Highlights From DOW's Q2 Conference Call: Most Active Quarter in Company's History

July 30, 2009 5:51 PM EDT

Dow Chemical (NYSE: DOW) reports Q2 earnings of $0.05 per share, ex-items, above the consensus of $0.09 loss. Revenues fell 40% to $11.32 billion, versus the consensus of $13.02 billion. Shares ended the day 6.2% higher.

Highlights From DOW's Q2 Conference Call:

• (CEO) The second quarter was one of, if not the, most active quarters in our company's history.
  
• We accelerated cost reductions from restructuring activities and Rohm and Haas related synergies. And we are ahead of schedule on both fronts.
  
• We reduced our $9.2 billion bridge loan by $5 billion.
  
• We signed four definitive divestitures agreements that will further deleverage our balance sheet, and we remain on track to deliver $4 billion in asset sales by the end of the year.
  
• We will continue to preferentially invest in our Advanced Materials, AgroSciences, and Performance portfolios to further increase the percentage of our business that comes from these units.
  
• Our Electronic and Specialty Materials, Coatings and Infrastructure, and Performance Systems segments all posted impressive volume gains of at least 20% versus last quarter.
  
• And our Basic Plastics segment also showed marked improvement sequentially, with EBITDA up more than 230% on strength in consumer and industrial packaging.
  
• We also delivered significant sequential volume improvements on a geographic basis. Asia-Pacific was up 34%; India, Middle East, and Africa, up 27%, and Latin America, up 12%.
  
• These results fully offset a decline in Dow AgroSciences, driven by a number of unique headwinds in the AG chemical space in the quarter.
  
• Our cost synergy program (with Rohm & Haas) is ahead of plan, both for the quarter and on a run rate basis. In fact, we have already, in only three months, achieved a run rate of more than $570 million against our 12-month run rate target of $780 million, and we are moving quickly towards our $1.3 billion synergy commitment related to this acquisition.
  
• The announced sales of Morton Salt, our stake in Dutch refinery TRN, and our calcium chloride business will generate $2.6 billion of gross proceeds that will be used to pay down our bridge facility.
  
• This morning, we announced a fourth major divestment, an agreement to sell our interest in OPTIMAL to PETRONAS for an enterprise value of Dow's share of more than $724 million and a net equity value of $660 million. We expect this transaction to close by the end of the third quarter of this year.
  
• Although we have committed to divest $4 billion in assets by the end of 2009, our potential list of divestments totals 23 to $26 billion.
  
• (CFO) We reported sales of 11.3 billion, 40% lower than the same period last year, driven by 20% declines in both volume and price.
  
• On a sequential basis, we saw 5% improvement in volume, which gained momentum as the quarter progressed.
  
• Structural costs were down more than 375 million in the quarter and more than 600 million year-to-date.
  
• Electronics and Specialty Materials, volume was up 22% from the prior quarter on increased demand from inexpensive cell phones, low-cost netbook computers, and flat-panel TVs.
  
• Volume was also up in Performance Systems, where government spending aimed at the automotive sector helped drive demand in geographies such as Brazil, Germany, and China.
  
• Unusually wet weather in the U.S. and Europe, coupled with extreme drought conditions in Argentina, reduced wheat pressure tremendously. In addition, rapidly-falling farm commodity prices changed farmer sentiment as they looked to reduce their input costs, resulting in lower demand for ag-chemicals.
  
• Corn sales were up 76% year over year, and cotton sales doubled. We also continue to make investments in research and development as these are yielding great results, like last week's news on U.S. EPA and Canadian regulatory authorization of our SmartStax seeds.
  
• (CEO) We now view there are clear signs that stabilization is occurring, and we are seeing strong growth in Asia-Pacific.
  
• Meanwhile, we expect the recovery in Europe and the U.S. to be slow, as unemployment continues to be a drag on consumer spending. And based on these factors, our operating plan for the balance of 2009 does not count on material improvements in market conditions.
  
