Specialty Chemicals Waiting for End-Market Relief

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

As specialty chemical producers gather this week for ChemSpec Europe 2002, a key issue is when economic recovery will translate into improved financial performance. Although hit hard by falling demand in consumer and industrial markets last year and in the first quarter, specialty chemical companies are cautiously optimistic about the recovery for this year and are looking to 2003 for better performance. While companies wait for demand to pick up in end markets, they also face challenges of new product development, optimal portfolio management and the need to raise critical mass.

Although there are positive signs of a US economic recovery, these gains are not immediately translating into improvements in the chemical industry overall and in the specialty chemical sector specifically, which are expected to be slower to realize such gains. Real gross domestic product (GDP) in the US increased at an annual rate of 5.6 percent in the first quarter of 2002, compared to an increase of 1.7 percent in the fourth quarter, according to the Department of Commerce's Bureau of Economic Analysis. Private inventory adjustment, personal consumption expenditures, government spending, residential fixed investment and exports were the main contributors to the increase. Personal income in the US increased $22.5 billion or 0.3 percent, and disposable personal income increased $23.4 billion or 0.3 percent in April, according to the Bureau of Economic Analysis.

"The overall economic recession that started in March 2001 most likely ended in December, making the downturn one of the mildest in business cycle history. A recovery is now underway and in the first quarter 2002 a 5.6 percent (SAAR) gain in the economy was registered," according to a June report by the American Chemistry Council. "Much of this was the result of inventories, but underlying final demand continued at a moderate pace. Consumer spending, government spending, housing, and slower reduction of inventories led growth. It appears that the 'freefall' in capital spending may be over, but trade was one area of continued weakness," notes the ACC.

However, the ACC projects, "The rapid growth of the quarter is not sustainable over the long-term and, as a result, we expect more modest growth in the remainder of 2002 and into 2003." It points to recent strong housing activity, which was skewed by the warm winter, which afforded builders in the US an early start on construction. It also points to low savings rates, a lack of pent-up demand, previous weakness in equity values and unemployment concerns.

Specifically, the ACC projects growth in US GDP at 3 percent this year, following only a 1.2 percent gain in 2001. For 2003, growth of 3.8 percent is expected. Industrial production is projected to increase 0.5 percent in 2002 after posting a 3.6 decline in 2001. In 2003, industrial production is expected to increase 5.3 percent.

Other barometers of the US economy, namely light vehicle sales and housing starts, are expected to show slight gains or modest declines. In 2001, light vehicle sales were 17 million. This figure is expected to fall slightly to 16.8 million in 2002 before picking up to 17.3 million in 2003. Housing starts, which were 1.61 million in 2001, are projected to be 1.65 million this year and 1.68 million in 2003.

"Inventories are providing a temporary boost to the economy, but other sectors will play a larger role in the months to come," says the ACC. "Industrial production is already rising to meet increasing demand. Consumer spending, while far weaker than in the boom years of the late-1990s, is growing at a respectable pace. The consumer should continue to lead the way, although at a more muted pace than previous recoveries. Capital spending seems to be stabilizing and the factory orders report confirms a bottoming out. The stage is being set for strong investment growth in 2003," notes the report. Risks to the forecast include another terrorist attack in the US, much higher oil prices, a collapse in housing or equity values, or a significant rupture of trade relations.

Although there is good news for the overall economy, the ACC points out there has been a decoupling of the historic relationship between the economy and the performance of the chemical industry. "The still strong US dollar, relative feedstock costs, overcapacity and customer inventories have played a much larger role in recent years. The role of inventories in particular has led to shorter cycles during the past decade when compared to previous decades," says T. Kevin Swift, the ACC's senior director for industry dynamics and statistics.

