Dow Takes The Global Slowdown On The Chin

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The Dow Chemical Company (NYSE:DOW) recently announced its earnings for the second quarter of 2012. The company reported net income of $649 million, a large negative earnings surprise of 9% and a decline of over 34% on a year-on-year basis, leading to a share price decline of 3.7% over the course of the trading day. Income was negatively affected by global price and volume declines combined with adverse currency conditions. Its European operations took the biggest hit, posting revenue declines of over 10%.

We currently have a Trefis price estimate of $31.61, which is about 8.7% above the market price.

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Global demand continues to be weak due to current macroeconomic conditions, and this has adversely affected prices and volumes, with revenue declines in all geographic segments. Over 63% of Dow’s revenues are from international operations, and a strong dollar has also played a large part in this poor showing. Sales in the EMEA regions (Europe, Middle East and Africa) have declined by a staggering 15%, and the company has not been able to compensate for this in other regions such as North America, Asia Pacific and Latin America, with most countries, including China and Brazil, facing slowdowns.

Most operating segments posted negative growth and even those with volume increases, such as Performance Plastics, showed decline due to price decreases. The Agricultural Sciences Products division, however, continued its upward trend, posting revenue growth of around 12%, and a new EBITDA margin record for the first half of the year. Revenues for this division grew 12%, driven by volume and price increases of 10% and 2% respectively. Its importance to the company has grown considerably, largely due to the unprecedented success of its Crop Protection and Seeds, Trails & Oils (ST&O) products.

The company has attempted to counter declining margins by employing efficiency and cost reduction measures, with an emphasis on increasing cash flow, deleveraging the balance sheet, and effective price and volume management. The process is expected to be carried out over the next couple of years, and could result in considerable margin improvements long term. It has already led to a $700 million increase in cash from operation, and a decrease in net debt to capitalization to 40.4% during this quarter.

However, management’s general outlook for the short-medium term is very negative, having stated that there is not much scope for improvement for at least 12 months, considering the current global economic scenario. We believe that Dow will continue to face difficulties until a recovery is imminent, and at this point, that does not seem likely.

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