Chemical Industry Management: Under the Magnifying Glass

03 June 2002 00:00  [Source: ICB Americas]

As chemical industry executives gather this week at the American Chemistry Council's (ACC) annual meeting in White Sulphur Springs, W. Va., the simple and direct question is whether CEOs and their companies are up to the near- and long-term challenges facing the industry. Looking for an answer to the question, Chemical Market Reporter's editor Pamela Sauer conducted a roundtable discussion with chemical analysts to gauge their views.

Participating in the discussion were Allan Cohen, managing director of First Analysis Securities Corp., responsible for US specialty chemical companies; Mark Gulley, senior research analyst with Banc of America Securities LLC, responsible for US specialty chemical companies; Timothy Gerdeman, managing director, US equity research at Lehman Brothers, responsible for US specialty chemical companies; David Kerans, analyst with Argus Research, responsible for US commodity and specialty chemical companies; Daniel Quinn, stock analyst at Morningstar Inc., responsible for the basic materials sector; John Roberts, senior vice president with Buckingham Research Group, responsible for US commodity and specialty chemical companies; John Rogers, vice president and senior analyst in Moody's corporate finance group, responsible for US major and specialty chemicals; Sergey Vasnetsov, senior vice president, US equity research at Lehman Brothers, responsible for US commodity chemical companies; and Takato Watabe, director, senior analyst with Merrill Lynch Japan, responsible for Asian major chemical companies.

CMR: What do you see as the greatest challenge facing chemical industry CEOs today and why?

Mr. Quinn (Morningstar): Delivering on restructuring efforts. The last 12 to 18 months marked the implementation of significant restructuring and cost-savings initiatives across the industry. It is important to see whether these process and organizational changes that occurred will yield improved results over time.

Mr. Vasnetsov (Lehman Brothers): Continuous (never-ending) drive to cut costs and maintain sales growth.

Mr. Watabe (Merrill Lynch Japan): Global Competition. Because recent, full-scale petrochemical plants in Middle East launch rapidly.

Mr. Gulley (Banc of America Securities): Long term, the greatest challenge for the downstream producer is re-establishing product and process innovation. For commodity players, a unique challenge is effectively managing capacity, particularly in Asia. In the short term, for both specialty and commodity players, the challenge is effectively managing resources in a difficult earnings environment.

Mr. Kerans (Argus Research): Overcapacity, particularly for the commodity producer. Chemical management needs to optimize resources by reducing overcapacity in currently overserved geographic areas such as the US and Western Europe. The natural correction to overcapacity is consolidation. Secondly, it must work to drive consumption in underserved areas, especially Latin America (notwithstanding the current political crisis), and even China (keeping in mind the serious problem of drawing profits out of China).

Given the dynamics of the marketplace for the commodity producer, one approach, as employed in the industrial gas segment, is to market products together with value added services. Commodity producers can find ways to smooth customers' operations with respect to a good number of products. In turn, they can improve their market share and gain some additional pricing power.

Mr. Rogers (Moody's): The key long-term issue is the increasing pressure on prices and margins in the industry. This pressure stems from three primary sources: higher petrochemical based raw material and energy prices; international competition based on low-cost raw materials or willing to accept much lower returns on invested capital; and large customers with purchasing power leverage (i.e., auto manufacturers, "Big Box" retailers, etc.). These three issues impact both commodity and specialty chemical producers to different degrees, but the net impact is similar across the industry.

Mr. Roberts (Buckingham Research): While the challenges vary by company, and over time, the common issue that has come to the forefront most recently is risk management. Whether it is protecting stakeholders from potential legal liabilities, such as asbestos litigation, or protecting [against] wild petroleum cost swings, the chemical industry is being buffeted by a variety of external factors that requires a heightened focus by management. Another major challenge, but it's been there for some time, is creating growth from new products and services.

Mr. Gerdeman (Lehman Brothers): The greatest challenge facing specialty chemical industry executives today is the inability to cobble together a satisfactory product portfolio that can achieve attractive (sustainable) sales, profit, and earnings growth. Even disregarding the recent economic slump, most specialty chemical companies in recent years have lost their pricing power, removing an important former source of sales and earnings growth. With such rare exceptions as Air Products and Chemicals and Praxair in the industrial gases sector, and Sigma-Aldrich in the research chemicals sector, selling prices have been on a deflationary track for several quarters. Furthermore, lacking meaningful market capitalizations, the vast majority of US publicly-traded specialty chemical companies lack interest by the large institutional investors, adding to most CEO's problems.

