisition minded textbook case in successful corporate diversification. But look again. That old-line product, frit (a specially formulated, granulated type of "fried" glass that is the major ingredient of porcelain enamel and ceramic glazes) still accounts for 36% of Ferro's business and, moreover, just about half of its pretax profits. Ferro continues to be the world's largest producer of frit and the business this year "is doing exceptionally well worldwide." Another long-established product line, inorganic colorants (which Ferro initially made as pigments for enamel and ceramics but now sells to producers of plastics and glass containers as well) bring in about 22% of total sales and 28% of profits. And all those diversification ventures last year provided 44% of sales but only 16% of profits. Thus, Ferro earns, before taxes, 16 cents on every $1.00 of frit or colorants that it sells, but less than 7 cents on the dollar for sales of its newer products. Glass fiber, with sales of about $20.5 million in 1973, has been only marginally profitable at best. Composite materials—either coated products or resin-impregnated reinforcements— provided $7 million in sales but sales were hurt by the decline of the U.S. space exploration program. Ferro's diversification into factory-built, panelized housing and residential construction, in which Ferro became involved when it bought Nashville-based Jones Homes in 1971, was, as Mr. Marks told stockholders candidly at the annual meeting last April, an "ill-timed venture." Jones Homes, whose market centered on low-cost homes, got caught squarely in a severe squeeze as federal low-cost housing subsidies dried up while building and financing costs soared. With the business awash in red ink (last year, to the tune of $1.4 million), Ferro in May sold Jones Homes back to founder Ralph L. Jones, writing off a loss this year of more than $1.7 million on the deal. "From this point forward," says Mr. Marks with a sigh of relief, "we should have no negative effect upon our operating results because of this housing company venture." (Ferro's earnings for 1974's first half were down 11% to $7.9 million, but with international business re-
maining strong, net income from continuing operations was up 16% to $9.7 million on a sales gain of 21%, despite the impact of reduced housing starts in the U.S. on demand for appliances and a decline in boat sales, the major market for the company's glass fiber output.) As for specialty chemicals, Ferro's sales were up 25% last year from the year before and continue to flourish this year despite some raw materials shortages. Ferro's move into the glass bead business last year by acquiring Cataphote Corp. is also doing well. But the overall contribution of these operations to the corporation's total sales and profits remains relatively modest. If all this suggests that Ferro's diversification strategy has yet to jell, however, it is only because it overlooks a significant element. A major share of the company's sales growth and even more of its rise in profits during the past several years have been abroad. Geographic diversification has proved to be a real winner. Last year, Ferro got 51% of its sales and a whopping 78% of its profits from operations outside the U.S. For a firm its size, it is remarkably multinational. Operating 27 plants in 16 foreign countries, last year Ferro pushed its sales overseas up—for the 21st year in a row—33%, about double the increase for domestic volume. In Europe, it earns 10% on sales; in Latin America and elsewhere abroad 9%. In the U.S., it earns but 3% on sales. Overseas too, it earns 32% on its net assets there. In the U.S., it earns 6%. Foreign sales have been growing significantly faster than those in the U.S., as well. In 1968, only about 40% of the company's total volume was generated abroad; in the late 1950's, only about 20%. Growth in overseas profits has been even more impressive. They have more than tripled since 1969, while those in the U.S. are up only about 40%. As chairman Marks puts it, "Many of the seeds we have planted abroad have now grown to forests." The point is that Ferro's business overseas is largely concentrated on its traditional products of frit and colors, and demand for both has grown much more abroad than it has in the U.S. In foreign markets, the big outlet for frit is in glazing for colored tile, rather than, as in the U.S., for porcelain enamel used on major appliances. Ferro executives are hopeful, in fact, that foreign tastes for tile on the walls and floors of homes may spread to the U.S., giving a boost to its domestic frit and color sales. Frit, as it turns out, has been a firstrate base on which to build a foreign business. Economies of scale are not a very significant cost factor, so that it can be made in relatively small plants to serve relatively limited national markets. In addition, it is a product of comparatively low visibility—not sold as such directly to consumers nor
based directly on national resources. Nor is it involved with national security. Hence it is an unlikely target for nationalism pressures. Building on a start in Canada 47 years ago, Ferro soon added subsidiary plants in the Netherlands, France, and the U.K. Now, most of its foreign sales are accounted for by products produced overseas rather than exported. Its biggest single operation abroad is in the Netherlands, with 80 to 90% of the frit produced there exported to markets where Ferro still lacks a local plant. (England, France, and Mexico similarly serve as export bases for developing markets elsewhere in the world.) Many of the company's top executives have a strong international background, also. Mr. Marks is Canadian born, having started with Ferro there and managed its Brazilian subsidiary for a while during the late 1930's before moving to the company's Cleveland headquarters to run all international operations. Several other officials have come up through the overseas operations. Because the international subsidiaries operate relatively autonomously, Mr. Marks points out, they make a good training ground for upcoming young managers. Nevertheless, Ferro continues to see the U.S. as the heart of its business. "Our technology and new products start here," Mr. Marks emphasizes.
