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FIRST-QUARTER EARNINGS LANGUISH Fifth consecutive earnings drop by U.S. chemical companies bucks rising U.S. economy, other industries George Peaff C&EN Northeast News Bureau
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f the quarterly trends in the chemical industry are any indicator, the manufacturing sector of the U.S. economy may be headed for a slowdown. For the fifth consecutive quarter, the 30 major U.S. chemical companies surveyed by C&EN posted a drop in earnings in this year's first quarter. During that period, earnings from the 30 firms totaled just under $2 billion, down 2% from first-quarter 1996. However, the earnings drop was less than the 12% fall in fourth-quarter 1996, primarily because raw material costs moderated from higher levels and chemical pricing edged up slightly. Sales for the 30 companies totaled $22.8 billion in the first quarter, up 2% from last year's first quarter. In fourthquarter 1996, sales for the 30 companies rose 3% from fourth-quarter 1995. By contrast, the U.S. economy, as measured by gross domestic product, grew at an annual rate of 5.6% during this year's first quarter. That compares with a 38% annual rate in fourth-quarter 1996. And sales and earnings of the group of
13 oil and gas companies and of 11 diversified manufacturers, which all have chemical segments, grew during the first quarter. Combined sales of the oil and gas companies rose 5% to $94.4 billion, and their total earnings climbed 22% to $5.81 billion. For the diversified manufacturers, sales grew 2% to $21.6 billion, and earnings rose 9% to $1.74 billion. However, the steady growth of the U.S. economy over the past few quarters may be coming to an end. Business inventories climbed in value by $46.1 bil-
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lion during the first quarter. In fourthquarter 1996, inventories rose only $17.1 billion. The first-quarter production rate in the chemical industry, as measured by the government, was 6.1% greater than in last year's first quarter. But in each month from January to March, production rates have dropped, indicating that chemical companies are beginning to cut production because of rising inventories. Chemical prices as measured by the government increased 2% in the first quarter, following a 1.5% increase in last year's fourth quarter and a 0.2% drop in the third quarter. But the pricing environment for various chemical products was mixed. "Prices in some key products, notably polyethylene and vinyl chloride . . . were up substantially from a year ago," says William S. Stavropoulos, president and chief executive officer of Dow Chemical. "Other products, such as caustic soda and polystyrene, faced price declines." Dow's sales were nearly $5 billion for the quarter, essentially the same as in
Ground rules for C&EN earnings analysis C&EN's quarterly report on financial performance of the U.S. chemical industry contains data from 30 major U.S. basic chemical companies and from 24 oil and diversified companies, each with more than $200 million 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. That is why DuPont, for example, is included in the table of diversified manufacturers. 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 before nonrecurring items and extraordinary charges. Foreign currency translations are included.
Chemical industry leaders for first-quarter 1997 Earnings8
Sales Rank 1997
1 2 3 4 5 6 7 8 9 10
$ Millions
Rank 1996
Dow Chemical $4,992.0 1 Monsanto 2,574.0 2 Union Carbide 1,638.0 3 Eastman Chemical 1,261.0 4 Praxair 1,158.0 5 Air Products 1,153.1 6 Arco Chemical 1,029.0 8 Rohm and Haas 986.0 7 W.R.Grace 785.1 9 IMC Global 664.8 10
Dow Chemical $452.0 343.0 Monsanto Union Carbide 157.0 Air Products 106.0 Rohm and Haas 104.0 Praxair 102.0 Eastman Chemical 72.0 Hercules 71.3 63.2 International Flavors Great Lakes Chemical 52.9
Note: Based on 30 chemical companies listed on page 22 . a After taxes.
20 MAY 19, 1997 C&EN
Profitability Rank $ Millions 1996
1 2 3 7 6 9 4 8 10 10
Earnings as Rank % of sales 1996
International Flavors Hercules Monsanto Great Lakes Chemical Nalco Chemical Rohm and Haas Albemarle Union Carbide Air Products Dow Chemical
16.5% 14.4 13.3 10.7 10.7 10.5 10.2 9.6 9.1 9.1
1 2 5 3 9 8 17 7 12 11
Chemical industry 1997 first-quarter results • • • • •
Sales increased 2% Earnings fell 2% Profitability eased down Production rose 6 . 1 % Prices increased 2%
Sales
Earnings
% change from year-earlier quarter 25 1
% change from year-earlier quarter
1995
1997
Production
Profit margin
1996
1997
1995
1995
1996
1997
Prices
> change from year-earlier quarter
After-tax earnings as % of sales 12r
1995
1996
1996
1997
% change from year-earlier quarter
1995
1996
1997
Note: All sales, earnings, and profit-margin data are based on 30 chemical companies listed on page 22.