"For the business of chemistry, the industry suffered its worst downturn in two decades, and perhaps the longest since Great Depression of the 1930s. This was the result of a strong dollar, the energy price shock, and the severe recession in manufacturing. Capacity utilization reached a 20 year low and margins were hammered. The situation at the end of 2001 was best reflected in the comment that conditions 'can't get much worse. Having reached bottom, it now appears that we are entering a recovery phase," he says.

For 2002, US chemical shipments are expected to increase only 1 percent to $458 billion, with consumer products and some specialty chemical segments offering the brightest prospects (chart, pg. FR 16). Overall volume is expected to rise less than 1 percent this year, according to ACC estimates. Assuming a more favorable macroeconomic environment, a 4.3 percent gain in volume is expected during a strengthening recovery in 2003. Larger gains are expected for the more cyclical basic chemical and specialty segments as shipments are anticipated to exceed $477 billion in 2003.

Shipments of specialties are expected to increase 3.3 percent this year, reaching $112 billion, according to the ACC, which points to some momentum for coatings, industrial gases and industrial and institutional cleaning chemicals. In 2003, specialty chemical shipments are expected to increase 5 percent, reaching nearly $118 billion with a recovery in industrial markets as the driver.

A surge in fine chemical and finished pharmaceutical imports as well as the paucity of new products in the pipeline diminishes growth prospects for pharmaceuticals. Agriculture represents a year in transition, with improved prospects for fertilizers and crop protection products in 2003. Personal care and other consumer products will be a bright spot in 2002 and into 2003.

In terms of trade, US exports declined in nearly every category during the first quarter 2002 compared to a year ago. The result of a weak electronics market, exports of electronic chemicals were down 43 percent.

The poor showing in electronic chemicals, usually a strong spot for specialty chemical producers, is tied to the overall poor performance of the electronics market. Worldwide semiconductor manufacturing equipment billings tallied $4.05 billion in the first quarter of 2002, according to the Semiconductor Equipment and Materials International (SEMI), a San Jose, Calif.-based trade association representing companies that supply manufacturing technology and materials to the world's chip makers, The figure is 64 percent below the same quarter a year ago and 1 percent below the billings figure for the fourth quarter of 2001.

SEMI also reported worldwide equipment orders of $4.15 billion in the first quarter of 2002. The figure is 36 percent below the same quarter a year ago but 35 percent above the orders figure for the fourth quarter of 2001.

"While the first quarter results emphasize the sharp decline in the worldwide semiconductor equipment market over the past year, on a sequential basis, the data also demonstrate that the market has stabilized," says Stanley T. Myers, president and CEO of SEMI. "Although clear signs of a new market driver remain elusive, the latest monthly data reflects the first sequential worldwide billings increase in 17 months, providing further evidence that the industry's worst cyclical downturn has bottomed and is forming a new base."

Sharp declines in US chemical exports also occurred in industrial gases (down 31.1 percent), bulk petrochemicals (down 20.3 percent), colorants (down 13.0 percent), and polymers (down 11.5 percent). Increases were posted in adhesives (up 22 percent), plastics additives (up 13.6 percent), and crop protection (up 13 percent). Pharmaceutical exports were flat.

Compared to the first quarter 2001, when natural gas prices were at historic highs, imports of chemical products fell in nearly all categories, including declines in specialty chemicals, with catalysts down 25.9 percent, coatings down 23.4 percent and electronic chemicals down 22.4 percent. Imports rose in several products including pharmaceuticals, which were up 31.6 percent, consumer products (up 2 percent) and surfactants (up 1.2 percent). US imports of other specialties, which include fine chemicals, rose 1.5 percent.

With a weaker dollar, stable energy prices and increased demand abroad, the ACC projects US exports to rise 4.3 percent to $83 billion in 2002. Increased demand in the US and a still overvalued dollar will encourage imports rising 8 percent to $85 billion. This will result in a chemical trade deficit of $2.0 billion, the first annual trade deficit since the mid-1920s. As the dollar returns to a valuation more in line with underlying fundamentals and demand abroad strengthens in 2003, US exports are expected to rise 8 percent to $90 billion and imports will rise 8 percent to $92 billion, resulting in a continued trade deficit of $2.0 billion, says the ACC.