Mr. Cohen (First Analysis Securities): Profitable growth. Growth numbers have not been there. The rationale is that the customer base and the industry have matured as providers to industrial companies. In the 1980s the sector continued to mature, particularly in North America and Europe. In the 1990s, the customer base became tougher as globalization continued. Single source supply and best possible price became the dominant theme.

CMR: How would you rate the chemical industry for returning shareholder value comparative to other industries? What factors are behind this level of performance?

Mr. Quinn (Morningstar): For returning shareholder value, the chemical industry's performance has been about average. Based on data as of the end of the first quarter, we estimate the median annualized return on the sector (which includes commodity, specialty and fine chemicals) to be approximately 11 percent over the trailing 12 months, and a negative 2.7 percent over the past five years. We feel the industry's diverse nature and steep decline over the past few years largely explain this performance.

Mr. Rogers (Moody's): Since the late 1990s, the industry, in general, has failed to generate returns above the cost of capital. In addition, P/E ratios, adjusted for average earnings through the cycle, have fallen well below their historic norms. Hence, for a majority of the companies in the industry, their stock price is at or below its price five years ago. Only a few of the billion-dollar plus companies have significantly exceeded the returns of the S&P 500. These include Rohm and Haas, Praxair, Sigma-Aldrich, Ferro and Valspar. The primary drivers behind this weak performance include the price and margin pressure mentioned above, combined with overcapacity due to the Asian crisis and the recent downturn in the US economy.

Mr. Roberts (Buckingham Research): Business periodicals such as Fortune, Forbes, Business Week & The Wall Street Journal evaluate shareholder returns by industry ever year. While individual chemical companies sometimes rank well, I can't remember the last time the chemical industry as a whole ranked well for more than a quarter or two. Growth has been below average, and increased competitive pressures have eroded margins over time. Customers have consolidated and learned to manage their costs better, and the chemical industry has not found ways to add new value at an offsetting rate. And as the industry has globalized, competition from new international competitors appear to have more than offset the opportunities for US companies to penetrate new markets.

Mr. Vasnetsov (Lehman Brothers): The last two years were unusually difficult for chemical companies; thus the results were unusually poor for chemical and many other industrial sectors. The key negative factors were shock of oil, natural gas prices, combined with US and European industrial recession.

Mr. Kerans (Argus Research): The industry labors under significant handicaps here. Investors are not willing to pay a premium for cyclical stocks, and understandably so; no one can take four-year earnings projections at face value. The building threat from international competitors only heightens the risks to future earnings, and the commodity nature of most chemical products carries enormous competitive pressures of its own.

Mr. Gerdeman (Lehman Brothers): The US specialty chemical industry's record for returning shareholder value in the past 10 years or so has been relatively poor as evidenced by many companies trading today at share prices at or below their share prices of several years ago. The unwillingness of many company management teams and boards of directors to consolidate the industry, even if hostile transactions are necessary, has led to a highly fragmented group of companies that have largely been forced to compete on selling price and expensive service offerings, as most of their technology/competitive advantages reached maturation.

Mr. Gulley (Banc of America Securities): While I can comment only on the specialty chemical sector, the industrial gas segment's performance, particularly in a recessionary environment, deserves kudos.

Mr. Watabe (Merrill Lynch Japan): Neither good nor bad comparative to other industries.

CMR: What would you identify as the most critical issues for a chemical company CEO to have on his agenda for 2002? What specific concerns do you see in petrochemical, specialty and fine chemicals?

Mr. Vasnetsov (Lehman Brothers): Cost cutting; managing energy costs volatility through hedging and pricing power; generating 25 to 30 percent of sales from "new products" (introduced from the last five years for specialty chemicals); maintaining volume growth above industrial GDP rate; and effective communication with investors.

Mr. Roberts (Buckingham Research): For petrochemical producers, cash generation remains a top priority. Most companies are still over-leveraged, with higher feedstock costs pressuring margins in a period where market demand does not appear to have recovered much. Further cost-cutting, working capital management and minimal capital spending remain common themes for most of these companies.

For specialty companies, the key issue is focus. This means rationalizing products or customers that are not high value, or structurally reducing the costs in some businesses to restore at least a part of it to specialty performance.

The fine chemicals market continues to evolve, with big companies like Dow Chemical becoming significant competitors. For most of the smaller companies, the issue will be segmenting the market into defendable niches.

