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Dow Reports Second Quarter 2005 Results: Year-over-Year Earnings per Share Increase 81 Percent

Published on 2005-08-01. Author : SpecialChem

"The fundamental strength of Dow's diverse business portfolio and the benefits of continuing to focus on margin management and financial discipline were clearly evident through the quarter, providing solid resilience in the face of significant headwinds," said J. Pedro Reinhard, executive vice president and chief financial officer.

Review of Second Quarter Results

The Dow Chemical Company (NYSE: DOW) reported sales of $11.5 billion for the second quarter of 2005, a 16 percent increase compared with the same period in 2004. Net income rose 85 percent to $1,265 million, and earnings per share were $1.30, an increase of 81 percent compared with $0.72 per share in the second quarter last year.

Net income for the second quarter included an after-tax benefit of $113 million, equivalent to $0.12 per share, related to the plan to repatriate foreign earnings in 2005, and a pretax charge of $31 million, or $0.02 per share, associated with the Company's early redemption of debt. In the second quarter of 2004, Dow recorded a net pretax gain of $20 million, or $0.01 per share, comprising gains of $563 million from asset divestitures associated with the formation of MEGlobal and Equipolymers, as well as restructuring charges totaling $543 million.

Price improved 20 percent compared with the second quarter of 2004, with double-digit increases in all geographic areas and across most businesses. This enabled the Company to record its tenth consecutive quarter of year-over-year margin recovery despite an increase of almost $900 million in feedstock and energy costs compared with a year ago. Volume was down 4 percent, principally due to the negative impact of divestitures of certain businesses during 2004. Excluding those divestitures, volume dipped less than 1 percent from a very strong quarter in 2004, reflecting reduced demand early in the quarter and the Company's continued focus on price/volume management.

With significantly improved cash flow and a continued focus on financial discipline, Dow was able to reduce debt by more than $1 billion during the second quarter. By the end of the quarter, the Company's gross debt to total capital ratio was approximately 43 percent, 10 percentage points lower than at the end of the same period in 2004. The Company's net debt to capital ratio is now less than 35 percent.

"The Company's strong financial performance continues," said J. Pedro Reinhard, Dow's executive vice president and chief financial officer. "The fundamental strength of Dow's diverse business portfolio and the benefits of continuing to focus on margin management and financial discipline were clearly evident through the quarter, providing solid resilience in the face of significant headwinds, including capacity additions and industry de-stocking through the value chain. While these industry factors were most pronounced in the ethylene chain, they also impacted other products.

"Earnings increased significantly compared with a year ago - despite a number of unplanned outages during the quarter, both at Dow facilities and at some of our joint venture operations," said Reinhard.

In the Performance Plastics segment, second quarter sales of $2.8 billion were 22 percent higher than the same period last year, with a strong increase in revenue across most businesses. Volume fell 2 percent, negatively impacted by the divestiture of the DERAKANETM business in the fourth quarter of 2004, while price increased 24 percent, led by Polyurethanes, Engineering Plastics, and Epoxy Products and Intermediates. Solid volume growth was reported by the Thermoset Systems business, driven by strong demand for construction, adhesive and sealant applications. Engineering Plastics also saw increased volume, with continued demand for polycarbonate across a range of applications, most notably for optical media, sheet and security products. And in the Epoxy Products and Intermediates business, sales increased significantly across all geographic areas, as the Company maintained its sharp focus on price/volume management. EBIT(1) for the Performance Plastics segment was $436 million, an increase of 63 percent compared with the same quarter of 2004.

