Dow Chemical’s (DOW) earnings for fourth-quarter 2014 bested expectations on broad-based volume gains, but its profits slid year over year in the quarter, hurt by a sizable loss associated with abandonment of a facility in Clarksville, TN, by its joint venture – Dow Corning.
The U.S. chemical giant recorded profits of $734 million or 63 cents per share in the reported quarter, a roughly 24% drop from $963 million or 79 cents per share recorded a year ago.
Barring one-time items including $500 million (pre-tax) in site abandonment loss, earnings of 85 cents per share outstripped the Zacks Consensus Estimate of 68 cents, marking the fifth straight quarter of positive surprise.
Dow recorded higher EBITDA margin (as adjusted) in the quarter with gains witnessed across all reporting segments, especially Agricultural Sciences. The company benefited from higher demand across major end-use markets and productivity improvement actions.
For the full year, adjusted earnings of $3.11 per share also came ahead of the Zacks Consensus Estimate of $2.95.
Dow registered net sales of $14,384 million in the quarter, flat year over year, as higher volumes across developed and emerging markets were masked by price decline in Europe. Dow saw higher volumes in most segments, especially Agricultural Sciences (up 9%) and Performance Materials and Chemicals (up 7%). Sales missed the Zacks Consensus Estimate of $14,410 million.
For 2014, sales rose 1.9% year over year to $58,167 million, but fell short of the Zacks Consensus Estimate of $58,293 million.
The Michigan-based company’s shares gained as much as 5.7% in pre-market trading, reflecting the forecast-topping earnings.
Dow, in Nov 2014, announced the realignment of its reporting segments to better reflect its strategy and improve peer comparison capabilities.
Segment Analysis
Agricultural Sciences
Sales went up 5% year over year to $1.9 billion in the quarter as gains witnessed in all geographies, especially in Latin America. Crop protection revenues rose 3% on gains across all geographies. Sales increased in herbicides, insecticides and fungicides. New crop protection products sales climbed 23% while sales of seeds moved up 9% in the quarter.
Consumer Solutions
Revenues from the division were $1.1 billion, flat year over year, as double-digit gains in North America were neutralized by declines in other regions. Sales rose in Automotive Systems on sustained growth of structural adhesives and strength in North America. Continued mobile device growth in semiconductor technologies was witnessed in Electronic Materials. This was more than offset by declines in display technologies.
Infrastructure Solutions
Sales from the division fell 4% to $2 billion in the quarter on declines in Europe, Middle East, Africa and India (EMEAI). Energy and Water Solutions benefited from higher demand for microbial control and reverse osmosis technologies. This was offset by soft construction related demand in Building and Construction and Coating Materials in Western Europe.
Performance Materials & Chemicals
Revenues rose 5% to $3.9 billion in the quarter with gains witness across all geographic regions. Gains across all regions led to a double-digit rise in polyurethanes sales. Gains witnessed in all geographies on higher Epoxy demand and productivity actions. This was, however, more than offset by declines in Industrial Solutions.
Performance Plastics
Sales fell 3% to $5.5 billion in the quarter on lower Hydrocarbons and Energy sales. Packaging and Specialty Plastics recorded flat sales as higher volumes in pipe and hygiene and medical market sectors was offset by unfavorable currency impact. Hydrocarbons and energy sales fell on softer conditions in oil and gas markets.
Financials and Shareholder Returns
Dow exited the quarter with cash and cash equivalents of roughly $5.7 billion, down around 5% year over year. Long-term debt increased around 12% year over year to roughly $18.8 billion. Operating cash flow for the quarter was $2.8 billion.
Dow returned $1.6 billion to its shareholders through dividends and share repurchases in the quarter and also completed its $4.5 billion buyback program.
Outlook
Dow envisions favorable demand fundaments amid an uncertain operating backdrop and currency headwinds. CEO Andrew N. Liveris said that Dow’s advantaged global cost positions are allowing it to increase asset utilization and its differentiated technologies and end-markets will enable it to boost returns in markets that are less vulnerable to price volatility.
Dow will continue to aggressively pursue portfolio management and productivity actions while effectively managing its cash, assets and markets for long-term growth. Liveris also added that falling oil prices will actually act in favor of the company.
Dow also remains committed 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. The company expects the start-up of the first units in Sadara and its PDH unit in Texas in 2015.
Moreover, Dow remains actively focused on seeking opportunities to optimize its portfolio by selectively spinning off or selling its underperforming assets and gradually shift focus to high growth businesses. The company sees $2 billion in proceeds from divestments of non-core assets and businesses signed or completed in 2014.
Dow, last month, agreed to dispose its Sodium Borohydride business and its polyolefin films plant in Findlay, OH, for aggregate proceeds of roughly $225 million. The divestments are part of Dow’s ongoing efforts to deliver $7 billion to $8.5 billion in gross proceeds from assets sale by mid-2016.
Dow came under pressure in early 2014 after activist investor Dan Loeb's Third Point hedge fund bought a major stake in the company. Loeb urged Dow to spin off its sluggish petrochemicals business and focus instead on high-margin, fast growing businesses with a view that the move will create more value for the company’s shareholders.
Dow and Third Point reached a crucial agreement in Nov 2014, under which, the former agreed to add four new, independent directors to its board (including two suggested by Third Point), thus avoiding the possibility of a proxy battle between them. All four new directors will be included in Dow’s nominations for election at the 2015 annual meeting.
Dow’s results shed light on demand trends for chemical products across a host of end-use markets. Its compatriot DuPont (DD), which reported on Tuesday, saw its profit jump on its strategic actions, including cost-savings from redesign initiatives and productivity improvements. Its earnings matched expectations while sales missed.
Among other big chemical names, Celanese’s (CE), fourth-quarter results (reported on Jan 22) were a mixed bag with earnings topping expectations while sales missing. Eastman Chemical (EMN) will report after the close today.
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