The timing of the electronic chemicals cycle is also a key issue for many companies, with 2002 possibly being a turning point. They need to strike a balance between managing costs during the downturn and being prepared for when growth returns. Electronic chemicals is probably 15 percent of DuPont after the textile and apparel spinoff; it's 20 percent of Rohm and Haas, Praxair and Arch Chemicals; and it is almost half of ChemFirst and Cabot Corp. And it's of course almost all of the business at the electronic chemicals companies such as Cabot Microelectronics, Macdermid, Park Electrochem and Rogers Corp.

Lastly, all CEOs are making sure they "secure the base," if you will. It comes back to the risk management issue earlier. Companies want to make sure they prepared in case the economy doesn't recover, or even reverses course again. We're seeing companies shore up their balance sheets by restructuring their debt, or even issuing equity, rather than waiting for a recovery to pay off their debt. Olin Corp's recent equity offering is an example of that.

Mr. Gulley (Banc of America Securities): For the specialty sector, the issues are, first, whether there will be a reasonably priced and adequate supply of petrochemical feedstocks, and second, whether the US downstream producer is to become aggressive in the Asia Pacific region and to a lesser extent Europe. Third is whether interest rates will continue to rise and their extent. This is more company specific than sector specific, and fourth whether R&D expenditures as a percent of sales will continue to decrease. In general, R&D is decreasing at a decreasing rate, and this is problematic for the sector.

Mr. Cohen (First Analysis Securities): The most critical issues for 2002 are: 1) profitable growth, 2) business portfolio, 3) new technology and products, 4) acquisitions and divestitures, and 5) strong operating practices. In order to succeed in this sector, a producer must do everything right. Fifteen to twenty years ago, a company had greater room for error. If you had strong technology, you could succeed. Now one has to be a strong operator across the board.

Mr. Gerdeman (Lehman Brothers): First, taking a proactive approach to prevent "margin squeeze" from higher raw material costs, by announcing selling price hikes and/or surcharges, and exercising extreme discipline on discretionary spending. Second is seeking out logical, synergistic business combinations that will afford scale-related raw material (and other) purchasing leverage, greater product breadth and depth, and simultaneously lead to a more consolidated industry that does not use selling prices as a competitive tool. Remember, a larger company can also invest a greater absolute sum of capital on R&D and still have the total amount be in line with industry standards when viewing R&D as a percentage of total sales! Third is a stepped-up focus on R&D spending to encourage new discoveries in the laboratory that will ultimately translate into new product introductions that command higher average selling prices/profit margins.

Fourth is refocusing product portfolios to consist solely of products/businesses where a given company can be a top three market share contender, divesting other businesses that dilute management's focus and compete for capital that would be best utilized in a higher growth, higher margin business unit within the company. RPM provides an excellent example of a company that has undergone a painful two-plus year restructuring program to emerge as a more focused and energized entity. And fifth is developing a capital structure that provides the greatest future flexibility for management to have the luxury to consummate strategic acquisitions, retire debt, or implement aggressive share repurchases. Companies with high dividend payout ratios need to reconsider whether the majority of those disbursements might be better utilized for research and development efforts to fuel future growth.

Mr. Rogers (Moody's): Cost reductions, cost reductions and new products. In petrochemicals, the major issue is overcapacity and weak demand followed by higher raw material costs. For specialty producers, it is keeping cost reductions ahead of raw material price increases and selling price pressure, along with commercializing new products that provide a significant differentiation in terms of cost and performance versus the competition. In my opinion, the fine chemicals market will be very difficult for several years, as most companies will suffer from over-investment by large multi-nationals. However, there are several bright spots including enzymes and chiral compounds that should benefit a small minority.

Mr. Kerans (Argus Research): In all branches of the industry, companies must husband their credibility. They must live up to financial projections and be honest with investors about potential threats to earnings from regulation or litigation. Investors will always keep chemical companies on a short leash because of their inherent vulnerability on environmental issues. Further, some chemical companies are chronically optimistic about their future performance. Unwarranted optimism or secretiveness reduces credibility to investors, particularly in a trough.

Stingy disclosure is certainly dangerous to a stock price. Dow's stock price, for example, dropped about 40 percent in January on unchecked news of its asbestos litigation. Companies, particularly American companies, can reduce the volatility of their stock prices by stepping beyond mandated disclosure.