Market Fundmentals

Despite the relatively poor market conditions for specialty chemical producers in 2001, Wall Street analysts do point to some favorable factors for the sectors. In terms of stock valuations, US-based specialty chemical companies substantially outperformed the S&P Industrials during 2001, climbing 20.5 percent on a market-cap weighted basis versus a 12.7 percent decline for the index, according to JPMorgan estimates. This strong pattern was also evident in the fourth quarter of 2001, when the value of specialty chemical stocks increased 17.9 percent versus a gain of 11.8 percent for the S&P Industrial Index.

"We view the 2001 outperformance as the market's recognition of both the excellent cash generation capabilities of specialty chemicals companies in a weak economic climate and their rebound capability in a recovery," says JPMorgan analyst Jeffrey Zekauskas. In projecting individual company performance, the analyst points to certain key factors. "New product and business development, the efficient integration of sizeable acquisitions and enhanced profitability stemming from restructuring of operations over a multi-year period are the keys to our investment case," he says. "Secondarily, sensitivity to economic expansion, raw material price relief and favorable industry structures play supporting roles."

A review of first quarter results of certain specialty chemical companies show the difficult going in certain end markets such as electronics as companies wait for improvement in the second half of 2002 and into 2003.

Companies Look to Rebound in 2nd Half:

Air Products

Declines in the global manufacturing sector, including electronics have hurt Air Products and Chemicals. The company reported a 14 percent decline in fiscal second quarter revenues (ended March 31) to $1.3 billion. With the impact of natural gas pass-through, acquisitions and divestitures, and currency effects, sales declined 3 percent, reflecting continued weakness in the global manufacturing sector, including electronics. "While manufacturing activity remained at low levels, we again saw improvement in our chemicals business, which traditionally has led us out of downturns," said Air Products chairman and CEO John P. Jones, at the time of the quarterly results.

In the industrial gases segment, sales declined 18 percent to $887 million, and operating income declined 19 percent, "primarily due to the pronounced global electronics slowdown," says the company. In its chemicals segment, sales of $358 million declined 8 percent primarily due to lower activity in amines and polyurethane intermediates.

In terms of its portfolio, Air Products is focusing on four main growth areas-electronics, refinery hydrogen, home care and performance chemicals. The company is among the leaders for specialty gases for electronics, a position that needs to be helped by an improving electronics markets. Analysts are also bullish on prospects in the refinery hydrogen market, which some estimate growing at 15 to 20 percent. The $5 billion homecare market and the $2.5 billion medical gas market are also important markets because of their low capital intensity and double-digit growth. Air Products expanded its homecare gas presence in Europe by acquiring assets from Messer Griesheim, moving it to number two in the European market, behind Air Liquide. Air Products is expected to focus on regional US homecare markets and also to seek further acquisitions in this area. In terms of recent portfolio changes, Mr. Jones points to the sales of its US packaged gas business to Airgas.

Albemarle

Albemarle reported net sales of $224.6 million for the first quarter 2001, primarily due to the inclusion of $35.6 million from its acquisitions of Martinswerk and the custom and fine chemicals business of ChemFirst, which were completed last year. "I am pleased with the improvement we've seen this quarter versus the fourth quarter of 2001, and especially the apparent strengthening in our flame retardants business," said Floyd D. Gottwald, CEO of Albemarle, at the time of the company's release. "While cautious about the outlook for the electronics end markets and its impact on our business as well as the economy in general, I believe our 2002 performance could surpass 2001."