Second quarter sales in the Performance Chemicals segment were $1.9 billion, 19 percent higher than the same period in 2004. This improvement was driven by a 23 percent increase in price, while volume was down 4 percent from the particularly strong levels of a year ago. Dow Latex had a strong second quarter, with UCAR™ Emulsion Systems reporting increases in volume and price across most geographic areas, led by particularly robust demand in Europe and North America. Emulsion Polymers also posted healthy revenue growth, despite the negative impact on latex sales caused by a seven-week strike in the Finnish paper industry. During the quarter, the business completed the successful start-up of its second styrene-butadiene latex line at Zhangjiagang in China. Specialty Polymers reported another solid quarter, posting record sales, with volume rebounding soundly after a slow start. Notable contributors to that success were Amerchol personal care products and FILMTEC™ membranes for liquid separation applications. Performance Chemicals reported EBIT of $343 million for the second quarter 2005, compared with $113 million posted in the same period last year, which included restructuring charges of $89 million. Excluding the 2004 restructuring charges, EBIT for the second quarter of 2005 increased 70 percent year-over-year.

The Plastics segment had a good second quarter, with sales climbing 19 percent from $2.3 billion in 2004 to $2.8 billion in 2005. Price increased 22 percent compared with the same period last year, while volume was 3 percent lower, due to the divestiture of the Company's PET/PTA business related to the formation of the Equipolymers joint venture in 2004. Excluding the divestiture, year-over-year volume was flat. Polyethylene volume was up 2 percent, as the business overcame industry inventory de-stocking through a strong focus on price/volume management. The Polystyrene and Polypropylene businesses each reported a slight downturn in volume, but demand for both polymers saw a marked improvement in June. Price and volume trends are now favorable across all three major polymers. The Plastics segment reported EBIT of $575 million for the second quarter, compared with $399 million in the same period in 2004, which included a gain of $124 million from asset divestitures associated with the formation of Equipolymers. Excluding this 2004 gain, EBIT in the second quarter of 2005 was more than double EBIT in the same period last year.

Sales in the Chemicals segment declined slightly in the second quarter of 2005 compared with the same period in 2004, dropping 1 percent to $1.4 billion. Price was up 18 percent, but volume was down 19 percent due to asset divestitures associated with the formation of the MEGlobal joint venture a year ago. Excluding these divestitures, year-over-year volume was down 3 percent. Demand for caustic soda in Europe and the United States picked up significantly late in the quarter, after a slow start. Vinyl chloride monomer reported an atypical quarter, with softer than normal demand for PVC in seasonal housing construction applications. To an extent, this was offset by an increased demand for PVC pipe in water infrastructure projects. Ethylene glycol volume was down year-over-year as a consequence of the formation of MEGlobal, while price was roughly flat compared with the same quarter of 2004, but showed strong signs of recovery at the close of the quarter. That momentum has carried through July. The Chemicals segment reported EBIT of $267 million for the second quarter, compared with $726 million reported in the same period in 2004, which included a gain of $439 million from asset divestitures. Excluding this 2004 gain, EBIT in the second quarter of 2005 was down 7 percent year-over-year.

"The Company made tremendous progress in the quarter, despite the negative impact of the industry inventory corrections, achieving further margin restoration while retaining its competitive edge in both the basics and performance businesses," said Reinhard.

"As the Company moves into the third quarter, price and volume trends have once again turned favorable across virtually all operating segments. The industry has passed through an inflection point in the up-cycle from a supply-demand perspective. And although feedstock and energy costs remain high and volatile, Dow expects to continue to report year-over-year earnings improvements through the remainder of the year, achieving record earnings in 2005, and further earnings growth in 2006," he concluded.

About Dow

Dow is a leader in science and technology, providing innovative chemical, plastic and agricultural products and services to many essential consumer markets. With annual sales of $40 billion, Dow serves customers in 175 countries and a wide range of markets that are vital to human progress, including food, transportation, health and medicine, personal and home care, and building and construction, among others. Committed to the principles of sustainable development, Dow and its 43,000 employees seek to balance economic, environmental and social responsibilities. References to "Dow" or the "Company" mean The Dow Chemical Company and its consolidated subsidiaries unless otherwise expressly noted.

Note: The forward-looking statements contained in this document involve risks and uncertainties that may affect the Company's operations, markets, products, services, prices and other factors as discussed in filings with the Securities and Exchange Commission. These risks and uncertainties include, but are not limited to, economic, competitive, legal, governmental and technological factors. Accordingly, there is no assurance that the Company'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.

Source: Dow


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