Dow Reports Second Quarter Results

  • Earnings Per Share Increases to $2.61, or $0.95 on an Operating Basis
  • Delivers Record 2Q EBITDA ($4.2B) and Record 2Q Operating EBITDA ($2.5B)
  • Highest 2Q EBITDA Margin (35%) and Highest 2Q Operating EBITDA Margin (21%) in a Decade
  • Cash Flow from Operations in 2Q Grows to $2.2B – Up 58% Versus Year-Ago Period

Third Quarter 2016 Highlights

  • Dow reported earnings per share of $2.61, or operating earnings per share of $0.95(1). This compares with earnings per share of $0.97 in the year-ago period, or operating earnings per share of $0.91. Certain Items in the quarter primarily reflected a $2.20 per share gain related to the Dow Corning ownership restructure and a $0.27 per share charge for costs associated with the restructuring plan announced in the quarter. The tax rate was impacted by Certain Items. Excluding these, the tax rate was within the Company’s modeling guidance.
  • Sales were $12.0 billion, down 7 percent versus the year-ago period primarily driven by lower hydrocarbons and raw material prices and the impact from the Dow Chlorine Products divestiture.
  • Volume grew 2 percent on a reported basis and 4 percent excluding the impact of divestitures and acquisitions, reflecting broad-based, consumer-driven demand with gains across all geographic areas – Asia Pacific (up 7 percent); Europe, Middle East, Africa and India (EMEAI) (up 4 percent); Latin America (up 4 percent); and North America (up 3 percent). Regional highlights included Greater China (up 7 percent), Europe (up 6 percent) and the United States (up 4 percent).
  • Operating EBITDA(2) increased to $2.5 billion, as gains in Infrastructure Solutions, Consumer Solutions and Performance Plastics more than offset lower equity earnings primarily driven by reduced earnings from the Kuwait joint ventures as well as Sadara start-up expenses.
  • Operating EBITDA margin(3) improved year-over-year by 160 basis points to 21 percent – reflecting disciplined margin management, portfolio actions that improved mix toward value-add products and targeted growth markets, as well as other self-help measures. Gains were achieved in Infrastructure Solutions (up 710 basis points), Consumer Solutions (up 540 basis points) and Performance Plastics (up 230 basis points). Agricultural Sciences declined 70 basis points. Performance Materials & Chemicals (down 460 basis points) declined due primarily to lower equity earnings and the impact of prior period divestitures.
  • Cash flow from operations grew to $2.2 billion in the quarter, up from $1.4 billion in the year-ago period, driven by ongoing disciplined actions to manage working capital as well as higher earnings.
  • Dow’s focused self-help measures delivered $90 million in productivity savings, bringing the first half contribution to nearly $180 million, tracking well above the 2016 target of $300 million.
  • The Company completed the ownership restructure of Dow Corning Corporation’s Silicones business on June 1. At full synergy run rate of $500 million – a $100 million increase from the initial target – the transaction is expected to add greater than $1 billion of EBITDA. Dow expects the transaction to be accretive to operating earnings per share, cash flow from operations and free cash flow(4) in the first full year after transaction close.

Comment

Andrew N. Liveris, Dow’s chairman and chief executive officer, stated:

“Dow’s relentless and disciplined execution once again delivered another quarter of operating earnings growth and margin expansion – marking our fifteenth quarter in a row – through a variety of challenging geopolitical and market conditions, and outpacing our peers.

“Our unique combination of world-class innovation, diversified integration and a narrower and deeper market focus enabled operating earnings growth in every business in our Consumer Solutions and Infrastructure Solutions segments, while the strength of our Plastics franchises was again on display. In areas where business conditions have been challenging, we continually implement proactive self-help measures. An example is in our Agricultural Sciences segment, where our actions have generated earnings year-to-date that have outperformed the industry downturn. Another example is our recent restructuring announcement, where we continue to intervene to accelerate earnings growth under these volatile market conditions.