Although flame-retardant results bottomed out sequentially in the first quarter, some analysts point to weak volume trends in polymer chemicals, oilfield chemicals and bromine derivatives. "Sales of polymer chemicals were off 4 percent in the first quarter as the Martinswerk acquisition was not able to offset an estimated 15 percent volume decline in flame retardants," says one analyst. The company expanded inorganic bromide capabilities at its dedicated production facility in Thann, France, and completed its purchase of Martinswerk GmbH from Alcan for roughly $44 million. Albemarle is also adding tetrabromobisphenol A capacity at Safi, Jordan, through its joint venture with Arab Potash, Jordan Bromine Company. This plant is scheduled for startup at the end of 2002.

Ciba Specialty

Ciba reported first-quarter revenue of SFr 1.81 billion, down 6 percent year-over year. Volume fell 2 points. Pricing declined an average of 2 points, and currency effects reduced reported revenue growth by about 2 points.

On a segment basis, Ciba followed the pattern of many specialty chemical producers, with year-over-year declines in the first quarter, but sequential gains over the fourth quarter. Plastic additives reported first quarter sales of SFr 460 million, down 6 percent year-over-year, and down 4 percent on a currency adjusted basis. Volume was flat and prices declined 4 percent due to strong competition in Nafta countries. However, sales improved 10 percent on sequential basis.

To expand its plastics additives offerings, Ciba announced earlier this year that it was acquiring DSM's flame retardant technology, which includes a range of halogen-free, melamine-based flame retardants. Ciba is expected to offer the flame retardants as a component of integrated packages that include a combination of effects, consistent with its strategy to provide high value-added effects for its customer products.

Coating effects sales fell 5 percent year-over-year to SFr 482 million in the first quarter, but the company saw sequential sales gains in the US and in Asian countries other than Japan. Overall, coating effects saw an 9 percent gain in sequential sales. In its other segments, water and paper treatment, sales declined 2 percent year-over-year, and only 1 percent factoring in currency effects to SFr 371 million. Sales in Asia-Pacific and Europe were particularly strong, and sequential gains were 2 percent.

Harder hit, however, were results for textile effects, which saw first quarter sales decline 12 percent year over year or 10 percent, excluding currency effects, to SFr 393 million. Volume fell 9 points due to declines in overall textile markets and Ciba's decision to pursue high-quality rather than quantity of sales. This decision helped, however, to limit pricing declines to 1 point. Home and personal care revenues declined 2 percent year-over-year to SFr 102 million, and were flat on a currency-adjusted basis. Both volume and prices were flat year-over-year.

Although Ciba, as one of the largest pure play specialty chemical companies, posted weak first quarter results, analysts point to some positive factors. "While Ciba's markets generally remained weak in the first quarter, it maintained gross margins of 33.3 percent, up 0.6 points year-over-year due to reduced personnel costs and significantly lower raw material costs," says First Analysis analyst Allan Cohen. The EBITDA margin of 16.6 percent was down 0.9 points year-over-year due to lower sales and negative currency effects. "A more severe decline was prevented by last year's business improvement initiatives, including reducing headcount by more than 600 (roughly 3 percent), streamlining information technology and supply chain systems, inventory reductions and tight controls on expenses as well as lower raw material costs," says the analyst.

"Ciba's first quarter results were as solid as the market had expected them to be following previous releases and trading statements from several other chemical companies," says JPMorgan analyst Colin Isaac. "Unsurprisingly, sales were up 6 percent from the very weak fourth quarter as underlying demand improved. Against first quarter 2001, however, the Ciba top line was still down 6 percent, with currency, volumes and pricing making equal contributions to the decline," he says. On average, margins were restored back to levels achieved in the second quarter of 2001.

A key issue for Ciba is whether the company will seek further acquisitions. Following the divestiture of its performance polymers operations in 1999-2000 and the completion of its divisional restructuring expected by the middle of this year, some analysts believe that the company is primed for acquisitions. "We think portfolio adjustments will now focus on enlargement rather than disposals," says one analyst, who adds that the company would be ready to pay up to SFr 700 million in cash to finance an acquisition. "We believe that Ciba's acquisition interest appears to be more of the bolt-on, medium-size type, available at a reasonable transaction multiple," says the analyst.

