Ferro sets sights on specialty chemicals With its acquisition of Keil Chemical last month, Ferro Corp. made a further step in its plans to carve out a bigger niche for itself in specialty chemical markets. Specialty chemicals—which at Ferro include primarily heat and light stabilizers and ultraviolet absorb­ers for use in plastics, as well as fungi-stats and other additives for paint and other chemical products—accounted for only 9% of Ferro's total sales ($256 million) last year.

Keil, which makes halogenated hy­drocarbons and sulfur-containing com­pounds for use as additives in cutting oils and industrial lubricants at Ham­mond, Ind., and also has developed some fire retardants for plastics, will help lift Ferro's specialty volume to about $35 million this year. Ferro board chairman Harry T. Marks, who looks to such specialty products as one of Ferro's best avenues for maintaining the company's growth, adds that Keil "will enable us to extend the scope of our specialty chemicals activities into product areas in industrial and plastics fields not previously served by Ferro."

Mr. Marks' yen to diversify is under­standable. A decade ago, Ferro's sales were increasing at a rather undramatic clip of 6 to 7% a year. Earnings had been in a rut for several years. Ferro's traditional product line was a decidedly unglamorous item with an even less glamorous name: frit. Its sales were tied closely to cyclical demand for major home appliances and seemed threatened by the inroads of new, more sophisticated products, such as plas­tics. Obviously, Ferro didn't need a high-priced management consultant or a bright young Harvard business school graduate to suggest that diversification into more promising areas might be its best strategy.

And that 's exactly what Ferro did, launching an acquisition and develop­ment program that has led it to take over about 25 smaller companies in the U.S. and abroad since 1960 and pushed it into such promising fields as glass fi­bers (through a license from Owens-Corning Fiberglas), industrial compos­ite materials, specialty ceramics and refractories, additives for polymers, and factory-built housing.

What is the outcome? Sales in the past 10 years have been growing at an annual rate of about 12%, net income by 17%. After-tax profit margins have widened to 6.2% of sales in 1973 from 4.0% in 1963. Return on average net worth jumped to 17.4% from 9.0% 10 years earlier.

Ferro moved onto the Fortune list of the top 500 industrial firms a couple of years ago, and among that select group of blue chips ranks within the top 25% in growth of earnings and return on stockholders' equity.

Clearly, then, its record suggests a

Marks: acquisition minded

textbook case in successful corporate diversification.

But look again. That old-line prod­uct, frit (a specially formulated, granu­lated type of "fried" glass that is the major ingredient of porcelain enamel and ceramic glazes) still accounts for 36% of Ferro's business and, moreover, just about half of its pretax profits. Ferro continues to be the world's larg­est producer of frit and the business this year "is doing exceptionally well worldwide." Another long-established product line, inorganic colorants (which Ferro initially made as pig­ments for enamel and ceramics but now sells to producers of plastics and glass containers as well) bring in about 22% of total sales and 28% of profits. And all those diversification ventures last year provided 44% of sales but only 16% of profits. Thus, Ferro earns, be­fore taxes, 16 cents on every $1.00 of frit or colorants that it sells, but less than 7 cents on the dollar for sales of its newer products.

Glass fiber, with sales of about $20.5 million in 1973, has been only margi­nally profitable at best. Composite ma­terials—either coated products or resin-impregnated reinforcements— provided $7 million in sales but sales were hurt by the decline of the U.S. space exploration program. Ferro's di­versification into factory-built, panel-ized housing and residential construc­tion, in which Ferro became involved when it bought Nashville-based Jones Homes in 1971, was, as Mr. Marks told stockholders candidly at the annual meeting last April, an "ill-timed ven­ture." Jones Homes, whose market centered on low-cost homes, got caught squarely in a severe squeeze as federal low-cost housing subsidies dried up while building and financing costs soared. With the business awash in red ink (last year, to the tune of $1.4 mil­lion), Ferro in May sold Jones Homes back to founder Ralph L. Jones, writ­ing off a loss this year of more than $1.7 million on the deal. "From this point forward," says Mr. Marks with a sigh of relief, "we should have no nega­tive effect upon our operating results because of this housing company ven­ture." (Ferro's earnings for 1974's first half were down 11% to $7.9 million, but with international business re­

maining strong, net income from con­tinuing operations was up 16% to $9.7 million on a sales gain of 21%, despite the impact of reduced housing starts in the U.S. on demand for appliances and a decline in boat sales, the major mar­ket for the company's glass fiber out­put.)

