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Divestments Shadow Earnings

At the half-year mark, several chemical firms’ strategies include selling major businesses

by Melody M. Bomgardner
August 19, 2013 | A version of this story appeared in Volume 91, Issue 33

In the first half of 2013, the U.S. chemical industry reported financial results that didn’t move the growth needle much. The 24 firms tracked by C&EN saw combined sales increase by 2.1% compared with the year-ago period, and earnings rose by a smaller 1.3%.

For the most part, chemical executives were less than pleased with the pace of global economic growth. In early 2012, firms boosted earnings by raising prices, but that strategy stopped working late in the year. Now, a number of diversified companies including Ashland, Dow Chemical, DuPont, and FMC Corp. are making tough choices about divesting or restructuring some long-held businesses in the quest to increase shareholder value.

These firms are making strategic decisions in an uneven business environment. Last year at this time, many companies reported a broad weakening in demand, but this year some sectors and geographies confronted market softness while others strengthened. The result was disparities in performance among firms. Eleven firms saw earnings drop in the first half, and for six companies the drop was greater than 20% compared with 2012.

For example, prices for titanium dioxide sank, taking a bite out of earnings at DuPont, Huntsman Corp., and Rockwood Holdings. And a weak electronics market hit Air Products & Chemicals, Albemarle, Dow, and DuPont. On the positive side, performance polymers were strong for Dow and Eastman Chemical. And continuing a years-long trend, agricultural products did well at Dow, DuPont, and FMC.


Geographically speaking, complaints about sluggishness in Europe abounded in financial reports covering the second quarter, a common theme going back to the Great Recession. More recently, some chemical executives said they will need to be less reliant on China for growth.

“We maintain the view that while growth continues in China, we all have to reset expectations below historical rates,” said Dow’s chief executive officer, Andrew N. Liveris, in a conference call with analysts.

Similarly, Air Products’ chief financial officer, M. Scott Crocco, told analysts, “In Asia, China continues to grow below trend line as the new government policy is focused on reforms in addition to growth.”

Interestingly, Eastman CEO James P. Rogers had a different take on China. “Our portfolio is benefiting from an emerging middle class and a focused shift to a consumer economy.”

PPG Industries and Praxair also reported strong results from China.

At Dow, despite slower growth in China, 34% of the company’s second-quarter revenue came from emerging economies, and those regions’ sales were up 7% from last year. Sales were also up in North America.

For the first half of 2013, Dow reported overall earnings of $1.6 billion, up 16.6% from 2012, while sales fell slightly. Liveris highlighted for analysts the high earnings and profit margin of Dow’s performance plastics segment in the second quarter, describing how the business uses low-cost feedstocks and sells to high-value markets such as packaging.

Not all of Dow’s segments had a thrilling quarter. In fact, Liveris labeled epoxies, European building and construction, and commodity chlorine derivatives as areas of the firm’s portfolio that need “dramatic improvements,” perhaps resulting in joint ventures or even divestitures. His presentation showed that combined they represent roughly $6 billion in annual sales.

Big businesses are for sale at several chemical companies.a Elastomers sales are for the 12 months prior to June 30, all others are for fiscal 2012. SOURCE: Companies
This graphic shows the divestments major chemical firms are considering.
Big businesses are for sale at several chemical companies.a Elastomers sales are for the 12 months prior to June 30, all others are for fiscal 2012. SOURCE: Companies

Robert Koort, chemicals analyst at Goldman Sachs, applauded Dow’s results in plastics but said the performance materials segment, where the epoxies business resides, needs work. “While we expected weakness in performance materials, due to propylene cost volatility, we were surprised by the margin degradation,” he wrote in a note to investors.

In contrast, Dow will hold on to its agriculture products division, which includes crop protection chemicals, seeds, and traits. At nearly $4 billion in revenue, agriculture claimed almost 14% of the firm’s overall sales in the first half, up from 12% in 2012.

But Dow’s agriculture division is just a sliver of the firm’s overall sales compared with DuPont, where it represented 41% in the first half. Sales in the agriculture business increased 11%, and earnings were up 8% from 2012.

Overall, DuPont reported $2.6 billion in profits in the first half, down 10.8% compared with the year-ago period. The culprit was prices for TiO2, which eroded as global production of the high-volume white pigment increased.

CEO Ellen J. Kullman surprised many DuPont followers by saying the firm will sell or spin off its performance chemicals segment, which includes TiO2 and fluoropolymers. If successful, it will be DuPont’s second large divestment in a short time, coming after last year’s sale of the performance coatings division to the Carlyle Group, a private equity firm.

Kullman told analysts that DuPont will emphasize its businesses in agriculture and nutrition, biobased industrial materials, and advanced materials. “Each of these offers up the opportunity to continue to build a high-margin, higher growth company,” she said.

Other diversified firms have also come upon a strategic fork in the road in their quest to increase shareholder value. Ashland disclosed it is exploring options, including a sale, for its water technologies business, which accounted for $1.7 billion of its $8.2 billion in sales last year. One challenge the business faces is weakness in demand for municipal wastewater treatment.

But some of Ashland’s specialty businesses did well in the second quarter, including pharmaceutical and personal care ingredients as well as adhesives and composites. In the first half, Ashland earned $260 million on sales of $4.0 billion. Sales and earnings slipped by 4.4% compared with last year.

FMC is also queuing up a major divestment. It has plans to sell its peroxygens business, part of its industrial chemical segment, this year. In its earnings news release, FMC CEO Pierre R. Brondeau sounded like Kullman as he touted his firm’s growth strategies in agriculture, health, and nutrition. Unlike DuPont, FMC also plans to keep making money in basic chemicals, mainly soda ash and lithium chemicals.

Basic chemicals did just fine at Axiall, which used to be called Georgia Gulf. The firm took on the new moniker in January after buying the basic chemicals business of PPG Industries. The now-larger firm grew its comparable earnings by a whopping 186.7% in the first half compared with 2012. Its sales were up by 35.5%.

PPG’s results also benefited from the sale. The company is more coatings-focused these days, having bought the North American architectural coatings business of AkzoNobel in April. PPG’s first-half earnings of $560 million were up by 126.7% compared with last year.

Though the coatings business grew significantly compared with last year, “overall economic conditions remained divergent by region,” said PPG’s CEO, Charles E. Bunch. “North America continued to expand, aided by higher industrial and auto production combined with continued positive momentum in the construction markets.”

The expansion of demand in the U.S. is likely to continue, according to the American Chemistry Council, a trade association. ACC’s leading economic indicator, a figure it calls the Chemical Activity Barometer, was 3.9% higher in late July than at the same time last year.

“CAB is signaling a moderately improving U.S. economy into early 2014,” says T. Kevin Swift, ACC’s chief economist. “Although other recent economic reports have been mixed, fundamentals appear strong, with housing demand still growing and consumers still spending.”


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