For example, British Petroleum's environmental standards are higher than mere compliance. While one might argue that investors are only interested in the bottom line, social responsibility can also pay off by reducing the threat of litigation. Calvert Funds and the World Resources Institute attempted to quantify this for the pulp and paper industry. They estimated the likelihood of various environmental regulations to address the industry's pollution and resource degradation, and evaluated the consequences to individual firms. Were the market to heed their computations, they argued, the firms in question would stand to shed anywhere from 5 to 20 percent of their value.

Mr. Quinn (Morningstar): First, rising energy prices. Forecasted increases will affect the bottom line.

Second, weak pricing. Based on first quarter 2002 earnings reports, some of the major chemical companies saw improving sales volumes, but weak pricing has continued to negatively affect revenue growth. Third, a rebound in the manufacturing economy. The financial performance of the sector is dependent on the general rebound of the macro economy. Commodity companies are the most vulnerable to the broader implications of the macro economy, as growth levels in manufacturing largely determine their results. Depending on a given company's portfolio of products, specialty and fine chemicals are vulnerable as well. For example, a coating producer will typically have a large stake in the growth of the aerospace and automotive end markets. And a fine chemicals maker's results may be closely tied to the performance of the pharmaceutical and biotechnology industries. There is evidence that the industrial and consumer end markets are improving, but how fast and to what extent still remains a question.

Mr. Watabe (Merrill Lynch Japan): First is how to take shares in China's market where demand is increasing remarkably. Second is structural reform when the market is improving. Third is diversifying raw materials in the bullish oil market. Fourth are survival schemes of the other companies after the birth of the strong union of Sumitomo Chemical and Mitsui Chemicals scheduled to be merged at 2003. And fifth is clarifying the direction (scale-up or scale-down) of non-petrochemical business, such as pharmaceuticals, electronic and others.

CMR: Over the last two years, what would you identify as the most significant event in shaping the industry? What would you identify as the key trends in terms of corporate organization, management and deal making? How do you see these specific areas evolving over the near term?

Mr. Kerans (Argus Research): I would immediately point to the rise in feedstock prices and their resulting volatility. The profusion of energy trading vehicles has not rationalized energy markets, to chemical firms' detriment. On the other hand, electronic business practices have been maturing, and to good effect. The trough would have been still uglier but for the cost savings and efficiencies they have brought. I expect even more progress in the next two years. The refinement of companies' internal accounting practices offers further opportunities. The new generation business software systems and other IT apparati are giving management unprecedented information into their companies' daily operations. I sense the problem now is for companies to make full use of the flood of information. We should see meaningful cost savings develop over the next few years, especially for the more complex, unwieldy companies.

Mr. Vasnetsov (Lehman Brothers): Energy price shocks of 1999-2002 (largest and more persistent in two decades); US industrial recession (worst in the past 20 years); maintaining growth and getting critical mass in selected end markets.

Mr. Cohen (First Analysis Securities): Within the last two years, the two greatest dynamics has been the volatility of oil prices and the general industrial slowdown. For the specialty chemical sector, 80 percent of its raw materials are derived from hydrocarbons. In 1999, oil prices were down and within two years almost tripled. This coupled with the industrial slowdown that began in 2000 and continued in 2001 led to a very difficult operating environment. The necessity for strong operating practices is accentuated. Any shortcomings are exploited by your competitor. Obviously gone are the blockbuster deals such as the BetzDearborn/ Hercules, which lead to overpriced acquisitions. The emphasis is on bolt-on acquisitions, for example, OM Group Inc.'s acquisitions of Ferro Corp.'s dmc2 for approximately $525 million. This is a reasonably priced acquisition. Previous acquisitions multiples were 12 to 14 X EBITDA. Any future acquisitions in the sector will be priced in the mid-upper single-digit range which is reasonable. CEOs lost jobs as a result of overpriced acquisitions.

Mr. Gerdeman (Lehman Brothers): Over the last two years, the most significant events that have shaped the industry include the lack of (logical) industry consolidation, excluding the highly successful 2000 transaction involving the acquisition of Lilly Industries by Valspar, and the 2001 acquisition of dmc2 by OM Group. Simultaneously, a few large transactions that did not have the prerequisite synergy merits occurred, and led to major erosion of shareholder value in those select instances. We look for financial buyers to increasingly play a role in future industry consolidation, and we also expect a more vocal shareholder base to place additional pressure on underperforming companies to join forces with stronger competitors.

