The Urethane Blog

Dow Q3 Results

Dow reports third quarter 2019 results

MIDLAND, Mich.–(BUSINESS WIRE)–Dow (NYSE: DOW):

FINANCIAL HIGHLIGHTS

  • GAAP EPS from continuing operations of $0.45; Operating EPS¹ of $0.91 versus pro forma results of $1.34 in the year-ago period. Operating EPS excludes significant items in the quarter, totaling $0.46 per share, primarily related to: environmental charges; integration and separation costs; and a gain associated with litigation matters.
  • GAAP Net Income of $347 million; Operating EBIT¹ of $1.1 billion versus pro forma results of $1.6 billion in the year-ago period.
  • Net Sales were $10.8 billion, down 15% versus pro forma results in the year-ago period, driven by lower local prices primarily due to declines in global energy prices.
  • Volume declined 2% versus pro forma results in the year-ago period. Demand growth in packaging, polyurethanes and silicones applications was more than offset by lower hydrocarbon co-product sales, resulting from a lighter feedstock slate in Europe, and increased ethylene integration from the startup of new U.S. Gulf Coast assets. Excluding the Hydrocarbons & Energy business, volume rose 1%.
  • Local price declined 12% versus pro forma results in the year-ago period, driven primarily by decreases in polyethylene, hydrocarbon co-products, siloxanes and isocyanates. Currency decreased sales by 1%.
  • Equity losses were $44 million, compared to pro forma equity earnings of $135 million in the year-ago period. The reduction was primarily due to lower results at the Kuwait joint ventures, driven by margin compression in monoethylene glycol (MEG) and polyethylene.
  • Operating EBIT was $1.1 billion, down from pro forma results of $1.6 billion in the year-ago period, reflecting margin compression and the impact from lost production in Argentina. These factors were partly offset by savings from cost synergies and stranded cost removal, as well as new capacity on the U.S. Gulf Coast. Sequentially, Operating EBIT rose $58 million and Operating EBIT Margin expanded 80 basis points (bps), driven by lower planned maintenance spending in the Industrial Solutions business and margin expansion in Packaging & Specialty Plastics.
  • Completed the Materials Science Division $1.365 billion cost synergy program and removed $40 million of stranded costs in the quarter.
  • Cash provided by operating activities – continuing operations was $1.8 billion, up $1.6 billion versus the year-ago period. Capital expenditures in the quarter were $472 million and free cash flow2 was $1.3 billion.
  • Returned $0.6 billion to shareholders in the quarter, including $0.5 billion in dividends and $0.1 billion in share repurchases.

SUMMARY FINANCIAL RESULTS

Three Months Ended September 30

Three Months Ended June 30

In millions, except per share amounts

3Q19

As Reported

3Q183

Pro Forma

vs. SQLY

[B / (W)]

2Q19

As Reported

vs. PQ

[B / (W)]

Net Sales

$10,764

$12,697

$(1,933)

$11,014

$(250)

Operating EBIT¹

$1,117

$1,611

$(494)

$1,059

$58

Operating EBIT Margin¹

10.4%

12.7%

(230) bps

9.6%

80 bps

Operating EBITDA¹

$1,856

$2,343

$(487)

$1,802

$54

Operating EPS¹

$0.91

$1.34

$(0.43)

$0.86

$0.05

Cash provided by operating activities – continuing ops

$1,790

$203

$1,587

$960

$830

  1. Op. EPS, Op. EBIT, Op. EBIT Margin and Op. EBITDA are non-GAAP measures. See page 13 for further discussion.
  2. Free cash flow is defined as cash flows from operating activities – continuing operations, excluding the impact of ASU 2016-15, less capital expenditures.
  3. Financial information for the three months ended September 30, 2018 was prepared on a pro forma basis and determined in accordance with
    Article 11 of Regulation S-X.

CEO QUOTE

Jim Fitterling, chief executive officer, commented on the quarter:

“Our results this quarter demonstrated the Dow team’s focus on managing operational levers in response to a difficult business environment. We grew volume in our packaging, polyurethanes and silicones businesses, and once again successfully leveraged our industry-leading feedstock flexibility in the U.S. and Europe. Our team also took actions to improve pricing – with notable improvements in the Packaging and Specialty Plastics business toward the end of the quarter. Further, we continued to drive down our cost structure, completing the $1.365 billion cost synergy program and removing $40 million of stranded costs. Together, these factors delivered sequential earnings, margins and free cash flow improvements. Overall, our results showcased the strengths of the Dow portfolio and team.”

SEGMENT HIGHLIGHTS

Packaging & Specialty Plastics

Three Months Ended September 30

Three Months Ended June 30

In millions, except margin percentages

3Q19

3Q18

vs. SQLY

[B / (W)]

2Q19

vs. PQ

[B / (W)]

Net Sales

$5,062

$6,157

$(1,095)

$5,205

$(143)

Operating EBIT

$798

$857

$(59)

$768

$30

Operating EBIT Margin

15.8%

13.9%

190 bps

14.8%

100 bps

Equity Earnings (Losses)

$23

$83

$(60)

$74

$(51)

Packaging & Specialty Plastics net sales were $5.1 billion, down $1.1 billion versus pro forma results in the year-ago period. Volume declined 4% as growth in Packaging and Specialty Plastics was more than offset by a decline in Hydrocarbons & Energy. Local price declined 13%, and currency decreased net sales by 1%.

