Dow Gears Up in Third Quarter

Chemical giant Dow Chemical Company (DOW - Analyst Report) earned 24 cents per share in the third quarter 2009, significantly better than the Zacks Consensus Estimate of 9 cents and 5 cents reported in the previous quarter, driven by cost reduction and asset sales. 

However, year over year, earnings declined 60% from 59 cents. Structural cost reductions resulted in savings of more than $380 million in the quarter and more than $1 billion year to date. Dow reduced its feedstock and energy costs by 46% year over year. Last month, Dow had sold a Dutch subsidiary for $457 million and a Malaysian business for $328 million. 

Dow reported sales of $12.0 billion for the quarter, down 22% year-over-year on lower volumes (9%) and prices (23%). However, sales improved 6% sequentially with a 6% rise in prices and a 3% increase in volumes. Sequentially, Dow's global operating rate improved 3% to 78%, driven by volume growth in key operating segments in China, Brazil and India, Middle East & Africa and favorable feedstock and energy costs in North America relative to other geographical regions which, coupled with Dow's feedstock flexibility, enabled increased exports. 

Electronic and Specialty Materials 
Sales in this segment declined 15% to $1.3 billion driven by a 9% decline in volumes and a 6% decline in prices. Volumes declined due to weak electronic demand on the back of global cutbacks in consumer spending. 

Results in Specialty Materials were down on lower demand in key applications such as home water softening, industrial production and weaker year-over-year demand in Dow Wolff Cellulosics. However, sales increased 8% sequentially, with a 7% increase in volumes and a 1% rise in prices. 

Coatings and Infrastructure 
Sales in the segment were down 22% to $1.3 billion, driven by a 9% decline in volumes and a 13% decline in prices. Weak year-over-year business conditions in the global building and construction industry affected demand for architectural paints and industrial coatings. Adhesives and Functional Polymers sales were down as well, principally due to lower demand for adhesive tapes, paper labels and adhesives used in textile applications. Sales were up 7% sequentially on a 4% rise in volumes and a 3% rise in prices. 

Health and Agricultural Sciences 
Revenues slipped 20% in this segment to $796 million on a 9% decrease in volumes and an 11% fall in prices. Agricultural Chemicals sales suffered from lower crop commodity prices, which caused farmers to reduce crop chemical applications, deplete existing inventories and delaying purchases. On a sequential basis, sales were down 34%, reflecting a 2% decline in price along with the typical seasonal decline in volume. 

Performance Systems 
Segmental sales were $1.5 billion, down 29% with volumes and prices declining 13% and 16%, respectively. Declines were driven by the global economic slowdown in the automotive, construction and housing industries. 

In Automotive Systems, original equipment manufacturers in North America and Europe decreased production. Sales increased 5% sequentially, driven by a 3% increase in price and a 2% gain in volume. 

Performance Products 
Sales in the segment were $2.4 billion, down 33% year-over-year. Volumes declined 8% while prices declined 25%. The global economic downturn drove the decline, despite governmental stimulus programs. On a sequential basis, sales in the Performance Products segment rose 16%. Volume increased 10% and price was up 6%. 

Basic Plastics 
Sales in Basic Plastics segment were $2.6 billion, down 32%. Volumes were down 1% while prices declined 33%. Volumes were significantly down in Europe due to production disruption at two of Dow’s polypropylene manufacturing facilities in Germany. On a sequential basis, sales in the Basic Plastics segment rose 11%, as a 2% decline in volume was more than offset by a 13% increase in price. 

Basic Chemicals 
Sales in Basic Chemicals segment were $568 million, down 49% year-over-year on the back of a 36% decline in prices and a 13% fall in volumes. Caustic soda prices were dramatically lower than year-ago levels as a result of weak alumina, chemical processing and pulp and paper industries. Vinyl chloride monomer (VCM) sales continued to be impacted by weak year-over-year infrastructure spending in the US, tight credit and contraction in the housing sector. On a sequential basis, sales in the Basic Chemicals segment fell 3%, as price declined 2% and volume decreased 1%. 

Dow has started benefiting from the Rohm and Haas acquisition concluded last quarter. The acquisition will consolidate higher margin and higher growth specialty businesses and reduce volatility in both earnings and cash flow. The acquisition is expected to help top-line growth and improve margins. . For the rest of 2009, Dow anticipates strong growth in the Asia-Pacific region, especially China, where domestic stimulus programs have created demand. 

We upgrade Dow from Neutral to Outperform.