A target area for the company could be its water and paper treatment division, where the company lacks the needed critical mass compared to, other key competitors, namely Suez, with earlier acquisitions of Calgon and Nalco, and General Electric, through its recent acquisition of BetzDearborn. A key aim of the company is to bring profits of its water and treatment business into line with the group average of 16.7 percent and the industry standard of 16 to 19 percent. Its current EBITDA margin of 10.4 percent is below this level despite the acquisition of AlliedColloids in 1998.

"Ciba believes it still lacks the necessary depth of services and products although the company has ruled out entering the more capital-intensive utility part of the water cleaning industry, and maintains its focus on product-related chemical solutions for industrial end-users, such as the paper, mining, oil and textile industries," says one European chemical analyst. "Ciba has indicated it would like to selectively participate in the consolidation of the industry, but only if returns from the assets to be acquired exceeded a double-digit hurdle rate."

Other analysts also point to the need to maintain a cautious acquisition strategy. "The essence of this strategy is to focus on sustainable internal sales growth through new product innovation, continually keep costs under control, focus more on customer needs, focus on cash/balance sheet efficiency, and avoid large dilutive acquisitions," says Merrill Lynch analyst James Knight. This strategy has evolved after the highly unsuccessful acquisition of AlliedColloids in 1998, and has accelerated under CEO Armin Meyer, who was appointed late in 2000, he says.

Ciba's decision to say away from large acquisitions differentiates the company from other European chemical companies that remain very much focused on the building mode, say analysts. Ciba is said not to be looking for acquisitions outside its present core divisions, and it is not likely to make any acquisitions in fine chemicals or flavors and fragrances. Some see sizable deals most likely in home and personal care or water treatment, with acquisitions less likely in coatings effects and plastics additives.

Crompton

Following the less than favorable M&A environment over the last 18 months, Crompton is expected to move toward the sale of its divestiture candidates, industrial specialties and refined products. Refined products and industrial specialties sales were down 10 percent and 11 percent, respectively, in the first quarter, versus the much stronger economic period last year. Overall, Crompton reported first quarter sales of $645 million, a decrease of 13 percent year-over-year, but a sequential gain of 7 percent over the fourth quarter. Sales declined in every segment, except organosilicones, which increased a 2 percent year-over-year.

"As indicated in January, we believe that the fourth quarter represented trough results for the company," said Vincent A. Calarco, chairman, president and CEO for Crompton, at the time of the earnings release. "Furthermore, we believe that first quarter results reflect the gradual improvement to be expected as the economy emerges from recession."

On a segment basis, polymer additives sales of $267.2 million were down 13 percent from the prior year due to a reduction in unit volume of 9 percent, lower prices of 3 percent and foreign currency translation of 1 percent. Plastic and urethane additives sales decreased 11 percent and 18 percent, respectively, due primarily to much stronger economic conditions in the prior year. Rubber additives sales were down 24 percent due mainly to lower unit volume resulting from a weak automotive market and business lost following a price increase in the third quarter of 2001. Petroleum additives sales declined 3 percent due equally to lower volume, price and foreign currency translation.

Polymer sales of $67.5 million were down 18 percent from the prior year as a result of a 13 percent decline in unit volume and a 5 percent decrease in prices. EPDM sales declined 20 percent as industry overcapacity resulted in lower unit volume and reduced selling prices. Urethanes sales were down 15 percent due primarily to much stronger economic conditions in the prior year. Polymer processing equipment sales of $49.8 million declined 15 percent from the prior year.

In specialty products, organosilicones sales of $113.8 million were up 2 percent from the first quarter of 2001 as a 7 percent increase in unit volume (primarily sulfur silanes in Europe) offset lower pricing of 3 percent and unfavorable foreign currency translation of 2 percent. Despite higher sales, operating profit of $7.1 million was down 38 percent from the prior year mainly as a result of lower selling prices, an unfavorable sales mix and start-up costs associated with a plant expansion in Italy.

