Business News
Dow Reports Third Quarter Results
Friday 29. October 2010 - Earnings (ex. certain items) More Than Doubled to 54 Cents Per Share from 24 Cents Per Share on Sales Growth of 23 percent(1) with Broad-Based Volume Gains in All Geographic Areas and in All Operating Segments; Combined Performance Segments Deliver Continued EBITDA Margin(2) Expansion
The Dow Chemical Company (NYSE: DOW):
Third Quarter 2010 Highlights
Dow reported earnings of $0.45 per share. The Company delivered earnings of $0.54 per share excluding certain items,(3) compared with earnings of $0.24 per share in the year-ago period excluding certain items and discontinued operations.
EBITDA(2) rose more than $350 million to more than $1.9 billion, the highest level since second quarter of 2008. EBITDA margin at a Company level was 15 percent, with margin in the combined Performance segments again expanding. This was driven by the Performance Products and Performance Systems operating segments, which together delivered an EBITDA increase of 30 percent, and margin expansion of more than 275 basis points.
Reported sales increased 7 percent versus last year. Sales were up 23 percent excluding the impact of divestitures with double-digit gains reported in all geographic areas and in all operating segments.
Sales in emerging geographies increased 19 percent and surpassed $4 billion in the quarter for the first time in the Companys history, with particular strength in Electronic Materials (up 45 percent) and Health and Agricultural Sciences (up 22 percent).
Volume increased 14 percent, with gains in all geographic areas and all operating segments. The largest increases were reported in Europe, Middle East and Africa (up 16 percent), and North America (up 15 percent). A double-digit volume gain was reported in the combined Performance segments. At the Company level, volume rose 8 percent versus last quarter excluding Health and Agricultural Sciences, with gains in all geographic areas.
Price increased 9 percent year-over-year, with gains in all geographic areas. This increase more than offset a $585 million increase in purchased feedstock and energy costs. While the largest increases were reported in the combined Basics segments, Coatings and Infrastructure and Performance Products reported double-digit price gains.
Dows global operating rate was 86 percent, up 6 percentage points from last quarter and representing the highest levels since the first quarter of 2008.
Net debt to total capitalization declined more than 200 basis points to 44 percent, primarily due to $1 billion of cash flow from operating activities and continued debt repayment.
Equity earnings were $251 million, up more than 10 percent from the year-ago period, led by increases in MEGlobal and the Companys joint ventures in Kuwait. Equity earnings have exceeded $1 billion for the trailing four-quarter period.
The Company continued to exceed its growth synergy targets related to the acquisition of Rohm and Haas, delivering more than $975 million in sales on a run-rate basis, exceeding the year-end target of $500 million.
Comment
Andrew N. Liveris, Dows chairman and chief executive officer, stated:
“Dows transformed portfolio delivered accelerated earnings growth this quarter, resulting in a two-fold increase over last year. Continued solid demand recovery in North America and Europe – coupled with sustained momentum in emerging geographies, which represented more than $4 billion of our overall sales in the quarter – drove robust revenue gains across all of our operating segments and in every geographic area. Our operating rates reached levels not seen since the first quarter of 2008, reflecting both broad-based demand growth and a return to our signature operational excellence capabilities.
“In particular, our Performance Products and Performance Systems operating segments achieved impressive results, with EBITDA up 30 percent over last year. Notably, the margin for our combined Performance segments has now expanded for five out of the last six quarters. Additionally, our joint ventures have now contributed more than $1 billion in equity earnings over the last 12 months. These results clearly demonstrate our strategy is continuing to deliver and that we have regained our momentum to transform Dow into an earnings growth company.”
Three Months Ended
In millions, except per share amounts Sept 30,
2010
Sept 30,
2009
Net Sales $12,868 $12,046
Net Sales, excluding Divestitures $12,868 $10,422
Net Income from Continuing Operations $597 $799
Net Income from Continuing Operations, excluding Certain Items $705 $357
Earnings per Common Share $0.45 $0.63
Earnings per Common Share, excluding Certain Items and Discontinued Operations in 2009 $0.54 $0.24
Review of Third Quarter Results
Note: All sales, price and volume comparisons are presented excluding divestitures. EBITDA is presented on a reported basis unless otherwise specified.