first-quarter 1996. Its earnings, however, dropped 5% to $452 million. "Ongoing productivity improvements and a globally balanced product portfolio recovered over two-thirds of the impact of higher feedstock costs and the unfavorable impact of currency on sales," says Dow. During the quarter, sales of 11 of the surveyed 30 chemical firms declined from the 1996 comparable period. For Albemarle, Cabot, W.R. Grace, Great Lakes Chemical, Lubrizol, Olin, and Witco, much or all of their sales declines reflected the divestment of businesses. But others' sales actually fell substantially in the quarter. Eastman Chemical's overall sales dropped 7% to $1.17 billion. Although sales of its specialty and performance and chemical intermediates segments increased in a quarter-to-quarter
comparison, sales of its core plastics business—mainly polyethylene terephthalate (PET)—declined nearly 25%. Lower PET prices continue, says Eastman, because continuing worldwide capacity additions are more than meeting the double-digit growth in demand. Phosphate fertilizer producers Freeport-McMoRan and IMC Global had 17% and 7% sales declines, respectively, as sales volumes fell and prices dropped. IMC Global says international and domestic demand was weak in the first quarter. Several companies posted higher sales in the quarter based on newly acquired businesses, including water treatment chemical makers BetzDearborn and Nalco Chemical, specialty chemical maker Ethyl, and fertilizer maker Mississippi Chemical. But other firms posted double-
digit sales growth, including industrial gas maker Air Products & Chemicals, polyvinyl chloride producers Geon and Georgia Gulf, and Monsanto, which was led by a 29% rise in sales in its agricultural products segment. Sales in Monsanto s chemicals segment, which will be spun off in the near future, were $732 million in the quarter, compared with $736 million in the year-earlier period. Both H. B. Fuller and Petrolite posted dramatically higher earnings for the quarter, 115% and 152%, respectively, but these increases can be explained by the weakness of their earnings a year earlier. Fuller's earnings for this year's first quarter were $5.8 million, compared with $2.7 million in the 1996 period. Sales were unchanged at $304 million. "Operating earnings increased substantially MAY 19, 1997 C&EN 21
business First-quarter earnings declined for 14 of 30 chemical firms FIRST-QUARTER 1997 Earnings8
Sales
Change from 1996 Sales
($ millions)
14% -27 5 54 -12
Earnings
Profit margin" 1997
1996
9.2% 10.2 4.7 7.4 6.8
9.3% 7.8 10.8 9.9 8.7
$ 1,153.1 198.4 1,029.0 306.4 432.0
$ 106.0 20.2 48.0 22.8 29.4
473.9 306.5 4,992.0 1,171.0 265.7
26.6 24.6 452.0 72.0 20.6
3 1 0 -7 10
25 9 -5 -36 8
5.6 8.0 9.1 6.1 7.8
4.6 7.4 9.6 8.9 7.8
Freeport-McMoRan H. B. Fuller Geon Georgia Gulf W.R. Grace
211.9 304.1 301.0 239.2 785.1
7.7 5.8 2.3 12.1 46.4
-17 0 23 15 -9
-55 115 nm -23 6
3.6 1.9 0.8 5.1 5.9
6.7 0.9 def 7.6 5.1
Great Lakes Chemical Herculesc IMC Global International Flavors Lubrizol
493.5 495.2 664.8 382.8 387.7
52.9 71.3 39.1 63.2 38.9
-8 6 -7 0 -4
-20 -6 -36 -5 6
10.7 14.4 5.9 16.5 10.0
12.3 16.4 8.6 17.3 9.0
Mississippi Chemical Monsanto Nalco Chemical Olin Petrolite
142.6 2,574.0 334.6 591.2 94.1
10.6 343.0 35.8 41.8 8.3
32 12 11 -15 6
-32 32 19 -18 152
7.4 13.3 10.7 7.1 8.8
14.5 11.3 9.9 7.3 3.7
Praxair Rohm and Haas Stepan Union Carbide Witco
1,158.0 986.0 139.7 1,638.0 568.5
102.0 104.0 4.5 157.0 26.8
6 -1 7 9 -4
46 4 -20 0 13
8.8 10.5 3.2 9.6 4.7
6.4 10.1 4.3 10.5 4.0
$22,820.0
$1,995.7
Air Products Albemarle Arco Chemical BetzDearborn Cabot Crompton & Knowles Cytec Industries Dow Chemical Eastman Chemical Ethyl
TOTAL
2%
12% -5 -55 16 -31
-2%
8.7%
9.1%
a After-tax earnings from continuing operations, excluding significant extraordinary and nonrecurring items, b After-tax earnings as a percentage of sales. c Results restated to reflect divested businesses, def = deficit. nm = not meaningful.
