DOW Dow Inc

The Dow Chemical Company (DOW) earned 85 cents per share in the second quarter of 2011, ahead of the Zacks Consensus Estimate of 80 cents per share as well as last year’s 54 cents per share. However, including one-time charges, the company earned 84 cents per share compared with 50 cents per share in the year-ago quarter.

Quarterly revenues jumped 17% year over year to $16.0 billion and were above the Zacks Consensus Estimate of $14.7 billion, driven by double-digit gains in all operating segments and geographic areas.

Excluding the impact of divestitures, volume grew 9% with gains in all operating segments but Coatings and Infrastructure, which was flat despite difficult conditions in construction end markets, and Chemicals and Energy.  Volume increased in all geographic areas, led by Latin America (23%) and Asia Pacific (11%).

Excluding the impact of divestitures, price rose 19%, with double-digit increases in all geographic areas. All operating segments except Electronic and Specialty Materials (up 7%) and Health and Agricultural Sciences (up 5%) reported double-digit price gains. Price gains more than offset an increase of $1.5 billion in purchased feedstock and energy costs.

Sales in the emerging geographies reached $4.9 billion, driven by Latin America, which increased more than 35% excluding the impact of divestitures. Volume in the emerging geographies increased 14% excluding the impact of divestitures, with double-digit gains in Electronic and Specialty Materials, Health and Agricultural Sciences, and Plastics.

EBITDA increased 24% year over year to $2.3 billion. EBITDA margin was up 200 basis points year over year. Dow’s global operating rate was 84%, up 4% year over year and 1% sequentially.

Segment Review

Electronic and Specialty Materials: Sales in the segment climbed 13% year over year to $1.5 billion, driven by 6% volume growth and price gains of 7%. Dow Electronic Materials reported a solid volume gain, with the strongest demand growth in the Display Technologies and Growth Technologies businesses, driven by new product introductions.

In Asia Pacific, Dow Electronic Materials reported double-digit demand growth, with gains across all business units, resulting from favorable demand trends in the region. The business recorded several customer wins in the quarter, including electroplating materials, chemical mechanical planarization pads and display films.

Specialty Materials reported a solid year-over-year sales increase, with double-digit gains across all geographic areas.

Equity earnings were $97 million versus $112 million in the same period last year. EBITDA for the segment was $429 million versus $426 million in the year-ago period.

Coatings and Infrastructure: Sales of $1.6 billion grew 14% year over year, driven by price gains. Double-digit sales gains were reported in Dow Adhesives and Functional Polymers, Dow Building and Construction, and Dow Coating Materials.

Volume growth in Dow Building and Construction and Dow Coating Materials continued to be restrained by soft demand from construction and architectural end-markets in developed regions.

EBITDA for the segment was $231 million compared with $230 million in the same period last year.

Health and Agricultural Sciences: This segment reported record sales of $1.5 billion, up 18% compared with the year-ago period. Volume increased 13% and price rose 5%. All geographic areas reported double-digit sales gains versus the same period last year. The business also posted record first-half sales of more than $3 billion.

EBITDA for the segment was $287 million, which compares with $196 million in the year-ago period.

Performance Systems: Sales in this segment shot up 19% to $1.9 billion, as volume increased 2% and prices surged 17%. Dow Automotive Systems reported double-digit volume expansion in Latin America, primarily driven by demand growth in Brazil and Mexico.

The business also reported demand growth for its technology-differentiated products in acoustical and adhesives (e.g., glass bonding) applications. Dow Elastomers reported sales growth of more than 25% , driven by volume and price gains across all geographic areas. The business’ sales in Asia Pacific rose more than 50% , primarily due to the successful start-up of a new joint venture specialty elastomers train in Thailand.