The Dow Chemical Company (NYSE: DOW) delivered sales of $12.9 billion in the third quarter of 2010, a 23 percent increase compared with the same period last year. Top-line growth was driven by a 14 percent increase in volume and a 9 percent increase in price. Double-digit sales gains were reported in all geographic areas, with the largest increases in North America (27 percent) and Latin America (24 percent). All operating segments reported double-digit sales increases.
Broad-based price gains were achieved in all geographic areas, led by Latin America (13 percent) and North America (12 percent). All operating segments reported year-over-year price increases except Health and Agricultural Sciences (down 7 percent) and Electronic and Specialty Materials (down 1 percent). The largest price gains were reported in the combined Basics segments, which collectively posted a 17 percent increase. The Companys price gains more than overcame a $585 million increase in purchased feedstock and energy costs.
At a Company level, volume grew 14 percent, with gains reported in all geographic areas and in all operating segments. Double-digit demand growth was reported in all operating segments, with the exception of Basic Plastics (up 5 percent) and Coatings and Infrastructure (up 1 percent).
On a geographic basis, the largest demand growth was reported in Europe, Middle East and Africa (EMEA) (16 percent) and North America (15 percent). Demand in Latin America rose by 11 percent, primarily due to strong volume growth in Health and Agricultural Sciences. Volume in Asia Pacific increased 8 percent, led by gains in Electronic and Specialty Materials.
At a Company level, EBITDA excluding certain items rose more than $350 million to over $1.9 billion. This represents the highest EBITDA level since the second quarter of 2008. EBITDA margin at a Company level was 15 percent, rising nearly 200 basis points year-over-year.
EBITDA margin in the combined Performance segments again expanded, excluding certain items. This was primarily driven by the Performance Systems and Performance Products operating segments, which together reported a 30 percent increase in EBITDA and margin expansion of more than 275 basis points. The combined Performance segments have now expanded EBITDA margin year-over-year for five of the last six quarters.
Net income from continuing operations excluding certain items was $705 million, up compared with $357 million in the third quarter of 2009.
Reported earnings for the current quarter were $0.45 per share, compared with $0.63 per share in the third quarter of 2009, which included gains from the divestitures of ownership stakes in Total Raffinaderij Nederland N.V. (TRN) and the OPTIMAL Group of Companies.
The Company earned $0.54 per share in the quarter, excluding certain items. This compares with earnings of $0.24 per share in the same quarter last year, excluding certain items and discontinued operations. Certain items in the current quarter consisted of Rohm and Haas integration costs of $0.02 per share; an after-tax adjustment of $0.02 per share to the loss on the divestiture of Styron; a charge associated with a labor-related litigation matter of $0.03 per share; and a loss on the early extinguishment of debt of $0.02 per share. (See supplemental information at the end of the release for a description of certain items affecting results.)
Dows global operating rate was 86 percent, up 8 percentage points year-over-year and up 6 percentage points sequentially. This represents the highest operating rate since the first quarter of 2008.
Selling, General and Administrative (SG&A) expenses declined 6 percent from the same period last year despite a 9 percent increase in Health and Agricultural Sciences, which was driven by new product launches and commercial activities related to recent seed acquisitions.
Research and Development (R&D) expenses were essentially flat with the year-ago period. The Company continued to preferentially invest in the technology pipeline of its combined Performance businesses, most notably Health and Agricultural Sciences, which reported a 14 percent increase in R&D investment.
Equity earnings were $251 million, up more than 10 percent from the year-ago period, led by increases in MEGlobal and the Companys joint ventures in Kuwait. Equity earnings for the trailing four-quarter period have exceeded $1 billion.
Dow continued to make solid progress in deleveraging its balance sheet. Net debt(4) to total capitalization fell more than 200 basis points to 44.2 percent from 46.5 percent in the second quarter of 2010. This was primarily due to $1 billion of cash flow from operating activities, as well as continued debt repayment.
The Company continued to exceed its growth synergy target related to the acquisition of Rohm and Haas. On a run-rate basis, growth synergies totaled more than $975 million. This represents an increase of more than 40 percent from the second quarter of 2010.