• (Q&A) Your prices have declined sequentially in most of the segments, and your large German competitor made some cautious comments today on their call. Does it worry you that if volumes don't pick up, that pricing may not hold? Can you comment on that price-volume dynamic, please? (A)Variable by type of business, but to stay on the commodity side for a second, clearly we're seeing operating rate improvements because of sequential volume improvements, especially in the emerging world, P.J., and so exports out of the U.S. are occurring again in our commodities, and that's really good news. Of course, we've done some right-sizing of the asset footprint, but really that doesn't reflect very much in the operating rate in the first half. Most of that stuff will appear in terms of decreased capacity in the second half on a run rate basis. So when you look at the commodities in particular, they've been either able to hold price or even increase price a little bit, based on cost push.
  Remember, oil went down to - whatever it was - the $30s and $40s and naphtha to its equivalent. It's now back up to the $60-odd mark. And naphtha followed it up. So it's more cost push pricing, not so much on snug supply demand, but on the rationale that costs are increasing and, in fact, many producers, especially those who crack naphtha, can't make money even on a variable-margin basis. And you will notice NE [ph] just announced taking down a cracker in Italy just the other day. There are lots of capacity, 9 million tons, we figure, that's coming out of the system this year because of variable margin dynamics in the commodities. So we believe there is some price momentum in the commodity side. Now, on the specialties, it's much harder. It's got nothing to do, really, with the cost push. It's got everything to do with supply demand in this sector, and the most promise there is really in the sectors that are showing sequential volume improvements of a great order of magnitude. We tabled those.
  Electronic and Specialty Materials was up 22%, sequentially. The IT sector is showing some robustness, especially in Asia. Coatings and Infrastructure, up 21%, also showing robustness, also in Asia. Performance Systems, up 20%, also showing robustness now, not just in Asia but actually around the world. Those have got decent price environments because of really large sequential improvements. So I would say to you, I'm not strong on the price curve right now, yet. I don't think we're very aggressive on it. I would say we are holding and maybe a little bit of atrophy in some areas.
  
• And quickly on K-Dow, you mentioned that there are a couple of parties interested. Would you give us your thoughts on the valuation? And would you like to sell this business at the bottom of the cycle? Thank you. (A) I think it's a great question in the context of the business we now have. The improvements we've made on the balance sheet this year to give us the flexibility to make the right decision, not just on K-Dow or its successor deal, but also on other units in Dow, is really the big headline that we'd like to articulate. We now have the flexibility to do what we have to do. On our pro forma balance sheet, with all the divestitures we've done, the equity raise, we are actually at the same point on debt-to-total cap that we would have been had we concluded the K-Dow deal, and that's a significant statement that we've performed against in the last five months. We're ahead of plan. Which really means that we have retained all of that asset and as that asset performs - you notice Basic Plastics performed very well in the quarter, we really understand the point that you're making, which is, this is bottom of the cycle. We have no desire to monetize a precious asset at the bottom of the cycle. So the people we are talking to, we had lots of inquiries, but some of them were very opportunistic, that were doing what you were just suggesting. The two we are talking to are long-term owners. They're
  like the Kuwaitis. They understand the value of this franchise. They understand that this franchise has a tremendous upturn just in front of it in the next several years, as the cycle turns. And so, normalized earnings and normalized valuations are the way we're thinking about it, and that's the way those two counterparties are talking to us.
  
• Andrew question on Dow AgroSciences, you mentioned that you are now thinking that you - because of its growth, it should be an ongoing part of the Dow portfolio. Does that really reflect the fact that you are not able to get the kind of strategic premium that you think the business is worth? (A) Don, we have, obviously, always carefully positioned ourselves here on Dow AgroSciences, and that continues on this call. Dow AgroSciences is a very, I would say, valuable property to everyone we have talked to and, of course, that includes how we view Dow AgroSciences. We were very, very deep into a full divest process because, frankly, there was no choice a few months ago. During that period of time, we had to make a lot of decisions about how much of that process would go all the way versus our alternatives. As we undertook that process, it was clear there were buyers out there that viewed this property with the same value that we viewed it, but obviously, negotiations didn't get down to an exclusive. We believed that, if it went that far, that we would definitely realize a good valuation on Dow AgroSciences. The key question, really, is would that be good for Dow's shareholders. And when I say that, the EBITDA potential of Dow AgroSciences, demonstrated and into the future, feeds our income stream and our ability to be an earnings-growth company and helps us on our gross debt to EBITDA ratios. So it's counterintuitive to sell it at anything less than a full premium. And I think that's really the mindset we are in right now. We are still having ongoing discussions. They include part monetization and they include strategic alliance with key players in the sector. And we are still maintaining full optionality on that unit. And at this point in time, though, as I said on the remarks, our personal - my personal preference is to retain it in the portfolio and seek enhanced collaborations with others.

The Dow Chemical Company engages in the manufacture and sale of chemicals, plastic materials, agricultural, and other specialized products and services worldwide.

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