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Second Quarter 2006 Earnings The Dow Company

Published on 2006-07-28. Author : SpecialChem

Second Quarter of 2006 Highlights

  • Sales for the three months ended June 30 were $12.5 billion, 9 percent higher than in 2005 and a new quarterly record for the Company.
  • Earnings per share were $1.05, compared with $1.30 per share a year ago. Earnings in 2005 included unusual items with a net favorable impact of $0.10 per share.
  • Compared with the second quarter last year, Dow recorded a healthy improvement in volume of 4 percent and a 5 percent increase in price; however, this was not enough to offset another major rise in feedstock and energy costs, which climbed more than $800 million year-over-year.

Comment

Geoffery E. Merszei, Dow's executive vice president and chief financial officer, stated: "Although this was a challenging quarter, we posted record sales and healthy cash flow, despite headwinds in feedstock and energy costs. Industry fundamentals remain sound, although there was some softness in Agricultural Sciences, Polyethylene and Acrylic Monomers during the quarter."

(In millions, except for per share amounts)
3 Months Ended
June 30
6 Months Ended
June 30
2006
2005
2006
2005
Net Sales
$ 12,509
$ 11,450
$ 24,529
$ 23,129
Net Income
$ 1,023
$ 1,265
$ 2,237
$ 2,618
Earning per Common Share
$ 1.05
$ 1.30
$ 2.29
$ 2.69

Review of Second Quarter Results

The Dow Chemical Company (NYSE: DOW) reported sales of $12.5 billion for the second quarter of 2006, a new quarterly record and 9 percent higher than the same period in 2005.

Net income for the quarter was $1,023 million, 19 percent lower than a year ago, while earnings per share fell from $1.30 in 2005 to $1.05 in 2006. Earnings for the second quarter of 2005 included a benefit of $0.12 per share related to the repatriation of foreign earnings, and a charge of $0.02 per share associated with the Company's early redemption of debt.

Compared with the same period last year, volume for the quarter increased 4 percent, with strong volume growth in Latin America and Asia Pacific, combined with good demand in Europe, more than offsetting a modest decline in North America. Price also edged higher, reflecting healthy increases in most of the Company's Basics businesses, dampened by weaker price momentum across much of the Performance sector. The resulting 5 percent year-over-year price improvement was not enough to counter another significant increase in feedstock and energy costs, which climbed more than $800 million compared with the second quarter last year causing margin erosion in our Performance segments.

"Although this was a challenging quarter, we posted record sales and healthy cash flow, despite headwinds in feedstock and energy costs," said Geoffery E. Merszei, Dow's executive vice president and chief financial officer. "Industry fundamentals remain sound, although there was some softness in Agricultural Sciences, Polyethylene and Acrylic Monomers during the quarter.

"We reported strong growth in Asia Pacific and Latin America, and improvement in Europe, which more than offset softness in North America - reinforcing the merit of our focus on geographic balance. Our drive to grow the Company through strategic joint ventures also added significantly to the bottom line, contributing more than $230 million in earnings during the quarter. And our on-going commitment to financial discipline allowed us to further reduce debt, lowering our debt to capital ratio to 36 percent, and ensured continued cost constraint, holding the Company's selling, general and administrative, and research and development expenses ("SARD") as a percent of sales to a record low of 5.5 percent."

In the Performance Plastics segment, sales for the second quarter were $3.44 billion, an increase of 13 percent compared with the same period in 2005. Volume rose 11 percent, with strong demand in Asia Pacific and Europe, while price increased 2 percent - not enough to offset the higher feedstock costs. Polyurethanes and Thermoset Systems reported increases in both price and volume, with continued growth in the Company's value-added Systems House business and better industry fundamentals in toluene diisocyanate. Dow Epoxy reported a healthy year-over-year improvement in volume, led by double-digit volume growth in Europe - with strong demand for civil engineering applications - and in Asia Pacific, where sales into coatings applications were particularly robust. Dow Building Solutions also recorded volume growth, as heightened demand from the U.S. commercial construction industry offset a drop in new housing starts, and European construction picked up strongly after a slow first quarter caused by unusually harsh winter weather. Dow Automotive reported lower volume compared with the same quarter a year ago, principally the result of reduced industry builds in North America. EBIT(1) for Performance Plastics was $412 million, down 17 percent compared with $498 million in the same quarter last year.