“Dows transformed portfolio delivered accelerated earnings growth this quarter, resulting in a two-fold increase over last year,” said Andrew N. Liveris, Dows chairman and chief executive officer. “Continued solid demand recovery in North America and Europe – coupled with sustained momentum in emerging geographies, which represented more than $4 billion of our overall sales in the quarter – drove robust revenue gains across all of our operating segments and in every geographic area. Our operating rates reached levels not seen since the first quarter of 2008, reflecting both broad-based demand growth and a return to our signature operational excellence capabilities.
“In particular, our Performance Products and Performance Systems operating segments achieved impressive results, with EBITDA up 30 percent over last year. Notably, the margin for our combined Performance segments has now expanded for five out of the last six quarters. Additionally, our joint ventures have now contributed more than $1 billion in equity earnings over the last 12 months. These results clearly demonstrate our strategy is continuing to deliver and that we have regained our momentum to transform Dow into an earnings growth company.”
Electronic and Specialty Materials
Sales in the Electronic and Specialty Materials segment were $1.4 billion, up 12 percent from the same quarter last year. Volume increased 13 percent, while price was down 1 percent. In the Electronic Materials business, the recovery in electronics end-markets that started in the second quarter of 2009 continued, with significant demand improvements year-over-year. This was particularly true in Asia Pacific where the business saw volume growth of 30 percent, as foundry utilization rates remained high and emerging regions provided solid demand for electronic devices. The highest demand growth was reported in Display Technologies and Growth Technologies, both of which had over 50 percent volume gains, driven by strong end-market demand for televisions and computer monitors, as well as gains in the advanced packaging growth platform. The business achieved several customer wins in the quarter related to its technologies for chemical mechanical planarization pads and slurries, metallization materials and optical filters for advanced plasma displays.
Sales in Specialty Materials rose versus the same period last year, with double-digit volume gains in Dow Microbial Control, Dow Water and Process Solutions and Dow Wolff Cellulosics and volume growth in all geographic areas. Dow Microbial Control reported double-digit volume gains in all geographic areas, with particular strength in energy end-markets in North America. Dow Water and Process Solutions reported double-digit volume growth for its reverse osmosis membranes and ion exchange resins, with notable strength in Asia Pacific, where demand for these products rose over 30 percent. Dow Home and Personal Care reported the strongest volume improvement in Latin America, as brand owners continue to place greater focus on growth in emerging regions.
Equity earnings were $98 million, reflecting continued strong performance at Dow Corning. This compares with equity earnings of $94 million in the same period last year. EBITDA for the segment was $426 million, which compares with EBITDA of $407 million in the same period last year.
Coatings and Infrastructure
Sales in Coatings and Infrastructure were $1.3 billion, up 11 percent compared with the same period last year. Volume rose 1 percent year-over-year, and price was up 10 percent. Volume and price gains were reported in all geographic areas. Dow Coating Materials reported double-digit sales gains in both architectural and industrial coatings. Tight epoxy fundamentals, particularly in epoxy intermediates, drove pricing in industrial coatings, with double-digit price gains in all geographic areas. In architectural coatings, continued weak construction end-markets in the developed economies were offset by robust volume growth in Asia Pacific, where the business continues to benefit from new products that were launched in the region. Additionally, the business reported year-over-year volume growth in North America architectural coatings due in part to customer wins related to recently launched, unique innovations for residential paint end-markets. Sequentially, margin expansion was seen in the architectural coatings business, due in part to pricing gains and resumed production of key raw materials from the Companys Deer Park production facility. Dow Building and Construction reported volume growth in all geographic areas except North America, which was primarily impacted by weakening new housing starts in the United States. While residential and commercial construction end-markets remain weak, the business construction chemicals portfolio is benefiting from trends toward remodeling, with double-digit volume growth reported for these products. Dow Adhesives and Functional Polymers reported demand growth in all geographic areas, with the largest increase in North America, driven by a rebound in demand for industrial laminates, as well as growth projects involving the business specialty labels and tapes.
EBITDA for the segment was $225 million, which compares with EBITDA of $213 million in the same period last year.
