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Agriculture, Arbitration Boost Dow Chemical - Analyst Blog

Posted
7/25/2013 1:08:00 PM
By: Zacks.com
Referenced Stocks:CE;DD;DOW;EI;EMN

Dow Chemical ( DOW ) saw its profit skyrocket in second-quarter 2013 on strength in its agriculture business, thanks to higher demand for crop protection products, and a hefty gain from its petrochemicals joint venture arbitration case.  

The U.S. chemical kingpin, whose products are used across a string of industries, racked up profit of $2.34 billion or $1.87 a share in the quarter, catapulting from $649 million or 55 cents a share logged a year ago.

Dow, a Zacks Rank #3 (Hold) stock, benefited from a sizable one-time gain in the reported quarter. The company, in Mar 2013, received a cash payment of $2.2 billion as damages from Petrochemical Industries Company of Kuwait (PIC) as part of the final resolution of the K-Dow Petrochemicals joint venture arbitration case. PIC withdrew from the $17.4 billion joint venture in 2008. Dow used the money it to pare its debt.

Barring loss on early extinguishment of debt and gain from the arbitration case, Dow earned 64 cents a share in the quarter, up from 55 cents a year ago. That beat the Zacks Consensus Estimate by a penny.

The Michigan-based company's shares were up 1.5% in pre-market trading.

Revenue, Volume and Pricing

Revenues of $14,577 for the reported quarter were essentially flat year over year as gains across agricultural sciences and performance materials were marred by declines in feedstocks and energy and performance plastics. It missed the Zacks Consensus Estimate of $14,640 million.

Sales rose modestly in North America while declining 6% in Europe, Middle East and Africa (EMEA). Latin America saw an 11% rise while Asia Pacific had a 3% gain.

Price fell 2% year over year on weak currency and lower feedstock costs while volume rose 2% in the quarter. Volume gains were witnessed in most geographic regions and all businesses other than performance plastics and feedstocks and energy.

Segment Review

Electronic and Functional Materials


Revenues were flat year over year at $1.2 billion in the reported quarter as higher volume was offset by lower pricing. Electronic materials sales were flat with semiconductor technologies witnessing weak demand. Functional materials sales were also flat while revenues rose in microbial control on strength in energy markets.

Coatings and Infrastructure Solutions

Sales were flat at $1.9 billion in the quarter as higher volume was neutralized by lower pricing. Volume gains were recorded across all regions barring EMEA. Sales declined in the building and construction business on weakness in commercial construction market.

Agricultural Sciences

The segment was the star of the quarter with sales rising 10% year over year to a record $1.9 billion, benefiting from strong volume gains and higher pricing. Crop protection products revenues rose 12% riding on gains across the board. Latin America recorded the largest gain on higher sales of herbicides and insecticides.

New crop protection revenues rose 14% in the quarter. Sales of seeds, traits and oils went up 4% on the back of strong demand for SmartStax products.

Performance Materials

Revenues crept up 1% to $3.4 billion as price decline was offset by a rise in volume. Volume improvement was by led by better asset supply and market share gains within polyurethanes and propylene oxide/propylene glycol.

Performance Plastics

Sales edged down 1% to $3.7 billion in the quarter, impacted by closure of a polyethylene plant in Belgium. Sales fell across elastomers and electrical and telecommunications businesses. Weak pricing hurt elastomers revenues while sale of the company's 50% stake in Nippon Unicar Co. Ltd. led to the decline in electrical and telecommunications sales.

Packaging and specialty plastics sales were higher in North and Latin America, and Asia Pacific but witnessed a decline in Europe. Food and specialty packaging sales were strong across all geographic regions.

Feedstocks and Energy

As in the first quarter, the segment was once again the weakest link with revenues falling 4% to $2.5 billion on lower pricing. Volumes were flat in the quarter.

Financial Health

Dow exited the second quarter with cash and cash equivalents of roughly $4.9 billion, up 18% year over year. Total long-term debt declined roughly 9% year over year to around $18.3 billion.

Dow's efforts to de-leverage its balance sheet led to a reduction in net debt to total capitalization ratio in the quarter, which clocked 36.4%, down from 40.4% a year ago. The company generated operating cash flows of $3.7 billion in the quarter.

Outlook

Dow said that it is well placed to deliver improved earnings in the second half of 2013. The company continues to seek opportunities to optimize its portfolio by selectively divesting its assets. It has already announced its plans to mop up roughly $1.5 billion from non-core assets sale and expects to implement additional portfolio activities over the next 12 months.

Dow will continue to pursue its cost reduction and efficiency programs while reducing debt, improving cash flows and maximizing shareholder returns. Moreover, the company will continue to invest in attractive regions through highly-accretive projects including the expansions in the U.S. Gulf Coast and Sadara joint venture in the Middle East.

Dow, under its restructuring program, is reducing its global headcount by 5% and closing some of its manufacturing facilities. The company targets aggregate cost savings of $2.5 billion with $1 billion expected this year.

Dow's results shed light on demand trend for chemical products. Among other big chemical names, DuPont ( DD ), which reported on Jul 23, had a mixed second quarter with earnings beating expectations while sales missing. Gains in agriculture were offset by lingering weakness across titanium dioxide and electronics businesses. DuPont said that it may sale its titanium dioxide paint business.

Celanese ( CE ) reported lower-than-expected second quarter results on July 18, hurt by sustained weakness in its core acetyl intermediates business. Eastman Chemical ( EMN ) will report its second quarter results after the closing gong on Jul 29.



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