As for specialty chemicals, Ferro's sales were up 25% last year from the year before and continue to flourish this year despite some raw materials shortages. Ferro's move into the glass bead business last year by acquiring Cataphote Corp. is also doing well. But the overall contribution of these opera­tions to the corporation's total sales and profits remains relatively modest.

If all this suggests that Ferro's diver­sification strategy has yet to jell, how­ever, it is only because it overlooks a significant element. A major share of the company's sales growth and even more of its rise in profits during the past several years have been abroad. Geographic diversification has proved to be a real winner.

Last year, Ferro got 51% of its sales and a whopping 78% of its profits from operations outside the U.S. For a firm its size, it is remarkably multinational. Operating 27 plants in 16 foreign countries, last year Ferro pushed its sales overseas up—for the 21st year in a row—33%, about double the increase for domestic volume. In Europe, it earns 10% on sales; in Latin America and elsewhere abroad 9%. In the U.S., it earns but 3% on sales. Overseas too, it earns 32% on its net assets there. In the U.S., it earns 6%.

Foreign sales have been growing sig­nificantly faster than those in the U.S., as well. In 1968, only about 40% of the company's total volume was generated abroad; in the late 1950's, only about 20%. Growth in overseas profits has been even more impressive. They have more than tripled since 1969, while those in the U.S. are up only about 40%. As chairman Marks puts it, "Many of the seeds we have planted abroad have now grown to forests."

The point is that Ferro's business overseas is largely concentrated on its traditional products of frit and colors, and demand for both has grown much more abroad than it has in the U.S. In foreign markets, the big outlet for frit is in glazing for colored tile, rather than, as in the U.S., for porcelain enamel used on major appliances. Ferro executives are hopeful, in fact, that foreign tastes for tile on the walls and floors of homes may spread to the U.S., giving a boost to its domestic frit and color sales.

Frit, as it turns out, has been a first-rate base on which to build a foreign business. Economies of scale are not a very significant cost factor, so that it can be made in relatively small plants to serve relatively limited national markets. In addition, it is a product of comparatively low visibility—not sold as such directly to consumers nor

10 C&EN August 12, 1974

based directly on national resources. Nor is it involved with national securi­ty. Hence it is an unlikely target for nationalism pressures.

Building on a start in Canada 47 years ago, Ferro soon added subsidiary plants in the Netherlands, France, and the U.K. Now, most of its foreign sales are accounted for by products pro­duced overseas rather than exported. Its biggest single operation abroad is in the Netherlands, with 80 to 90% of the frit produced there exported to mar­kets where Ferro still lacks a local plant. (England, France, and Mexico similarly serve as export bases for de­veloping markets elsewhere in the world.)

Many of the company's top execu­tives have a strong international back­ground, also. Mr. Marks is Canadian born, having started with Ferro there and managed its Brazilian subsidiary for a while during the late 1930's before moving to the company's Cleveland headquarters to run all international operations. Several other officials have come up through the overseas opera­tions. Because the international sub­sidiaries operate relatively autono­mously, Mr. Marks points out, they make a good training ground for up­coming young managers.

Nevertheless, Ferro continues to see the U.S. as the heart of its business. "Our technology and new products start here," Mr. Marks emphasizes.

