Growth and profitability will belong to market leaders
who provide high value for their customersTo Our Shareholders
Some shareholder letters are easier to write than others. At the end of 1997, when our earnings growth and total return to shareholders were at the top of our peer group, it was easy. At the end of 1998, when our drop in earnings and our total return to shareholders place us at the bottom, finding the right words for you is hard.
You don't want excuses and you won't get them. What I will try to do is to explain what we tried to do during 1998 - what worked and what didn't - and what we will be doing in 1999 and beyond to earn your confidence and support - both based on improved and sustained performance.
1998 was indeed challenging for Witco as we struggled to achieve short-term performance objectives while ensuring our long-term goals. We entered the year truly energized by the prospects of putting in place an infrastructure capable of supporting growth. Fundamental issues loomed, however, as 1998 turned out to be an extremely tough year on many fronts for Witco and the entire chemical industry.
Net sales in 1998 were $1.94 billion or 11% lower than 1997. Income from continuing operations excluding non-recurring items was $.83 per common share-diluted, which was 50% below the $1.66 per common share-diluted for 1997.
Our performance during the year was adversely affected by a number of factors: the economic crisis in Asia, pricing pressures, and most importantly, our inability to grow and replace volume lost from the divestiture of low margin, non-strategic, commodity businesses and product lines.
While we did not allow these short-term problems to derail our strategies for transforming Witco, we did allow the intensity of our restructuring activities to distract us from our most important mission: serving customers. To address this issue, during 1998 we tried to place our priorities on those initiatives that most directly impact our ability to be an outstanding supplier to our customers. Witco employees moved quickly to do what was right for our customers as well as for our company. Their actions improved key customer relationships and provided us with a foundation for ongoing improvements, particularly in the critical area of error free delivery for all Witco customers.
By year end, our results - both the accomplishments that in many ways were remarkable and the financial performance that was not - underscored both the difficulties that 1998 presented and the depth of our commitment to build a company capable of creating long-term value for customers and shareholders alike.
Building Value - Fixing Witco
When I came to Witco in 1996, I saw tremendous potential in this company and stated a vision I believe in equally strongly today. In December of that year, we unveiled our three-year restructuring plan designed to bring Witco into the 21st century as a customer-driven, operationally sound, leading specialty chemical company.
Our motivation was straightforward and compelling. Witco had slipped in critical areas of safety, operational excellence, business processes, and reliability for our customers. We were not providing new products and applications at a rate needed to fuel growth. The strategies we developed and the three-year timetable we established were our response to clearly discernible business needs, competitive pressures and shareholder obligations.
During 1997, the first year of our plan, we were able to balance our financial performance and our transformation strategies, producing excellent financial results and completing nearly all of our restructuring objectives for the year. We consolidated operations and made our factories safer and more efficient. We also developed the blueprint for upgrading our technology infrastructure and our business processes. Some of these actions have been completed and others will be ongoing throughout the three-year restructuring period.
Today, I can report with conviction, that Witco is a safer, more efficient, and more competitive manufacturer than it was two years ago.
As we entered 1998, we began our transition toward a focus on growth with a plan that included further fundamental operational improvements, process and technology enhancements, and important steps in the globalization of key businesses.
- Our overall safety performance has improved from the bottom 10% to the top 10% of the chemical industry.
- We have established environmental standards and implemented a Zero Release Initiative at all sites.
- In the past two years, we closed or sold 14 manufacturing facilities, 41 warehouses and terminals, 20 sales and administrative offices, 5 research and development facilities, and reduced employment levels by approximately 1,000. Through plant consolidation and investments in modernization, we have made outstanding and measurable progress in productivity, production planning and inventory control at our facilities.
- In a period of less than one year, we moved from planning to implementing the integrated business processes of Enterprise Resource Planning (ERP) supported by SAP software in our Enterprise Design for Global Excellence (EDGE) initiative. EDGE is also facilitating Year 2000 compliance, which will be achieved on schedule.
- Efforts to improve sales effectiveness, create cross-business marketing opportunities, identify new business opportunities and drive error-free delivery are yielding strong results.
- Through our PACE (Product, Process and Cycle-Time Excellence) initiative, we have implemented a process that truly enhances and accelerates new product development.
- For Witco as a whole, we now have a coherent strategy for growth in Asia/Pacific. Despite the downturn in this region's economy, it has been and will continue to be one of the fastest growing markets of the world. We have new leadership and a multi-year plan to become a market leader in this region.
Building Value - Establishing Our Capabilities
During 1998, we continued installation of our ERP processes and SAP software. We continued to increase manufacturing capacity, modernize our operations, invest in safety and environmental improvements and expand global reach. These investments in our businesses and our operations totaled $281.6 million, making 1998 our peak capital spending year. We also added R&D and technical assistance capabilities to strengthen development of the new products and processes that, in the end, define how a specialty chemical company adds value for its customers. This peak spending, coupled with the poor earnings performance that failed to reach our dividend pay-out level, led us to increase our short-term debt significantly in 1998. We have a job in front of us to reduce the debt load as quickly as possible, but the investments we made accomplished much and are critical to the future of our company. Some of the results are:
Thanks to the remarkable commitment and dedication of our workforce, these improvements are already beginning to create opportunities for our company.
- Completed a business swap with CIBA Specialty Chemicals, Inc., providing significant global competitive strength for our Polymer Chemicals Group.
- Substantial improvements at four Polymer Chemicals operations: doubled capacity for peroxide production at Marshall, TX; increased amide production at Memphis, TN; modernized processes at Taft, LA and Mapleton, IL, significantly increasing manufacturing capabilities and capacity with minimal investments.