Dow Formulated Systems volume contracted in the quarter due to continued weakness in construction end-markets, particularly in EMEA, as well as lower demand for wind energy applications in China. Dow Wire and Cable reported a double-digit sales increase, driven by broad-based price gains, as well as volume growth resulting from robust demand for power transmission and telecommunications applications in Latin America, particularly in Brazil and Mexico.

EBITDA was $260 million versus $225 million in the year-ago quarter.

Performance Products: Sales soared 29% to $3.2 billion, primarily based on higher prices. Prices rose 20% while volumes were up 9%. Amines posted a double-digit volume increase, driven by ethanolamines used in agricultural chemicals and by ethyleneamines demand in China.

The Epoxy business continued to report strong double-digit year-over-year sales growth, with a volume gain of more than 25%, led by EMEA and North America. Polyglycols, Surfactants and Fluids also reported volume growth, led by Latin America and Asia Pacific. Demand was particularly strong for surfactants in food and fuel applications, and also for lubricants, driven by uses in steel and automotive industries.

Oxygenated Solvents reported double-digit price gains across all geographic areas. The business continues to see strong underlying demand in its key end-use markets of energy, health and nutrition and oil additives. Polyurethanes sales growth was driven by double-digit price gains in all geographic areas. Volume growth was led by North America and Latin America, as the business benefited from tight supply conditions in the polyurethanes industry.

EBITDA was $387 million versus $330 million in the year-ago period, including a $26 million pretax gain on the divestiture of Styron, partially offset by a $12 million adjustment to the 2009 restructuring charge.

Plastics: Basic Plastics sales were up 30% to $3.3 billion driven by an increase of 20% in prices and a rise of 10% in volumes. The business continued to record volume growth in Asia Pacific due in part, to additional sales from a new joint venture manufacturing facility in Thailand.

Plastics maintained strong margins despite high and volatile raw material costs. Polypropylene reported a significant sales increase in all geographic areas except Asia Pacific as broad-based, double-digit price gains in the packaging and hygiene and medical sectors were achieved in response to rising propylene costs. The business reported robust demand in North America due to low inventory levels in the value chain and growing demand in automotive, consumer durable goods, and packaging end-markets.

Equity earnings for the segment were $65 million compared with $59 million in the year-ago period. EBITDA for the segment was $751 million versus $696 million in the prior-year quarter.

Chemicals and Energy: Sales in the segment went up 23% to $1.0 billion due to a rise of 26% in prices and 3% in volumes. The Chlor-Alkali/Chlor-Vinyl business reported strong sales growth, particularly in EMEA, where the business achieved double-digit price increases. The largest price gains were reported in caustic soda, where tight supply and continued strong demand in the alumina and pulp and paper industries supported further pricing initiatives.

Vinyl chloride monomer sales were higher than the comparable period last year due to strong price increases in response to rising ethylene costs. Ethylene Oxide/Ethylene Glycol volume increased from the year-ago period as the industry experienced unplanned production outages and planned turnarounds. The business reported a double-digit increase in price, led by gains in EMEA and North America.

Equity earnings were $130 million for the quarter compared with $54 million in the year-ago period. EBITDA for the segment was $282 million versus$100 million in the same period last year.

Balance Sheet View

Dow with its recent focus on debt reduction, recorded total leverage of $18.5 billion as of June 30, 2011. Comparatively, at the end of June 30, 2011, cash and cash equivalent amounted to $2,223 million versus $3,562 million at the end of March 31, 2011. Net debt-to-capital was 41.6% versus 42.8% in the prior quarter.

Outlook

There was no financial guidance from Dow. However, Dow anticipates demand to improve further, especially in Asia with the global economic recovery. The US and European markets have also started showing signs of improvement. Dow is also optimistic on major consumer-markets, including electronics, coatings, automotive and packaging. However, construction markets are expected to remain weak.

DOW faces stiff competition from EI DuPont de Nemours & Co. (DD).

Currently, DOW has a short-term (1 to 3 months) Zacks #3 Rank (Hold) but a long- term Neutral recommendation.

 
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