“Equally important, our teams continued to achieve key milestones with both the Dow Corning and DowDuPont transactions. We closed the Dow Corning silicones transaction, increasing our synergy target to $500 million, while bringing in a new element for growth and a powerful technology platform that will further drive Dow’s focus in attractive, targeted market sectors, as well as enhance the earnings power of the new Dow – the world’s leading material science company.

“And we recently received overwhelming approval for the historic DowDuPont transaction from our shareholders, illustrating the market’s recognition of this pivotal opportunity to deliver value to all stakeholders, as we drive the intended separation into three independent, leading science-based companies that will redefine their respective industries.”

 

Three Months Ended

In millions, except per share amounts

June 30,

2016

June 30,

2015

Net Sales

$11,952

$12,910

Adjusted Sales(5)

$11,486

$12,212

 

 

 

Net Income Available for Common Stockholders

$3,123

$1,135

Net Income Available for Common Stockholders,

Excluding Certain Items

$1,075

$1,064

 

 

 

Earnings per Common Share – Diluted

$2.61

$0.97

Operating Earnings per Share

$0.95

$0.91

Agricultural Sciences

Agricultural Sciences reported second quarter sales of $1.6 billion, down from $1.7 billion in the year-ago period. Sales were impacted by low crop commodity prices, high industry inventories and currency headwinds.

Crop Protection volume was lower primarily due to reduced demand for generic herbicides and the AgroFresh divestiture, which more than offset new product innovations, including continued adoption of Spinetoram insecticide and Arylex™ herbicide. Seeds volume declined as double-digit growth in corn was more than offset by soft demand in sunflower and soybeans.

EBITDA for the segment declined to $228 million from $255 million in the year-ago period. Operating EBITDA was $232 million, down from $269 million in the year-ago period, primarily reflecting the impact of prior period divestitures. Excluding the impact of these portfolio actions, year-to-date operating EBITDA was modestly lower compared to the first-half of 2015, as benefits from productivity improvements and proactive self-help mostly offset challenging macros.

Equity losses for the segment were $11 million in the quarter.

Consumer Solutions

Consumer Solutions delivered second quarter sales of $1.3 billion, up from $1.1 billion in the year-ago period, primarily on the addition of the Consumer Solutions - Silicones business.

Volume increased 19 percent, primarily reflecting the addition of Consumer Solutions – Silicones, starting in June. Excluding the impact of the Dow Corning transaction, volume grew 4 percent, with gains across all businesses. Dow Automotive Systems achieved double-digit volume growth, continuing its trend of growing above the rate of the global automotive end-market. The business also achieved multiple new commercial wins across several geographic areas, benefiting from its unique market participation strategy and innovative product technologies, particularly in structural adhesives. Consumer Care grew market share supported by new product launches, contributing to a double-digit volume increase in personal care applications and solid demand in home care market sectors, which more than offset lower volume in the pharmaceutical chain, driven by inventory de-stocking. Dow Electronic Materials grew volume on new business wins and share gains in the semiconductor and display sectors.

EBITDA increased to a record-level of $1.6 billion, primarily due to the gain related to the Dow Corning ownership restructure. Operating EBITDA rose to a quarterly record of $341 million, up significantly from $236 million in the year-ago period, with increases in all businesses enabled by new commercial wins, robust demand for innovative products and market share gains. Notable highlights included double-digit earnings growth in both Dow Electronic Materials and Dow Automotive Systems.

Equity earnings for the segment were $18 million, compared to $19 million in the year-ago period. 

Infrastructure Solutions

Infrastructure Solutions reported second quarter sales of $2.1 billion, up from $2 billion in the year-ago period as a result of the addition of the Infrastructure Solutions - Silicones business which more than offset lower pricing in all other businesses.

