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
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
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
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
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
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
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.
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
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:
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
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
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 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
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.
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.
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.
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.
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
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
"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
"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
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