"Our aim is to develop new products in the U.S. that we can market throughout the world, using our present foreign activities as a core." Thus, Ferro may look to broaden its newer specialty chemicals business by carrying successful products overseas, following the same pattern that has been so profitable with frit and colors. (An important reason why profits have been higher outside the U.S. is that Ferro has taken abroad only those products that have proved to be winners at home.) Although frit continues to perform strongly abroad, with Ferro's overall sales of the product rising at a 15%a-year clip, its U.S. market seems to have reached maturity. Porcelain enamel has been losing out to other coating materials (such as powder coatings, in which Ferro is also active) because relatively high application costs put it at a competitive disadvantage in the appliance market. Consequently, the surface area of major appliances now covered with porcelain enamel has declined. Ferro claims that its share of the total market has been expanding and thinks new technology will keep demand strong. Nevertheless, it sees the need to diversify into new lines where it can apply its established technological and marketing skills in the U.S. It got into the glass fiber business 20 years ago, for example, because it feared that reinforced plastics might
Ferro's sales and profits: mostly from foreign operations. NET SALES
NET INCOME
Europe 37%
Europe 23% U.S. 49%
Other areas J 13% / x Latin American
15%
U.S. 22%
Other areas \ 18% I Latin America 23% /
y $15.78 million
$255.9 million
and still centered largely on frit and colors TOTAL REVENUES
INCOME BEFORE TAXES
Colors 28%
Colors 22% Frit 37%
Specialty ceramics
--.
$255.9 million
9% s P e c i a , «y •--«•^ ceramics Other ^ operations*
12%j
Other operations" 30%
Frit 48%
v
-
15%
/
win a dominant position for appliances. That has not been the case. And meanwhile, the glass fiber division has been dogged by unsatisfactory prices, at least until recently, and rising manufacturing costs. Although Ferro never really has expanded from its Nashville operations, however, it has not given up hope. Ranking fourth among the five U.S. glass fiber producers in size, Ferro has concentrated on fiber for reinforced plastics, a relatively strong growth market. And it is hoping that a new electric direct-melt process that it has installed at Nashville may turn the fiber business into a money-maker. Ferro plans to license the electrosmelting process worldwide. It claims that because initial requirements for capital are lower, the process will permit fibers to be produced competitively in relatively small plants, which would make it attractive to small consumers or for plants in underdeveloped countries. But it is to chemicals that Ferro executives are looking most enthusiastically for new growth opportunities. "We do best," says Mr. Marks, "in specialty areas that require top-flight technology and service." The company wants to expand on the base acquired with Keil, as well as with Ottawa Chemical, a producer of biological and odor control agents and ferrite powders it took over in 1968 and with Grant Chemicals, bought in 1970, which makes dioxane and other specialty and custom chemicals. Research is being focused on such fields as polymer additives, pigments, sound control, and coating materials. Marketing vice president John W. Slaton hopes the specialty chemical operations will be expanding by about 15% a year during the next few years. To accomplish that, he recognizes, Ferro will have to continue to make acquisitions "to build up the type of product lines we need for growth." And especially he would like now to pick up one or more fairly sizable producers— in the $20 million to $30 million sales range—"to consolidate our activities and give us the substance we need to commit more money to research and development." Ferro also wants to move more aggressively into specialty chemical markets overseas, where it has only a toehold now. It already has a joint venture, Nissan-Ferro, in Japan making heat stabilizers for plastics and is looking to invest more there. It is active in Australia, also. And its acquisition of Glastec Importacao e Comercio, a maker of materials for use in reinforced plastics in Brazil, gives it a start in South America. "We want to expand from our existing business bases," Mr. Marks adds, "and we will continue to be opportunistic in the sense that we do not intend to let our experience with Jones Homes deter us from continuing to look diligently for new opportunities anywhere we might be able to find them."
$31.0 million • Excludes Jones Homes. Note: Data for 1973.
August 12, 1974 C&EN
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