Dow Chemical DOW continued its positive earnings surprise streak with a solid beat in third-quarter 2015 and saw a healthy jump in its profits, helped by strong margins in its performance plastics business and lower raw material costs. But its sales fell by double-digits and trailed expectations, hurt by currency headwinds and unfavorable pricing impact.
The U.S. chemical kingpin registered profits of $1,290 million or $1.09 per share in the reported quarter, a roughly 51% jump from $852 million or 71 cents per share recorded a year ago. The bottom line was driven by a $621 million gain associated with the sale of its AgroFresh specialty chemical business.
Barring one-time items including gain on AgroFresh divestment and costs related to portfolio management actions, earnings of 82 cents per share outstripped the Zacks Consensus Estimate of 68 cents, marking the eight straight quarter of positive surprise.
Dow recorded higher EBITDA margin (as adjusted) in the quarter on increased margins across Performance Plastics, Performance Materials & Chemicals, Consumer Solutions and Infrastructure Solutions divisions that more than offset a decline in the agriculture business. The plastics business, in particular, logged solid gains as it is benefiting from Dow’s significant feedstock advantage in North America (stemming from cheaper natural gas).
However, Dow’s revenues slipped 16% year over year to $12,036 million with declines witnessed across the board. Sales fell short of the Zacks Consensus Estimate of $12,252 million. Volume rose 2% on an adjusted basis in the quarter, driven by a 5% rise in volumes in the Performance Plastics unit.
Dow also announced a 10% raise in its dividend. The Michigan-based company’s shares climbed around 6.7% in early trading.
Segment Analysis
Agricultural Sciences
Sales fell roughly 14% year over year to $1.2 billion in the quarter, hit by currency headwinds and lower commodity prices. Crop protection revenues declined on unfavorable currency and price impacts and weak volumes in Latin America. Sales of seeds also fell in the quarter, impacted by shift in acreage from corn to soybeans in the Americas.
Consumer Solutions
Revenues from the division were $1.1 billion, down 8%, as increased demand for differentiated solutions in the automotive and semiconductor market sectors was more than offset by price declines and currency impact in Europe, Middle East, Africa and India (EMEAI) and Asia Pacific.
Automotive Systems delivered volume gains, aided by solid demand for light-weighting technologies in North America and EMEAI. Volumes were flat in Electronic Materials as healthy demand for semiconductor and growth technologies was masked by weakness in interconnect and display technologies.
Infrastructure Solutions
Sales from the division slid around 14% to $1.9 billion in the quarter as lower pricing and currency headwind more than offset volume gains. In Energy and Water Solutions, higher demand for reverse osmosis technologies in emerging markets was more than offset by lower energy sales in North America.
Volumes rose in the company’s building and construction business across most regions, led by EMEAI. Coating materials volumes also rose on strong gains in EMEAI.
Performance Materials & Chemicals
Revenues tumbled 21% to $3.1 billion in the quarter as pricing pressure and currency headwinds offset higher volumes in Asia Pacific. Polyurethane volumes rose on startup of a new plant in Thailand and market share gain in EMEAI. Volumes rose across Chlor-Alkali, Vinyl and Epoxy businesses.
Performance Plastics
Sales fell roughly 18% to $4.7 billion in the quarter as lower pricing and currency pressure in EMEAI more than offset higher volumes across all regions.
Packaging and Specialty Plastics recorded higher volumes on higher demand for differentiated packaging products and sales into emerging markets. Elastomers business registered higher volumes on continued adoption of the company’s products in transportation, infrastructure and consumer goods markets. The hydrocarbons and energy business saw higher volumes on increased LPG cracking in North America. Electrical and Telecommunications volumes also rose in the quarter.
Financials and Shareholder Returns
Dow exited the quarter with cash and cash equivalents of roughly $7.6 billion, up around 32% year over year. Total long-term debt fell around 8% year over year to roughly $17.5 billion.
Dow returned nearly $2 billion to shareholders through dividends and share repurchases through the reported quarter. Operating cash flow was $2.5 billion for the quarter, up 41% year over year.
The company raised its quarterly dividend by 10% to 46 cents per share, bringing the annualized payout to $1.84 per share. Dow also announced its plans to expedite its three-year $5 billion share buyback program by repurchasing $1 billion of shares in the fourth quarter, and the balance $2 billion in 2016.
Outlook
Dow is seeing growth across China, the U.S. and Europe in the upcoming quarters amid a challenging environment in other markets including Brazil. The company also expects higher demand to eventually drive oil prices, thereby boosting its margins. CEO Andrew N. Liveris said that Dow will remain focused on executing its growth actions as well as portfolio management and productivity initiatives.
Dow is expected to continue to gain from its productivity and growth actions. The company 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 U.S. Gulf Coast and Sadara projects are expected to ramp to full production over the next two years.
Moreover, Dow is selectively spinning off or selling its underperforming assets and gradually shifting to high-growth markets. The company recently wrapped up the separation of a major portion of its chlorine value chain and merger of those businesses with chemical maker Olin Corp. OLN. The tax-efficient consideration value of the transaction is $4.6 billion.
The disposal of the chlorine assets represents a significant part of Dow's aggressive portfolio management actions as it is looking to move away from cyclical commodity chemicals businesses.
With the chlorine transaction, Dow has surpassed its earlier stated target to dispose $7 billion to $8.5 billion of non-strategic assets by mid-2016, with aggregate pre-tax proceeds from divestments now approaching more than $12 billion.
Dow also noted that its joint ventures in Kuwait will be restructured over the next nine months, leading to a different ownership structure. The company will reduce its overall stake in the MEGlobal joint venture by end-2015, receiving $1.5 billion in pre-tax proceeds. It will also reduce its overall ownership interest in the Greater EQUATE joint venture (expected transaction completion by mid-2016).
Dow is a Zacks Rank #4 (Sell) stock.
Better-ranked stocks in the chemicals space include Celanese Corp. CE and Innospec Inc. IOSP, both holding a Zacks Rank #2 (Buy).
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