Mr. Gulley (Banc of America Securities): Some companies have been successful in reducing their debt levels and increasing their purchasing power. The sector on the whole remains skittish about acquisitions, and it doesn't appear that we will see much M&A activity until at least 2003. We estimate that the median multiple is trading at 9x EBITDA with the historical median being 7.5x EBITDA.

Mr. Roberts (Buckingham Research): Two issues in the past two years that have significantly shaped the industry is the Dow-Carbide deal, and dissolution of the integrated life science model. The Dow-Carbide deal increases the potential scale of deals tremendously. Even a Dow-Carbide is not a large company compared to the largest companies in the global technology and industrial markets. So similar size or even larger deals may be possible. In the life sciences area, DuPont's pharmaceutical sale, and the speculated separation of Bayer's pharma operations, would leave only a handful of European and Japanese chemical companies with health care operations. And Monsanto's and Syngenta's new lives as stand-alone agricultural products companies could mark the beginning of the separation of agricultural products from industrial products.

Corporate organizations continue to get flatter, with greater spans of control and a focus on global business units rather than a matrix of product and regional mangers. Joint ventures also continue to play a key role as a transition structure as companies reorganize. Joint ventures continue to be a way to transition out of a business, such as DuPont in polyester, or a way to enter into a new area, such as the DuPont-Air Products semiconductor chemical venture. We expect to see a continued high level of joint ventures in the chemical sector.

Mr. Rogers (Moody's): From a bondholder's perspective, the biggest concerns are the never-ending downturn in the US industrial economy (we're not optimists) and credit tightening by the major lenders to the industry. These issues have forced most companies into the public debt market at a time when financial performance is at a low point, thereby significantly increasing borrowing costs. Clearly the near-term impact should be greater focus on cost reduction efforts and a deferral of large debt-financed acquisitions. This should limit consolidation in commodities to mergers or joint ventures. As for specialty and quasi-specialty companies, acquisitions will be limited to financial buyers or well financed multinationals. The one key area that needs to be addressed by the industry is how to attract and retain key employees over the long-term given weak stock market valuations.

Mr. Quinn (Morningstar): We believe the most significant event has been the economic downturn, and its strongly negative effect on industry fundamentals. Many CEOs have responded by placing a much stronger emphasis on core competencies, improving operational efficiency, and delivering sustainable growth. Dow Chemical divesting its pharmaceutical businesses, purchasing Rohm and Haas's agrochemical business, and implementing the Six Sigma methodology are some of the most striking examples. We also see DuPont's major restructuring efforts as indicative of this trend as well. Although textiles and fibers are historically one of its core competencies, DuPont believes the segment's low-margin, slow-growth fundamentals are restraining the company's ability to deliver sustainable, 10 percent EPS growth. Thus, DuPont is the process of redefining its core competencies.

Industry emphasis is and should continue to be on strengthening balance sheets and stimulating cash flows. With those financial objectives as the biggest priorities, we don't believe merger and acquisition activity will be much of a priority in 2002. As companies continue to redefine their business models, some small scale deal-making may be in the offing in 2002. What's fat for one company, can be meat for another, as the Air Products' sale of its packaged gases business to Airgas shows. In 2003 and beyond, as the positive effect of the restructuring initiatives become more evident, companies will have greater flexibility.

Mr. Watabe (Merrill Lynch Japan): The most significant event is the launches of full-scale petrochemical plants in Middle East. The key trend is the holding company. The introduction of a consolidated return system will bring some changes.

CMR: In terms of individual company leadership or management, does any company stand out in terms of performance or progressive management and why?

Mr. Vasnetsov (Lehman Brothers): PPG, Dow, and Nova Chemicals-consistent, clear and reliable performance.

Mr. Kerans (Argus Research): First, I would single out PPG Industries Inc. for foreseeing and confronting the realities of a sustained trough. Over the last 15 months, most companies' public preparedness has assumed an economic recovery to be just over the horizon. PPG has consistently looked the most prudent on contingency and strategy. Second, Nova Chemicals CEO Jeffrey Lipton has earned my confidence for being so well informed about his company at so many levels. Of course Nova's profile is more streamlined than most, but Mr. Lipton's ability to coordinate his subordinates' practices is noteworthy.

Mr. Gulley (Banc of America Securities): In terms of performance, the industrial gas segment does stand out. From a management perspective, the aggressive implementation of Six Sigma by [such] companies as Dow, DuPont and 3-M is positive.

