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Chemical Firms Grew Earnings In 2014

Large firms saw their portfolios hold up against pricing pressures and uneven demand growth

by Melody M. Bomgardner
March 9, 2015 | A version of this story appeared in Volume 93, Issue 10

A chart of the U.S. chemical industry leaders for 2014.

The chemical industry confronted a litany of difficulties in 2014, including sluggish and uneven demand, volatile commodity prices, a strong dollar, and activist investors pressing diversified firms to break apart. Nevertheless, the 19 firms tracked by C&EN increased earnings by a healthy 8.5% compared with 2013, even though sales edged up a scant 1.1%.

In their statements and conference calls with analysts, some executives seemed to be tailoring their comments for the ears of impatient investors, such as Third Point’s Daniel S. Loeb, who has been a critic of Dow Chemical’s leadership, and Nelson Peltz of Trian Fund Management, who has launched a proxy war against DuPont’s board.

In years past, the conference call discussions highlighted long-term plans to boost sales or enter new markets. Now, whether chemical executives call their strategies “portfolio refinement” or “aggressive portfolio management,” they stress their willingness to jettison low-margin businesses and cut operating costs to the bone. The companies are also buying back a huge number of shares and increasing dividends to raise share prices in the short term.

But chief executive officers also point out how diversification saved the day for investors in 2014. At Dow Chemical, earnings grew by a sharp 24.4% to $3.7 billion for the year. The firm’s strong fourth quarter surprised analysts concerned about the recent drop in oil prices. The success came “thanks to our integration, our end market diversification, and our global market access,” CEO Andrew N. Liveris said in a conference call.

Indeed, Dow’s ability to consistently generate cash from its diverse businesses is more important to its profitability than oil prices are, according to Robert Koort, a chemical analyst at Goldman Sachs. Dow generally makes higher profits when natural-gas-based feedstocks have a cost advantage over petroleum-based feeds. However, “Dow presented a positive outlook, once again noting that lower oil prices could stimulate the global economy and thus its volumes,” Koort wrote in a note to investors.

For the fourth quarter, Dow’s sales were flat, in part because of the effect of a strong dollar on the firm’s business in Western Europe. But Dow saw volumes increase by 4.0% thanks to healthy demand, in both developed and emerging markets, for agricultural products, epoxies, polyurethanes, and performance plastics. Higher agricultural demand came primarily from Latin America, and sales of structural adhesives for the automotive market grew in North America. For the year, sales were up 1.9%.

At DuPont, sales shrank 2.8% in 2014 compared with the previous year, a theme that accelerated a bit in the fourth quarter because of the unfavorable currency effect. But the company’s earnings of $3.6 billion were up 10.5% from 2013. DuPont’s industrial biosciences business had a particularly strong year, with earnings up 25% to $211 million due to productivity improvements and increased demand for enzymes by ethanol producers. In the fourth quarter, volumes were up in all segments except electronic chemicals.

But none of this is of great interest to activist investors more concerned with share prices. Thus, in her opening comments to analysts about the fourth quarter, DuPont CEO Ellen J. Kullman didn’t boast about any particular businesses. Instead she described an ongoing process for transforming the company’s portfolio, including the upcoming midyear spin-off of its performance chemicals business, to be called Chemours. She talked about DuPont’s $2 billion stock repurchase program, a 4% increase in dividends, and a boost to a now-$1.3 billion cost reduction plan.

Later in her comments, Kullman was clear that the firm plans further investment in its three main businesses—agriculture, advanced materials, and industrial biosciences—in 2015, despite pressure from Trian to reexamine this mix. Similarly, Liveris signaled his plans to keep petrochemical and specialty chemicals in Dow’s portfolio, although the company did ink deals to divest $2 billion of “nonstrategic assets” in 2014. For example, in November it agreed to sell its Angus Chemical nitroalkane business to the private equity firm Golden Gate Capital for $1.22 billion.

Eastman Chemical was able to grow earnings by 6.0% to $1.1 billion through diversification, which in its case was helped by an acquisition. Eastman’s purchase of Taminco, a maker of amines and crop protection chemical raw materials, came just in time to add to earnings in the fourth quarter. A decrease in tire production in Asia would have taken a bite out of Eastman’s additives business, but sales of specialty amines from Taminco boosted results in the segment.

Mark J. Costa, Eastman’s CEO, highlighted Taminco, along with three smaller acquisitions—Commonwealth Laminating & Coating, Knowlton Technologies, and BP’s turbine oil business—as key to his strategy for overcoming headwinds in 2015. He listed several serious challenges outside management control, including “continued global economic uncertainty, volatile oil prices, and the recent strengthening of the U.S. dollar.”

chart showing chemical earnings amid slow sales growth in 2014.

Ashland, Celanese, and Huntsman Corp. are other diversified firms that posted strong earnings gains in 2014. Ashland has worked to winnow its portfolio, selling its water technologies segment and its elastomers business. But the company plans to hold on to its current roster and has plans to expand its retail Valvoline operations.

Overpruning can have tragic results, as any gardener knows. When Chemtura emerged from bankruptcy in 2010, it marketed specialty chemicals, agrochemicals, and pool and home care products. But it has since sloughed off all but specialty chemicals, and now the company’s sales are suffering because of an excess capacity of bromine and organometallics, used in polymerization catalysts, caused by expansion by competitors including ICL.

In a conference call with analysts, Chemtura CEO Craig A. Rogerson opened the door for “strategic alternatives,” including a buyout. But analyst Ahmed Alamin of investment bank Cowen & Co. said in a research note that the firm would be unlikely to find a buyer.

Meanwhile, Axiall seems to have fallen into a similar predicament. The aromatics and chlorovinyls company, formed in 2013 out of PPG Industries and Georgia Gulf assets, saw its earnings heavily affected by significant new capacity for chlorine and caustic soda. It also suffered because of temporary cost increases for ethylene and natural gas and an unplanned outage of a major facility. Earnings in 2014 fell by 65.0%, resulting in a slim profit margin of 2.0%.

Volatile sales and earnings and risky competitive landscapes are reasons why larger firms resist breaking up into smaller pieces. For example, both Liveris and Kullman have been asked by analysts if they plan to divest or separate their agriculture businesses. No doubt they are tempted: Serving the agriculture market requires big spending on R&D, and returns are seasonal and often unpredictable.

At the same time, it would be difficult to let go of such a strong bet for future growth. The 5% volume hike posted by DuPont’s agriculture business was the most for any of the firm’s segments in 2014. At Dow, two new insecticides saw a 23% increase in sales for the year, and the firm has high hopes for the upcoming launch of Enlist herbicide-tolerant seeds. As Liveris told one analyst, “This is Dow’s AgroSciences product pipeline coming through big time.”  

A chart of quarterly earnings for large agriculture businesses.

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