Crop protection sales of $52.5 million were down 13 percent from the prior year due to a decline in unit volume of 10 percent, lower pricing of 1 percent and lower foreign currency translation of 2 percent. Unit volume was down mainly as a result of unusually strong prior year demand in Europe, and high distributor inventories and new competitor registrations in Canada.

Great Lakes

Like other plastic additive producers, Great Lakes is facing competitive selling price pressures in bromine-based products and plastic additives. The company also faces some pressure on its pool chemicals business because of recent drought conditions in the northeastern US and more stringent water restrictions that may impact sales this summer, say analysts.

On a segment basis, the company will continue to look for sequential gains realized in the first quarter. First quarter sales in polymer additives decreased 17.5 percent (volume down 14 percent; price down 4 percent) to $138 million. However, sales in polymer additives increased 5 percent (volume up 7 percent; price down 2 percent) compared to the fourth quarter. Flame retardants and polymer stabilizers improved sequentially.

Hard hit in the first quarter were performance chemical sales, which decreased 30.1 percent from $88 million to $61 million, primarily due to declines in fluorine and fine chemicals. Water treatment sales increased 1.5 percent (volume up 3 percent; prices down 1 percent) to $112 million from $111 million, primarily due to increased market penetration of new product sales, which were offset by customers minimizing inventory assets.

ICI

For ICI, exposure to commodity markets has been the most problematic in terms of recent earnings performance. ICI reported an 11 percent decline in sales in the first quarter, although its core businesses-National Starch, Quest, performance specialties and paints-reported a more modest 3 percent decline. Margins for this core group were held at last year's level (8.5 percent) although somewhat below the fourth quarter results (9.2 percent).

"Although it is almost five years since the transformation of ICI began, its earnings and arguably its share price continue to be overshadowed by the commodity activities," says JPMorgan's Mr. Isaac. Industrial chemicals reported a £9 million ($13 million) operating loss due to its exposure to Argentina through ICI Argentina and continuing weak economics in PTA. Huntsman International, the joint venture with Huntsman Corp., through which ICI divested its titanium dioxide, polyurethane and olefins activities, also reported a loss of £13 million ($19 million). "Although the Huntsman Corp. is due to buy out ICI's stake in this partnership in the third quarter of next year, its weak financial position has caused concern that this may not be possible and clearly ICI may have to endure several further quarters of losses from this business," says Mr. Isaac.

OM

For OM, declines in raw material pricing in its metals business have beenthe most problematic. OM suffered declines in its base metal chemistry business in the first quarter, but analysts say the company may see some upside in cobalt pricing. For the first quarter, net sales in the base metal chemistry segment, which includes cobalt, nickel, copper and other base manufacturing metals, decreased 16.7 percent to $196.3 million. This was due to lower cobalt, nickel and copper raw material market prices, which were partially offset by a 6.5 percent increase in volume and a 2.0 percent increase resulting from the acquisition of Rhodia's organic metals business. In the first quarter, cobalt sales declined 30 percent to $51 million and nickel sales by 14 percent to $100 million. Copper sales were $26 million in the first quarter, up 9 percent from the first quarter of 2001. Sales in its precious metal chemistry division were $383 million in the first quarter, led by strong sales of auto catalysts in Europe, North America and Brazil. Metal management sales were $610 million.