over [the] prior year due to higher sales volume, lower operating expenses, and improved gross margins," says Fuller. Petrolite, which is in the process of being acquired by Baker Hughes, had earnings of $8.3 million in the quarter, compared with $3.3 million in the yearearlier period. Sales were up 6% to $94 million. In 1996, the company installed a strategic plan to remake the company. "We restructured the management of our core businesses, streamlined business systems, and repositioned the company as a vital and fully integrated partner to our key customers," says Paul H. Hatfield, Petrolite's chairman, president, and CEO. "Business with our core energy chemical and polymer customers, worldwide, increased as a result." Of the 30 chemical firms, 14 posted 22 MAY 19, 1997 C&EN
lower earnings in the first quarter. In addition to Eastman, Freeport-McMoRan, and IMC, others with double-digit declines in the quarter were petrochemical derivative producer Arco Chemical, carbon black producer Cabot, Georgia Gulf, specialty chemical maker Great Lakes, Mississippi Chemical, diversified chemicals maker Olin, and specialty chemicals maker Stepan. "Profits for the first quarter of 1997 declined [because] improvements in aromatic chemicals, methanol, and vinyl compounds were not sufficient to offset a substantial drop in caustic soda pricing," reports Georgia Gulf. The company's production volumes in first-quarter 1997 were up 4% from fourth-quarter 1996 and 17% from first-quarter 1996. Weather-related plant shutdowns impact-
ed the company's results in the first quarter of last year. As in first-quarter 1996, Dow, Monsanto, and Union Carbide were the top three chemical companies in both sales and earnings. But Arco's slide in earnings during the first quarter led to its disappearance from the Top 10 companies in earnings. And once again, International Flavors & Fragrances occupied the top spot in profit margin for the first quarter, although its profit margin slipped to 16.5% in the 1997 period from 17.3% in the same period in 1996. Arco, BetzDearborn, and Loctite—which no longer appears in the 30-company ranking after its merger with Germany's Henkel— dropped out of the Top 10 in profit margin. Air Products (No. 9), Albemarle (No. 7), and Dow (No. 10) all moved into the Top 10 in profit margin for this year's first quarter. Sales and earnings rose for most of the 13 oil and gas firms and 11 diversified manufacturers. But in some cases, the firms' chemical segments tempered sales, operating earnings, or both in the quarter. Chemical sales and earnings were both down for Amoco, but chemical sales were up and earnings were down for Ashland, Chevron, Fina, KerrMcGee, and Occidental Petroleum. Phillips Petroleum, Sun Co., and Unocal do not break out sales and earnings information for their chemical segments. Exxon, the largest chemical producer among the oil and gas firms, reported that overallfirst-quartersales were up 8% and earnings were up 24%. Its chemical sales were up almost 9% to $3.42 billion, and its chemical earnings gained 8% to $310 million. Overall sales and earnings, as well as those for chemical segments, were also higher for Lyondell Petrochemical and Shell Oil. Mobil's chemical earnings increased, but its chemical sales dropped because of the sale of its plastics business. DuPont, the largest chemical producer among the 11 diversified companies, posted a 4% gain in overall sales and a 13% gain in earnings. Its chemical sales gained little, however, to $4.55 billion from $4.52 billion a year earlier. But after-tax operating earnings from its chemical operations rose 12% to $584 million. FMC's overall sales increased 17%, but chemical sales declined 2%. And operating earnings in its chemical businesses also declined 16%, a major contributor to the firm's overall 30% earnings drop. Low prices for caustic soda and hydro-