Volume increased 12 percent, primarily reflecting the addition of Infrastructure Solutions - Silicones, starting in June. Excluding the impact of the Dow Corning transaction, volume declined 2 percent. Dow Building & Construction delivered volume growth in most geographies – led by double-digit gains in EMEAI and Latin America – on strong demand for construction chemicals, BLUEDGE™ licensing technology and spray foam insulation applications. Energy & Water Solutions reported volume declines due to soft demand in the US shale gas market. Dow Coating Materials achieved volume increases – gaining share in most geographic areas – led by double-digit growth in China and gains in both the industrial and architectural market sectors. Performance Monomers reported a volume decrease, primarily due to the business’s strategic decision to reduce its merchant monomer exposure.

EBITDA for the segment was $1.4 billion, primarily due to the gain related to the Dow Corning ownership restructure. Operating EBITDA for the segment increased to $432 million, up significantly from $267 million in the year-ago period, with growth in all businesses. Notable highlights included double-digit earnings improvement in Dow Building & Construction and Performance Monomers.

Equity earnings for the segment were $45 million, up from $35 million in the year-ago period.

Performance Materials and Chemicals

Performance Materials & Chemicals reported second quarter sales of $2.3 billion, down from $3.2 billion in the year-ago period, reflecting the impact of the split-off of Dow Chlorine Products and pricing declines.

Volume was down 19 percent, reflecting the impact of the Dow Chlorine Products transaction. Excluding divestitures, volume was flat as double-digit gains in Asia Pacific were offset by declines in North America and EMEAI. Polyurethanes delivered volume growth led by double-digit increases in demand for downstream, higher-margin system house applications, particularly in Asia Pacific, where sustainable urbanization continues to drive consumer demand, which more than offset lower volumes due to planned turnaround activity. Industrial Solutions reported a modest volume decline due to the expiration of a long-term supply arrangement and reduced heat transfer fluid demand into solar applications, which more than offset higher ethylene oxide licensing and catalyst sales. Chlor-Alkali and Vinyl saw volume declines on lower production due to a major planned turnaround at one of its European facilities.

EBITDA was $301 million down from $572 million in the same period last year. Operating EBITDA for the segment was $295 million, down from $572 million in the year-ago period, primarily driven by the impact of lower equity earnings, reduced earnings due to prior period divestitures and pricing pressures.

Equity losses for the segment were $12 million, down from equity earnings of $122 million in the same quarter last year, on Sadara start-up costs as well as reduced earnings from the Kuwait joint ventures due to the change in ownership of the MEGlobal joint venture and lower monoethylene glycol prices.

Performance Plastics

Performance Plastics reported second quarter sales of $4.7 billion, down from $4.8 billion in the year-ago period as volume gains in all businesses and geographies were more than offset by pricing headwinds, primarily in Hydrocarbons.

The segment reported volume growth of 12 percent. Excluding the impact of acquisitions, volume grew 13 percent, with gains across all businesses. Dow Packaging and Specialty Plastics achieved a second quarter record sales volume on continued operational excellence and demand, notably in emerging geographies. Growth in the business was led by demand in industrial and consumer packaging applications and the health and hygiene market sectors. Dow Elastomers volume increases from strong demand for its innovative technologies in automotive components, hot melt adhesives and high-performance athletic footwear were balanced by the impact to production from higher turnaround activity. Dow Electrical and Telecommunications realized volume gains across all geographies, led by double-digit growth in North America and Latin America, on continued demand for fiber optics and coaxial and jacketing solutions. The Hydrocarbons and Energy businesses reported volume gains with growth in all geographic areas.

EBITDA for the segment was $1.2 billion down from $1.5 billion in the year-ago period which benefited from the gain on the Univation step acquisition. Operating EBITDA was $1.2 billion, up 7 percent, or $80 million, from same period last year, enabled by Dow’s geographic breadth, differentiated product platforms, and robust consumer-driven demand in packaging, transportation and infrastructure.

Equity earnings for the segment were $45 million, down from equity earnings of $101 million in the same quarter last year, primarily due to Sadara start-up costs and a lower contribution from EQUATE.