Health and Agricultural Sciences
Health and Agricultural Sciences sales were $948 million, up 19 percent compared with the year-ago period. Volume increased 26 percent, more than offsetting a 7 percent price decline. Agricultural chemical volume increased in part due to range and pasture herbicide growth, coupled with the continued success of new agricultural chemical products in North America and Latin America. Seeds, Traits and Oils posted significant volume gains in corn, cotton and soybeans. In both corn and cotton, the business gained share. Preliminary Dow AgroSciences data from nearly 50 percent of its U.S. Corn Belt replicated trials on SmartStax hybrids shows the positive performance of the trait technology that enables SmartStax to deliver higher whole-farm yield potential to growers.
EBITDA for the segment was a loss of $12 million, which compares with earnings of $5 million in the year-ago period.
Performance Systems
Sales in Performance Systems were $1.6 billion, up 16 percent compared with the same quarter last year. Volume increased 12 percent and price was up 4 percent. Volume increased in all geographic areas and in all businesses. Dow Automotive Systems reported a double-digit improvement in volume, led by strong demand in Asia Pacific and North America. The business reported double-digit demand growth for its technology-differentiated products used in acoustical, glass bonding and body structure applications. Additionally, the business reported a demand increase of more than 20 percent for both its polyurethane foams and systems formulations. Dow Elastomers reported sales growth versus last year, primarily driven by volume growth in North America and EMEA. A modest drop in automotive end-market demand in China was more than offset by robust demand in North America, where the business gained share. Dow Formulated Systems reported double-digit sales gains in all geographic areas, resulting in volume growth of more than 20 percent. The business continues to see robust demand for wind energy applications, particularly in Asia Pacific. In EMEA, the business reported particularly strong demand for rigid panel insulation, particularly in Russia. In North America the business also saw solid demand in infrastructure life preservation, particularly for road and bridge protection applications. Dow Wire and Cable reported a double-digit sales gain, with volume growth in most geographic areas. Demand growth in the emerging regions was led by Latin America, while North America and EMEA showed improvement as well, though government stimulus spending has yet to have a significant impact on activity.
EBITDA for the segment was $225 million in the quarter. This compares with EBITDA of $207 million in the year-ago period, which included $1 million of the Companys gain on the sale of OPTIMAL.
Performance Products
Sales in Performance Products were $2.6 billion, up 25 percent compared with the same period last year. Volume rose 10 percent and price rose 15 percent. Double-digit demand growth was reported in North America and EMEA; volume also increased all businesses. Amines reported price and volume gains versus the year-ago period, with solid year-over-year pricing for ethyleneamines due to tight supply/demand balances globally. Polyglycols, Surfactants and Fluids reported sales gains in all geographic areas, with double-digit volume gains in North America and EMEA. Demand in these regions was particularly strong for lubricants, surfactants, and high temperature heat transfer fluids used in concentrated solar power applications. Epoxy reported a strong upturn in sales, with volume growth of more than 30 percent, led by EMEA and North America. Tight supply/demand fundamentals in the allylics chain, due to industry outages, drove strong demand growth, particularly for epichlorohydrin. Polyurethanes reported a strong increase in sales, primarily driven by price gains. Demand growth was recorded in all geographic areas except Asia Pacific, where the business chose to forego lower margin sales. Oxygenated Solvents reported a strong increase in sales, with volume growth of more than 20 percent. Demand gains were seen in all geographic areas, as the business reported strong growth in electronics, health and nutrition, lube oil additives and refrigerant end-markets.
EBITDA for the segment was $429 million. This compares with EBITDA of $438 million in the year-ago period, which included $140 million of the Companys gain on the sale of OPTIMAL.
Basic Plastics
Sales in Basic Plastics were $2.6 billion, up 19 percent from the same quarter last year. Volume increased 5 percent and price was up 14 percent. Polyethylene reported a double-digit sales increase, driven primarily by price gains, which were recorded in all geographic areas. Double-digit demand growth was seen in North America where favorable feedstock costs enabled export opportunities to Asia Pacific. On a sequential basis, volume growth was most notable in Latin America, as sales returned following an unplanned outage that impacted results in the second quarter of 2010. Polypropylene also reported double-digit sales gains, led by strong pricing in all geographic areas resulting from tight supply of monomer and polymer due to industry operational issues.