Mr. Roberts (Buckingham Research): You have to give Monsanto credit for taking the early lead in ag biotech, and for staying with it through all kinds of distractions. That's still potentially the highest growth market for the chemical industry. The managements of the industrial gas companies are also to be commended for putting profitability ahead of growth, although their growth has been pretty good, as well. And this will sound odd, but Dow Chemical is better regarded for all the transactions they've done, while Cabot is know for its ability to grow without acquisition. Portfolio management is much more important to a large company like Dow than it is to a much smaller company like Cabot.

Mr. Cohen (First Analysis Securities): There are a number of strong managements that stand out in the specialty chemical sector. The OM Group has made substantial internal and external changes, particularly in how it does business with its customers. Ferro Corp. has made substantial internal improvement and is prepared for acquisitions. Spartech Corp. stands out for its consolidation and masterful integration. Cambrex Corp., under Cyril Baldwin, has done a tremendous job in transforming itself to from a fine chemical supplier to a fully integrated life science materials and service provider. David Harvey has done a tremendous job at Sigma Aldrich Corp. in transforming the company into a life science provider and reinvigorating growth. Also Valspar Corp. under the leadership of Richard Rompala has performed a masterful change from an acquisition/consolidation strategy into a strategy of internal growth and globalization. Lastly, Mineral Technologies Inc. for making more change in the papermaking industry than was ever done before. It created not only new and profitable technology in papermaking, but also in steel and glass making.

Mr. Gerdeman (Lehman Brothers): We give accolades to CEOs such as Rich Rompala at Valspar and Jim Mooney at OM Group for taking bold consolidation moves that made strategic and economic sense, creating incremental shareholder value in the process. While the jury is still out on the ultimate sustainability of their newfound discipline, the leaders of the large global industrial gas companies have recently demonstrated impressive leadership skills, curtailing capital expenditures and announcing (and getting) higher selling prices despite the weak economy.

Mr. Watabe (Merrill Lynch Japan): Shin-Etsu Chemical. Because it has updated record profit year by year in harsh economic conditions.

Mr. Rogers (Moody's): Again from a bondholder's standpoint, the key issue is consistent financial policies, despite depressed stock prices and potentially attractive acquisition candidates. Very few companies have lived up to this standard. The most notable exception is Dan Smith at Lyondell, who has steadfastly maintained the company's focus on debt reduction in the face of a very difficult operating environment over the past four years.

In terms of progressive management, I believe that many companies have woken up to the value of continuous cost reduction efforts and balance sheet management since 1998. However, very few have been able to side step the weakness in the US industrial economy over the past 18 months.

Mr. Quinn (Morningstar): With most of the major restructuring only completed recently, we feel it's too early to pass judgement on management performance. The proof will be in the pudding over the next 12 to 18 months.

CMR: What management practices or organizational practices do you feel are lacking in the chemical industry? Are there best practices from other industries that could serve as a model?

Mr. Vasnetsov (Lehman Brothers): Ability and willingness to review/ change long-term industry customs. Resistance to industry consolidation-one of the obvious ways for maintaining growth and getting critical mass in selected end markets.

Mr. Gerdeman (Lehman Brothers): First, companies need to upgrade their boards to include non-company professionals, and perhaps expand beyond older industry members to younger members that are not ingrained in the specialty chemical industry. Engelhard is a great example of a company that has made a conscious decision to upgrade its board. Second, senior management teams need to increasingly make decisions that are in the best interest of ALL shareholders, rather than solely focusing on so-called "social issues" that place an emphasis on employee lifestyle issues over tough decisions that are in the best interest of the majority of shareholders (external shareholders in aggregate always own more than insiders in nearly every instance.) Lastly, we would encourage more transparent compensation system that consists of low base salaries and variable-rate "pay-for-performance" incentives that can add up to several multiples of the base salary.

Mr. Gulley (Banc of America Securities): From a financial management perspective, advantage could be gained by greater use of hedging both in currencies and raw materials. Six Sigma does distinguish itself.

Mr. Roberts (Buckingham Research): While some chemical companies spend a lot of time on R&D productivity, I don't think the chemical industry on average does a very good job here. Many companies can't tell you how much of sales came from new products, services or customers added in the past three to five years. The chemical industry was also a relatively late comer to Six Sigma. They're catching up, but they still not to where companies like GE and Honeywell are.

Mr. Rogers (Moody's): I believe that there are two specific areas that seem to be lacking in the industry. First is that most companies in the industry have only recently embraced Six Sigma practices and goals. Therefore, the cultural and operational changes are only beginning. Hence, the benefits won't be apparent for several more years.

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