Dow Chemical DOW topped earnings expectations in first-quarter 2015 and saw a healthy jump in its profits in the quarter, thanks to higher margins across most operating segments. But lower oil prices and currency headwinds stemming from a stronger dollar dented its sales.
The U.S. chemical kingpin recorded profits of $1,478 million or $1.18 per share in the reported quarter, a roughly 41% surge from $1,049 million or 79 cents per share recorded a year ago.
Barring one-time items including a gain on the sale of ANGUS Chemical, earnings of 84 cents per share trounced the Zacks Consensus Estimate of 78 cents, marking the sixth straight quarter of positive surprise.
Dow recorded higher EBITDA margin (as adjusted) in the quarter with gains witnessed across most reporting segments, including Performance Plastics, Infrastructure Solutions and Consumer Solutions. The company benefited from higher demand for its high-margin, technology-driven businesses and productivity improvement actions.
However, Dow saw a double-digit decline in its top line in the quarter, hurt by lower pricing (down 12%) resulting from changes in crude oil prices and currency devaluations vis-à-vis the greenback. Its revenues dropped 14% year over year to $12,370 million, missing the Zacks Consensus Estimate of $13,019 million.
Dow saw higher volumes across Performance Plastics (up 6%), Performance Materials & Chemicals (up 5%) and Consumer Solutions (up 5%) units in the reported quarter.
The Michigan-based company’s shares gained 2.3% in pre-market trading, reflecting the handy earnings beat.
Segment Analysis
Agricultural Sciences
Sales fell 12% year over year to $1.9 billion in the quarter, affected by weak demand and price headwinds. Crop protection revenues slipped 11% on unfavourable currency impact and lower volumes in Europe, Middle East, Africa and India (EMEAI) and the Americas.
Sales of seeds fell 14% in the quarter. Increased crop yields and elevated inventories are hurting crop commodity prices, leading to reduced planted acreage of corn across the Americas.
Consumer Solutions
Revenues from the division were $1.1 billion, down 1%, with double-digit gains in North America were more than masked by declines in EMEAI and Asia Pacific. Sales increased in Automotive Systems on sustained growth of structural adhesives and strength across North America and Asia Pacific.
Continued mobile device growth in semiconductor technologies was witnessed in Electronic Materials. This was, however, neutralized by declines in display technologies.
Infrastructure Solutions
Sales from the division fell 10% to $1.8 billion in the quarter on lower pricing. Energy and Water Solutions benefited from higher demand for reverse osmosis technologies, eclipsed by lower volumes in microbial control. Higher sales in North America were offset by declines in Europe and currency impact in the company’s Building and Construction business. Coating Materials sales fell as price decline and currency headwinds offset higher volumes.
Performance Materials & Chemicals
Revenues fell 8% to $3.2 billion in the quarter as price declines and currency headwinds offset volume gains across all geographic regions. Polyurethane volumes rose in most markets. Sales declined in the Industrial Solutions business on lower pricing and negative currency impact in EMEAI. Sales in Chlor-Alkali and Vinyl fell due to weak ethylene di-chloride prices and significant turnarounds.
Performance Plastics
Sales tumbled 23% to $4.3 billion in the quarter on lower Hydrocarbons and Energy sales. Packaging and Specialty Plastics recorded higher volumes in food & specialty packaging and hygiene & medical markets, offset by unfavorable currency impact and weak pricing. Hydrocarbons and energy sales fell on weak conditions in oil and gas markets.
Financials and Shareholder Returns
Dow exited the quarter with cash and cash equivalents of roughly $6.3 billion, up around 43% year over year. Total long-term debt increased around 12% year over year to roughly $19.3 billion. Operating cash flow for the quarter was $1.2 billion, a first quarter record.
Dow returned $977 million to shareholders in the first quarter through dividends and share repurchases.
Outlook
Dow, a Zacks Rank #3 (Hold) stock, envisions geopolitical and economic uncertainty through this year. However, it expects the oil market to be more favorable in the upcoming quarters. CEO Andrew N. Liveris said that amid this backdrop Dow will remain focused on executing its growth actions. This is reflected in the company’s investment in launching 5,000 new products in the past 12 months, thereby further boosting its portfolio. Similar launches are expected over the next 12 months.
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 Saudi Arabia and U.S. Gulf Coast projects later this year.
Dow also continues to aggressively pursue portfolio management and productivity actions while effectively managing its cash, assets and markets for long-term growth.
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 is exiting a major portion of its chlorine business that has been in operation for over 100 years. Dow, last month, announced that it will divest a considerable portion of its chlorine value chain and merge that with Olin Corp. OLN in a deal valued at around $5 billion. With the transaction, Dow expects to exceed its target of divesting $7 billion to $8.5 billion of non-strategic businesses and assets.
Dow and activist investor Dan Loeb's Third Point hedge fund 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.
Third Point, earlier, pressed 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’s results put a spotlight on underlying trends in the broader chemical industry. Its compatriot DuPont DD, which reported on Tuesday, posted better-than-expected earnings on the back of cost-savings from its operational redesign initiatives and productivity actions. But currency headwinds dragged down its sales that missed expectations.
Another chemical major, Eastman Chemical EMN will report after the close on Apr 30.
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