Sales in the Performance Chemicals segment were $1.97 billion for the second quarter of 2006, 5 percent higher than the $1.88 billion in the same period last year. Volume increased 6 percent year-over-year, but price declined 1 percent, as several businesses struggled to offset the significantly higher raw material costs. Dow's Latex and Acrylic Monomers business reported solid demand from both Europe and Asia Pacific for styrene-butadiene latex in paper and carpet applications, with particular strength in China, where the Company successfully started its second styrene-butadiene latex train at Zhangjiagang towards the end of last year. But margins were down, most notably in acrylic monomers, where industry fundamentals were weaker than a year ago. Specialty Chemicals posted improvements in both price and volume compared with the same quarter a year ago, with glycol ethers seeing significant sales growth in Asia Pacific, and amines reporting solid demand for wood treatment applications. The Designed Polymers business benefited from strong sales into the European construction industry, good growth in U.S. paint applications and its continued success in the pharmaceutical sector. EBIT for Performance Chemicals was $362 million for the quarter, 11 percent lower than $406 million reported in the same period last year.

The Agricultural Sciences segment reported sales of $962 million for the second quarter, 7 percent lower than the quarterly record of $1 billion achieved in the second quarter of 2005. Volume declined by 5 percent compared with the same period last year, while price was 2 percent lower despite higher costs. Overall sales outside the United States were slightly ahead of the same quarter last year, with particularly strong gains in Latin America. However, this was overshadowed by a severe decline in U.S. revenues, which saw no repeat of last year's fungicide sales spike - when inventories were built ahead of a potential soybean rust outbreak - and where a growing demand for herbicide-tolerant corn continued to negatively impact sales of Dow's selective herbicides. On a positive note, Dow's efforts to spur demand for healthy oils reaped further benefits during the second quarter: two large national restaurant chains in Canada converted to NATREON™ oil, while in the United States consumer testing got underway with another large restaurant chain. EBIT for Agricultural Sciences was $161 million, a decline of 32 percent compared with $238 million in the same period a year ago.

The Basic Plastics segment posted second quarter sales of $2.99 billion, 16 percent higher than the same period in 2005. Price rose 11 percent and volume was 5 percent higher. Polyethylene reported a significant increase in price and solid volume gains compared with the second quarter last year, with particular strength in the United States, Latin America and Asia Pacific. But margin growth was constrained, as early attempts to increase price failed to gain traction. It was a similar story in Polypropylene, where increasing raw material costs continued to put pressure on margins despite year-over-year double-digit price increases, good demand and full capacity utilization of the Company's plants in both North America and Europe. Polystyrene reported solid volume gains in all regions outside North America, but margins were squeezed in an environment of weakening prices. Year-over-year, polystyrene price fell in all geographic areas except Europe, where the business recorded a modest increase. Compared with the same quarter of a year ago, EBIT for the Basic Plastics segment fell 6 percent, from $527 million in 2005 to $493 million in 2006.

Second quarter sales in the Basic Chemicals segment increased 5 percent compared with a year ago, from $1.35 billion to $1.42 billion. In the Core Chemicals business, caustic soda recorded a healthy year-over-year price increase, but volume was down as weakness in pulp and paper, chemical processing, and soaps and detergents more than offset continued strong demand in the alumina sector. The business reported steady volume for vinyl chloride monomer, with solid demand for polyvinyl chloride in seasonal applications. The Ethylene Oxide / Ethylene Glycol business reported volume growth in all geographic areas, but margins contracted as raw material cost increases significantly outpaced the business' ability to raise price. The Basic Chemicals segment reported EBIT of $219 million for the second quarter, 18 percent lower than $267 million for the same period a year ago.

"To summarize, although results this quarter were below our expectations, we posted record sales and reported earnings that were among the highest in Dow's history," said Merszei.

"Looking ahead, given the challenges of the first half of the year, we believe it will be difficult to meet our earlier expectations that earnings in 2006 will be better than in 2005. We will continue to focus on financial discipline and cost control, and expect to see further improvements in both price and volume.

"Overall we still expect that 2006 and 2007 will be very good years for Dow," he concluded.

(1) Earnings before interest, income taxes and minority interests ("EBIT"). A reconciliation of EBIT to "Net Income Available for Common Stockholders" is provided following the Operating Segments table.

About Dow

Dow is a diversified chemical company that harnesses the power of science and technology to improve living daily. The Company offers a broad range of innovative products and services to customers in more than 175 countries, helping them to provide everything from fresh water, food and pharmaceuticals to paints, packaging and personal care products. Built on a commitment to its principles of sustainability, Dow has annual sales of $46 billion and employs 42,000 people worldwide. References to "Dow" or the "Company" mean The Dow Chemical Company and its consolidated subsidiaries unless otherwise expressly noted.

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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