"Our aim is to develop new products in the U.S. that we can market through­out the world, using our present foreign activities as a core." Thus, Ferro may look to broaden its newer specialty chemicals business by carrying suc­cessful products overseas, following the same pattern that has been so profita­ble with frit and colors. (An important reason why profits have been higher outside the U.S. is that Ferro has taken abroad only those products that have proved to be winners at home.)

Although frit continues to perform strongly abroad, with Ferro's overall sales of the product rising at a 15%-a-year clip, its U.S. market seems to have reached maturity. Porcelain enamel has been losing out to other coating materials (such as powder coatings, in which Ferro is also active) because relatively high application costs put it at a competitive disadvan­tage in the appliance market. Conse­quently, the surface area of major ap­pliances now covered with porcelain enamel has declined. Ferro claims that its share of the total market has been expanding and thinks new technology will keep demand strong. Nevertheless, it sees the need to diversify into new lines where it can apply its established technological and marketing skills in the U.S.

It got into the glass fiber business 20 years ago, for example, because it feared that reinforced plastics might

Ferro's sales and profits: mostly from foreign operations.

NET SALES NET INCOME

$255.9 million $15.78 million

and still centered largely on frit and colors TOTAL REVENUES INCOME BEFORE TAXES

$255.9 million $31.0 million

• Excludes Jones Homes. Note: Data for 1973.

win a dominant position for applian­ces. That has not been the case. And meanwhile, the glass fiber division has been dogged by unsatisfactory prices, at least until recently, and rising man­ufacturing costs. Although Ferro never really has expanded from its Nashville operations, however, it has not given up hope. Ranking fourth among the five U.S. glass fiber producers in size, Ferro has concentrated on fiber for re­inforced plastics, a relatively strong growth market. And it is hoping that a new electric direct-melt process that it has installed at Nashville may turn the fiber business into a money-maker. Ferro plans to license the electrosmelt-ing process worldwide. It claims that because initial requirements for capital are lower, the process will permit fibers to be produced competitively in rela­tively small plants, which would make it attractive to small consumers or for plants in underdeveloped countries.

But it is to chemicals that Ferro ex­ecutives are looking most enthusiasti­cally for new growth opportunities. "We do best," says Mr. Marks, "in specialty areas that require top-flight technology and service."

The company wants to expand on the base acquired with Keil, as well as with Ottawa Chemical, a producer of biological and odor control agents and ferrite powders it took over in 1968 and with Grant Chemicals, bought in 1970, which makes dioxane and other spe­cialty and custom chemicals. Research is being focused on such fields as poly­mer additives, pigments, sound control, and coating materials.

Marketing vice president John W. Slaton hopes the specialty chemical operations will be expanding by about 15% a year during the next few years. To accomplish that, he recognizes, Ferro will have to continue to make ac­quisitions "to build up the type of product lines we need for growth." And especially he would like now to pick up one or more fairly sizable producers— in the $20 million to $30 million sales range—"to consolidate our activities and give us the substance we need to commit more money to research and development."

Ferro also wants to move more ag­gressively into specialty chemical mar­kets overseas, where it has only a toe­hold now. It already has a joint ven­ture, Nissan-Ferro, in Japan making heat stabilizers for plastics and is look­ing to invest more there. It is active in Australia, also. And its acquisition of Glastec Importacao e Comercio, a maker of materials for use in reinforced plastics in Brazil, gives it a start in South America.

"We want to expand from our exist­ing business bases," Mr. Marks adds, "and we will continue to be opportunis­tic in the sense that we do not intend to let our experience with Jones Homes deter us from continuing to look dili­gently for new opportunities anywhere we might be able to find them."

August 12, 1974 C&EN 11

Colors 22%

Specialty ceramics --. 12%j

Other operations"

30%

Frit 37%

Frit 48%

Colors 28%

9% sPec ia ,«y •--«•^ ceramics Other ^ operations*

v- 15% /

Europe 23%

Other areas J

x 13% /

U.S. 49%

Latin American

15% y

Europe 37%

Other areas \ 18% I

Latin America

23% / U.S. 22%