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Dow Chemical posts higher profits, considering options for epoxy and chlorine derivatives units

9:08 AM MDT | July 25, 2013 | Rebecca Coons

Dow Chemical reported higher second-quarter profits, driven by an advantaged feedstock position in North America, strong adoption of corn seeds and new crop protection products by farmers, and previously announced cost-cutting programs.

Adjusted earnings of 64 cts/share were up 16% YOY, narrowly beating a 63 cts/share consensus of analyst estimates compiled by Thomson Reuters (New York). Sales were flat YOY, at $14.6 billion. Net income more than tripled year-over-year (YOY), to $2.34 billion, largely due to a $2.2-billion gain from the K-Dow arbitration.

"[T]his was a strong quarter for Dow, and our results reflect the deliberate actions we’ve taken and continue to take across our portfolio," says chairman and CEO Andrew Liveris. "We are pleased with our performance, despite ongoing macroeconomic headwinds in most parts of the world."

Strong performance in agricultural sciences and performance plastics demonstrates Dow’s market and technology leadership in those segments, Liveris says. “We also are fully implementing aggressive improvement plans in those segments that do not currently meet our return on capital expectations," he adds.

The company is currently evaluating underperforming businesses, specifically epoxies, chlorine derivatives, and building and construction outside North America, which together represent $6 billion in annual revenue. "Here we see the need for more dramatic interventions," Liveris told investors on a conference call this morning. "Therefore, these businesses are in the fix-take action mode, which includes exploring all possibilities, including joint venturing or divesting them."

Liveris noted Dow's track record of carving out integrated businesses, most recently the 2010 sale of its Styron business. "This was a highly complex carve-out on 20 Dow sites, with hundreds of residual service agreements to ensure that there were no stranded costs. Dow has the expertise and demonstrated track record to execute a highly complex, integrated carve-out successfully, with Styron as a recent, strong example," he said.

Dow’s plastics additives and polypropylene licensing and catalysts are already up for sale as part of a $1.5-billion divestiture plan announced in March.

The announcement comes just days after DuPont announced it was exploring the sale or spin-off of its $7 billion/year performance chemicals unit as part of its transformation to a “higher growth, less cyclical company.”

Liveris also says the sweeping restructuring program announced late last year remains on track. Eighteen of the 29 assets targeted for closure by the second half of 2014 have been shut down, and more than half of the planned 3,300 job cuts have been made.

Looking ahead, Liveris noted “promising signs of [economic] recovery” with steady improvements in the US, growth in agriculture and transportation, and signs of recovery in electronics. While China “appears to be stabilizing,” he warns that expectations should be reset below previous forecasts. Europe remains weak, however, with limited upside in 2013 and continued contraction in both residential and non-residential construction.

Segment results

Electronic and functional materials sales of $1.2 billion were flat YOY, as volume increases of 2% were offset by a 2% decline in prices.  Segment Ebitda fell 11.5% YOY, to $254 million. Dow Electronic Materials reported growth in films and OLED drove higher sales in display technologies. Overall, Dow’s electronic materials sales were flat with semiconductor technologies experiencing softer demand in the quarter. In functional materials, overall sales were flat. Dow’s microbial control segment grew sales in all regions, delivering a new quarterly sales record primarily due to strength in energy markets. Segment equity earnings slipped 20%, to $28 million, driven primarily by Dow Corning.

Coatings and infrastructure solutions reported sales of $1.9 billion, flat YOY, as volumes rose 2% and price declined 2%. Segment Ebitda declined 25.8% YOY, to $250 million. Volume growth for the segment was recorded in all regions except Europe, Middle East and Africa (EMEA). Dow’s coating materials sales increased as volume gains slightly offset price declines. Sales declines in Dow's building and construction segment were led by building solutions in EMEA, which continues to experience a weak overall construction market. Equity earnings were 44.4% lower YOY, at $25 million, primarily as a result of lower earnings from Dow Corning.

Agricultural sciences reported record second quarter sales of nearly $1.9 billion, up 10% YOY. Volume increased 9% and price rose 1%. Segment Ebitda of $290 million is 5.5% lower YOY, reflecting a shift in seasonal buying patterns and increased growth investments. Agricultural Sciences achieved a new first half Ebitda record of $774 million. Volume gains were achieved in all geographic areas led by Latin America. Second quarter crop protection sales rose 12% YOY, with increases in all geographic areas. Latin America posted the largest gains, driven by higher sales of herbicides and insecticides. Sales of new crop protection products grew 14% YOY. Seeds, traits and oils (ST&O) sales were up 4 % YOY. Year-to-date, ST&O sales are up 23%, driven by strong farmer demand for SmartStax corn hybrids—a stacked-trait seed by Dow AgroSciences and Monsanto.

Performance materials sales were $3.4 billion, up 1% YOY. Segment Ebitda slipped 18.9% YOY, to $284 million. Volume grew 4%, while price declined 3%. Volume increases were driven by improved asset supply and market share gains within polyurethanes and propylene oxide/propylene glycol. Lower propylene costs drove lower market pricing levels. Competitive pricing pressure stemming from unfavorable supply/demand dynamics—particularly in the epoxy, chlorinated organics, polyurethanes and propylene oxide/propylene glycol segment—impacted overall margins. Equity losses for the quarter were $12 million, versus $20 million in the year-ago quarter.

Performance plastics sales fell 1% YOY, to $3.7 billion, reflecting the previously announced shutdown of a high-density polyethylene facility in Tessenderlo, Belgium.  Segment Ebitda increased 33% YOY, to $1 billion.  Dow packaging and specialty plastics improved sales in North America, Latin America and Asia Pacific, more than offsetting lower sales in Europe that were primarily impacted by the Tessenderlo closure. Sales in food and specialty packaging showed great strength across all geographic regions.  Transportation demand and improvements in hot melt adhesives for carton sealing and nonwoven markets fueled a record volume quarter for Dow’s elastomers business. Revenues were down on lower market pricing levels versus the comparative period. Dow’s electrical and telecommunications segment expanded margins on effective execution of business initiatives, particularly in the power market, though sales were down due to the transition leading up to the July 1, 2013 divesture of Dow’s 50% ownership in Nippon Unicar. Equity earnings more than doubled, to $88 million.

Feedstocks and energy sales slipped 4% YOY, to $2.5 billion. Price declined 4% due to falling monomers, while volume was flat. Volume gains in EO/EG were offset by decreases in Hydrocarbons associated with lower operating rates and a lighter feedslate in Europe. Equity earnings of $105 million are nearly double YOY.  Segment Ebitda increased 44.0% YOY, to $193 million.

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