Outlook

Commenting on the Company’s outlook, Liveris said:

“The pace of economic growth remains uneven across the major geographies. Consumption remains a key growth driver, wherever growth exists. We continue to see healthy demand in North America, led by the strength of the consumer. Measured recovery in Europe continues, despite heightened geopolitical uncertainties. Latin America is showing early signs of improvement from a low base. And the rise of increasingly affluent consumers across Asia continues to validate Dow’s strategic portfolio shift towards an enhanced focus on consumer-driven products and solutions.

“Despite the varied economic landscape, we continue to see favorable conditions and robust demand in our core consumer-led markets of packaging, automotive and construction throughout the world. We will increasingly capture value from these selected market sectors through our differentiated products underpinned by our geographic breadth, our integrated and diversified portfolio, our global scale and our deep material science technology platforms.

“Ongoing macroeconomic volatility demands a resolute focus. Our resilient business portfolio, strategic investments and self-help productivity actions, including our recently announced restructuring program, position Dow well to continue delivering through a variety of market conditions. Our teams remain squarely focused on our priorities of delivering our near-term financial commitments while also enabling our future with the Dow Corning and DowDuPont transactions. As we have shown these last many years, we will continue to maximize value for our customers and returns for our shareholders in both the short- and long-term.”

 

Dow will host a live webcast of its second quarter earnings conference call with investors to discuss its results, business outlook and other matters today at 9:00 a.m. ET on www.dow.com.

(1) Operating earnings per share is defined as earnings per share excluding the impact of “Certain Items.” See Supplemental Information at the end of the release for a description of these items, as well as a reconciliation of operating earnings per share to “Earnings per common share – diluted.”

(2) EBITDA is defined as earnings (i.e., “Net Income”) before interest, income taxes, depreciation and amortization. A reconciliation of EBITDA to "Net Income Available for The Dow Chemical Company Common Stockholders" is provided following the Operating Segments table. Operating EBITDA is defined as EBITDA excluding the impact of “Certain Items.”

(3) EBITDA margin is defined as EBITDA as a percentage of reported net sales. Operating EBITDA margin is defined as operating EBITDA as a percentage of reported net sales.

(4) Free cash flow is defined as cash flow from operations less capital expenditures.

(5) “Adjusted Sales” is defined as “Net Sales” adjusted for divestitures and acquisitions.

 

About Dow

Dow (NYSE: DOW) combines the power of science and technology to passionately innovate what is essential to human progress. The Company is driving innovations that extract value from material, polymer, chemical and biological science to help address many of the world's most challenging problems such as the need for clean water, clean energy generation and conservation, and increasing agricultural productivity. Dow's integrated, market-driven, industry-leading portfolio of specialty chemical, advanced materials, agrosciences and plastics businesses delivers a broad range of technology-based products and solutions to customers in approximately 180 countries and in high-growth sectors such as packaging, electronics, water, coatings and agriculture. In 2015, Dow had annual sales of nearly $49 billion and employed approximately 49,500 people worldwide. The Company's more than 6,000 product families are manufactured at 179 sites in 35 countries across the globe. References to "Dow" or the "Company" mean The Dow Chemical Company and its consolidated subsidiaries unless otherwise expressly noted. More information about Dow can be found at www.dow.com

Use of non-GAAP measures: Dow’s management believes that measures of income excluding certain items (“non-GAAP” measures) provide relevant and meaningful information to investors about the ongoing operating results of the Company. Such measurements are not recognized in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and should not be viewed as an alternative to GAAP measures of performance. Reconciliations of non-GAAP measures to GAAP measures are provided in the Supplemental Information tables.

Note: The forward looking statements contained in this document involve risks and uncertainties that may affect Dow’s operations, markets, products, services, prices and other factors as discussed in filings with the Securities and Exchange Commission (“SEC”). These risks and uncertainties include, but are not limited to, economic, competitive, legal, governmental and technological factors. Accordingly, there is no assurance that Dow’s expectations will be realized. The Company assumes no obligation to provide revisions to any forward‑looking statements should circumstances change, except as otherwise required by securities and other applicable laws.