Rohm and Haas

Like other specialty chemical companies with exposure to electronics, Rohm and Haas reported significant declines in first quarter sales although analysts are bullish on the fundamentals. The company's first quarter revenues were $1.38 billion, down 12 percent year-over-year. However, excluding sales of electronic materials and salt, the remaining chemicals segments (coatings, adhesives and sealants and performance chemicals) declined 6 percent year-over-year. Of the 6 percent decline, 2 points were due to negative currency effects, 2 points to exiting certain liquid polysulfide and dye businesses, and 1 point to a volume decline in the monomer business. Within the chemicals division, sales of products used in architectural paint, construction, automotive, and flexible grocery packaging markets grew while sales of products for the industrial coatings, industrial water treatment, merchant monomer and paper market continued to be weak. Sequentially over the first quarter, overall revenue grew 3 percent, driven by a 6 percent sequential gain in electronic materials, 7 percent in plastic additives and 11 percent in coatings.

"While Rohm and Haas continues to face weakness in a significant portion of its markets, its internal strengthening is evident in its bottom line results," says First Analysis' Mr. Cohen, "with EPS up about 37 percent year-over year as revenue declined about 12 percent." The analyst says the company is on track for achieving its goal of $200 million in annual cost savings by October 2002.

Earlier this month Rohm and Haas's chairman and CEO Raj L. Gupta said once the global economies are back on track, the company's current portfolio of products is capable of generating annual sales growth of 5 to 6 percent. The company's current portfolio has the potential to generate between $350 million and $400 million in free cash flow (after capital spending and dividend payments to shareholders), along with a return on net assets in excess of 10 percent, above the company's cost of capital. "We are committed to delivering unique and differentiating technology to the fastest-growing segments of the markets in which we compete," he said.

Hercules

The key move for Hercules was the divestiture of the water treatment business of BetzDearborn to GE Specialty Materials for $1.8 billion. Hercules will use the net proceeds of $1.67 billion to repay outstanding loan balances estimated at $1.6 billion and to provide $73 million of collateral for outstanding letters of credit. Hercules has retained BetzDearborn's paper process chemicals business, which has been integrated into the pulp and paper division. Following the BetzDearborn divestiture, Hercules realigned its reporting segments. They include performance products, which includes the pulp and paper and Aqualon divisions and engineered materials and additives, which includes FiberVisions and the rosins and terpenes division.

The company is "doing a good job reducing costs," says First Analysis' Mr. Cohen, "although we note specialty chemicals companies that have undergone extended restructuring processes have tended to lose some of the bottom-line impact due to giving back some cost savings via lower pricing and erosion of sales," he says. The company is on track to achieve its goal of $125 million in cost savings by the end of the year, with only about $60 million to go, $38 million from the end of last year and $26 million from the first quarter.

"With the sale of BetzDearborn, we dramatically improved our financial health, flexibility and opportunities going forward," said William H. Joyce, chairman and CEO last month in commenting on first quarter results. "We delivered strong operating results in a very challenging environment. Our work process redesign programs and cost reduction efforts drove the improvement in our earnings.

"Most importantly, we're seeing the cost savings improvements reach the bottom line. The EBITDA margins of our continuing businesses were 18.4 percent in the first quarter of 2002, a 300 basis point improvement from the first quarter of 2001. Now that we have completed the sale of BetzDearborn, our top priorities are focusing on our four remaining businesses, driving out costs, and improving our work processes."

Like other specialty chemical companies, Hercules reported lower year-over-year results in the first quarter. The performance products segment reported net sales of $327 million, down 2 percent year-over-year on a pro-forma basis (reflecting the re-alignment of its reporting segments), driven by a 2-point volume decline. Pulp and paper sales fell by about 2 percent year-over-year, with a 1 point negative currency effect and a 1-point volume decline as increased sales of functional chemicals were offset by a decline in process chemicals. Aqualon sales were flat year-over-year.

Engineered materials and additives reported net sales of $75 million, down 9 percent year-over-year, which Hercules attributed to contractual pass-through of lower polypropylene costs in the FiberVision divisions. First-quarter revenue in the FiberVisions division declined 11 percent year-over-year. First quarter rosins and terpenes revenues were roughly flat year-over-year and grew 39 percent sequentially due to customers' restocking inventories.

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