- Expanded capacity at Sistersville, WVA to meet growing market demands for a consistent, reliable supply of organofunctional silanes used in adhesives, sealants and coatings.
- Completed a new unit at Perth Amboy, NJ to manufacture environmentally friendly, water-based polyurethane dispersions.
- Established a new Industrial Specialties manufacturing facility in Singapore, expanding our capabilities for serving the agriculture, oil field and emulsion polymerization markets in Asia/Pacific.
- Expanded R&D capabilities for Industrial Specialties, further strengthening our position as one of the few companies with worldwide capabilities to develop, formulate and manufacture a broad range of surfactant technologies.
- Expanded a North American arrangement with Petro-Canada Lubricants to combine our leading market position and application skills with their superior manufacturing capability.
As we move into 1999, capital spending will be much lower than in 1998, the peak year of our restructuring, and then will be reduced further in the future. In total, capital spending related to the three year restructuring program will exceed our original estimates by about 13%.* This increase is due to timing delays and higher than expected costs associated with some projects.
When complete, the capital program will generate a cumulative internal rate of return of a few points shy of the original target set forth in 1996.* Moving ahead, we will continue to apply strict financial controls to achieve our long-term goals for financial performance. We are absolutely committed to improving profitability and value for shareholders and we believe the actions we are taking represent the best and fastest route to this end.
Building Value - Focusing on Our Strengths
On January 13, 1999, we announced that we were entering the next phase of our strategy to become a more focused, market leading, specialty chemical company.
We are focusing our resources on developing the high growth, high performance specialty chemical businesses in which we hold market leadership positions. These include Polymer Chemicals, OrganoSilicones and Industrial Specialties. Refined Products, a lower growth market leadership business, continues as an important part of our portfolio, providing excellent cash generation.
By the end of 1999, we will divest or find a strategic alliance for our Oleochemicals and Derivatives business. We will operate other businesses as non-core portfolio businesses, which will be cultivated based on their success in meeting strategic and financial goals. Decisions with respect to continued ownership, disposition, or other creative strategic alternatives to strengthen those businesses will be made on that basis.
The current difficult global chemical industry environment has made this transformation of Witco even more imperative. Growth and profitability will belong to market leaders who provide high value for their customers and whose business processes are both cost and capital efficient. Witco, today, has the requisite positioning and performance potential in these market leadership businesses.
When the actions we announced in January are completed, Witco will be a smaller but stronger specialty chemical company. Our portfolio will consist of businesses that lead in technology, enjoy preeminent market positions and generate fundamentally attractive margins. This is where our focus, our resources and our spending belong, and throughout 1999 this is where they will be more intensively placed.
Building Value - Organized for the Future
Several important organizational and management changes were made at Witco in early 1999 to support our more focused portfolio.
In January, we announced a post-restructuring organization. Concurrently, Roger Sharp executive vice president and chief of global operations, who joined Witco in 1996 to lead the design and implementation of our restructuring program, announced his intention to retire from his position and from the Board of Directors.
Shortly thereafter Mr. Sharp resigned and the majority of Mr. Sharp's business responsibilities were assumed by Camillo DiFrancesco, senior vice president and CFO, and by executive vice presidents Dustan McCoy and Patrick Mackey who also continue to lead Witco's core business groups, OrganoSilicones and Polymer Chemicals, respectively.
Mr. Sharp provided valuable insight and leadership for our company, particularly in the areas of safety, environmental responsibility and operational improvements. His contributions were critically important to Witco and we are grateful for his service. Looking ahead, Mr. McCoy, Mr. Mackey and Mr. DiFrancesco will provide strong and effective leadership to help guide us into the next century.
David Verner, formerly group vice president for OrganoSilicones, stepped into the critical role of vice president, human resources. Long a positive force for change throughout our company, he is the perfect choice to lead this function during such a critical period in our evolution.
We also welcome Edgar Smith as vice president, general counsel and corporate secretary. Formerly general counsel of General Signal Corporation, Mr. Smith brings years of experience and excellent legal and business judgment to his new position.
Looking Ahead With Confidence
The success of a specialty chemical company is determined by its ability to create value by solving problems through science. Reading through the next few pages of this annual report, you will see how creatively and how well Witco employees are succeeding at adding value for customers. As our company consistently and profitably exploits the science of solutions, we will move ever closer to preeminence in our industry.
During 1999, we must complete our restructuring efforts so we can turn our full attention and energy to growing our businesses. We also must build on the strength that our market leadership positions provide to bring new products and applications to market, and to expand our product lines and our global reach. We will continue to concentrate on error free delivery and other customer service enhancements. As these efforts are reflected in increased sales, the leverage created by our improved cost structure should begin to become visible on the bottom line.
I am confident that by the end of 1999, Witco will emerge a sharply focused, operationally sound company capable of growing our revenues at two to three times the growth of GDP and of achieving our long-term financial goals.*
By all measures, these are the attributes of a company that can produce and sustain superior value for customers, employees, and shareholders. This is the kind of company that Witco employees are building by applying the same fierce commitment to operational excellence that is helping us stay ahead of the competition in the marketplace. I am deeply grateful for their determination and hard work.
To those who say it can't be done, Witco employees, by their actions and accomplishments are saying our challenges are no match for the work we are capable of doing and the company we are capable of building.
E. Gary Cook
Chairman, President and Chief Executive OfficerMarch 25, 1999
*Certain factors that may cause actual results to differ from information presented in these forward-looking statements are discussed in the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations - Cautionary Statements" included in the 1998 Financial Review and in the company's Annual Report on Form 10-K for the year ended December 31, 1998.
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