Equity earnings for the segment were $63 million, compared with $55 million in the year-ago period. The increase was largely attributable to EQUATE, which benefited from capacity expansions versus last year. Basic Plastics EBITDA for the quarter was $731 million, which included a $2 million pretax adjustment to the gain on the divestiture of Styron. This compares with $590 million in the year-ago period.
Basic Chemicals
Sales in the Basic Chemicals segment were $757 million, up 33 percent from the same period last year. Volume increased 13 percent, with price up 20 percent. The Chlor-Alkali/Chlor-Vinyl business reported significantly higher sales, with double-digit volume growth in all geographic areas and strong pricing, particularly for caustic and vinyl chloride monomer. Strong global demand for caustic continued in the alumina and the pulp and paper industries, while tight supply in the industry supported continued price increases. Vinyl chloride monomer sales were higher due to robust U.S. polyvinyl chloride (PVC) export demand that more than offset continued weakness in construction end-markets in the United States. Ethylene Oxide/Ethylene Glycol (EO/EG) volumes were down from the year-ago period, mainly due to the shutdown of a facility in the United Kingdom. This was partly offset by strong pricing due to improved industry supply/demand fundamentals. In addition, the Chlorinated Organics business reported higher sales due to improved pricing in refrigerants, fluoropolymers and solvents applications.
Equity earnings increased to $92 million for the quarter, compared with $45 million in the year-ago period, due to improved results in MEGlobal and EQUATE. EBITDA for the quarter was $181 million. This compares with EBITDA in the year-ago period of $195 million, which included $187 million of the Companys gain on the sale of OPTIMAL.
Outlook
Commenting on the Companys outlook, Liveris said:
“Dows portfolio delivered strong volume gains in most of our operating segments as well as across every geographic area in the third quarter, giving us confidence that a sustained global economic recovery, led by emerging economies, is firming despite headwinds such as sovereign debt, high unemployment or asset bubble formation.
“Our view is that robust growth in emerging economies will continue as domestic demand in faster-growing geographies such as Brazil, Asia, Middle East and Eastern Europe is further strengthening in a number of leading end-markets, including amongst others infrastructure, transportation, and packaging. Growth is also expected to continue in China, where fiscal policy tightening measures have reduced asset bubble concerns.
“We are also encouraged to see signs of improved growth in North America and Europe, especially Germany, which point toward increased momentum in the developed regions. Many of Dows major end-markets – such as electronics, coatings, automotive and packaging amongst others – continue to show strength, despite ongoing headwinds from high unemployment and continued weakness in construction spending. We expect growth in the developed world will be at a slightly lower rate than experienced in the first half of the year – importantly, it is growth, nonetheless.
“Our new portfolio is now well-balanced to mitigate against a global slowdown with our strong and stable downstream market-driven sectors, our key presence in emerging geographies, and our high-performing plastics unit – which is positively leveraged to a commodity cycle rebound – all providing clear advantages as global growth proceeds on a more measured pace. As such, the Company remains poised to continue achieving margin expansion, as we have demonstrated for six consecutive quarters. We will remain focused on our strategic, operational, and financial goals to realize the full potential of our business portfolio, and continue to drive costs down to remain the most productive and efficient company in the industry. At the same time, we will preferentially drive investment in innovation for growth in all of our Performance businesses and in emerging geographies. This focus positions Dow well to deliver sustained earnings growth.”
(1) Sales, price and volume comparisons are presented excluding divestitures.
(2) EBITDA is defined as earnings before interest, income taxes, depreciation and amortization. EBITDA margin is defined as EBITDA as a percentage of sales. EBITDA and EBITDA margin are presented excluding certain items(3) unless otherwise specified. A reconciliation of EBITDA to “Income (Loss) from Continuing Operations Before Income Taxes” is provided following the Operating Segments table.
(3) See Supplemental Information at the end of the release for a description of these items.
(4) Net debt equals total debt (“Notes payable” plus “Long-term debt due within one year” plus “Long-Term Debt”) minus “Cash and Cash equivalents” and “Marketable securities and interest-bearing deposits.”
TM SmartStax multi-event technology developed by Dow AgroSciences and Monsanto. SmartStax is a trademark of Monsanto Technology, LLC.