Packaging and Specialty Plastics reported a decline in net sales as volume growth was more than offset by reduced prices. Volume gains were reported in Asia Pacific and Europe, Middle East, Africa & India. Lower volume in Latin America was due to restricted monomer supply as ethylene operations in Argentina were offline through the quarter. The business reported the strongest end-market growth in industrial and consumer packaging, flexible food and specialty packaging, and health and hygiene applications.

Hydrocarbons & Energy reported a net sales decline on lower volume and price. The sales volume decline was driven primarily by: lighter feedstock usage in Europe, leading to lower co-product production volumes; increased ethylene integration (lower merchant sales) from the startup of new U.S. Gulf Coast assets; and planned turnaround activity in Europe.

Equity earnings for the segment were $23 million, down from pro forma equity earnings of $83 million in the year-ago period. The decline was primarily driven by lower earnings from the Kuwait joint ventures and increased equity losses from Sadara.

Operating EBIT was $798 million, down $59 million versus pro forma results in the year-ago period. Margin expansion, contributions from new capacity and cost synergy savings were more than offset by lower equity earnings.

In September, a judgment was entered by The Court of the Queen’s Bench in Alberta, Canada ordering Nova Chemicals to pay the Company approximately CAD$1.43 billion (equivalent to approximately USD$1.08 billion). The judgment relates to an initial ruling in June 2018 where the court found that Nova violated several contractual agreements related to ethane allocation and ethylene production under a jointly-owned ethylene asset. The judgment is subject to appeal. On October 10, 2019, Dow received the related cash payment (net of tax withholding) of USD$0.8 billion. Subsequently, the Company issued a make whole call for the full redemption of $1.25 billion of notes due in 2021, further reducing debt.

Industrial Intermediates & Infrastructure

Three Months Ended September 30

Three Months Ended June 30

In millions, except margin percentages

3Q19

3Q18

vs. SQLY

[B / (W)]

2Q19

vs. PQ

[B / (W)]

Net Sales

$3,365

$3,913

$(548)

$3,342

$23

Operating EBIT

$193

$466

$(273)

$154

$39

Operating EBIT Margin

5.7%

11.9%

(620) bps

4.6%

110 bps

Equity Earnings (Losses)

$(70)

$54

$(124)

$(78)

$8

Industrial Intermediates & Infrastructure net sales were $3.4 billion, down $548 million versus pro forma results in the year-ago period. Volume was flat, local price declined 13%, and currency decreased net sales by 1%.

Polyurethanes & Construction Chemicals reported a net sales decline, as modest volume growth was more than offset by price declines, led by lower components (isocyanates and polyols) prices. Local price declines were reported in all geographic regions. Volume growth was led by the U.S. & Canada on improved supply of methylene diphenyl diisocyanate (MDI), as the year-ago period was impacted by planned turnaround activity. In addition, volume growth continued in polyurethane systems, as the business marked 25 consecutive quarters of year-over-year volume growth.

Industrial Solutions reported lower net sales, primarily driven by price declines that reflected lower feedstock costs. The business reported a modest decline in volume, driven by reduced demand in energy, agricultural and automotive end-markets, which more than offset growth in catalyst applications and pharma end-markets.

Equity losses for the segment were $70 million, down from pro forma equity earnings of $54 million in the year-ago period, primarily due to margin compression in isocyanates at Sadara and MEG at the Kuwait joint ventures.

Operating EBIT was $193 million, down $273 million versus pro forma results in the year-ago period, primarily due to lower equity earnings and margin compression in isocyanates and MEG.

Performance Materials & Coatings

Three Months Ended September 30

Three Months Ended June 30

In millions, except margin percentages

3Q19

3Q18

vs. SQLY

[B / (W)]

2Q19

vs. PQ

[B / (W)]

Net Sales

$2,250

$2,552

$(302)

$2,356

$(106)

Operating EBIT

$200

$398

$(198)

$214

$(14)

Operating EBIT Margin

8.9%

15.6%

(670) bps

9.1%

(20) bps

Equity Earnings (Losses)

$2

$3

$(1)

$1

$1

Performance Materials & Coatings net sales were $2.3 billion, down $302 million versus pro forma results in the year-ago period. Local price declined 10%, volume declined by 1%, and currency decreased net sales by 1%.

Consumer Solutions reported a decline in net sales as volume growth in Asia Pacific and the U.S. & Canada was more than offset by local price declines in all geographic regions, led by lower siloxanes prices. The business reported year-over-year volume growth in the infrastructure end-market, as well as improved demand for siloxanes in Asia Pacific. These more than offset demand contraction in automotive and consumer electronics end-markets.

Coatings & Performance Monomers reported lower net sales on declines in local price and volume. Coatings volume declined, primarily driven by lower demand in U.S. & Canada architectural coatings and in Asia Pacific industrial coatings end-markets. Performance Monomers volume declined, primarily due to lower merchant sales of acrylates in North America.

Operating EBIT was $200 million, down $198 million versus pro forma results in the year-ago period, primarily due to margin compression in siloxanes and lower coatings and monomers demand.

OUTLOOK

“Over the past year, we have made strong progress on our operational and financial playbook for the new Dow,” said Fitterling. “We have taken prudent actions to adapt quickly to the macro environment and to preserve our financial strength. Moving forward, we will continue to leverage our feedstock flexibility; advance lower-risk, higher-return growth investments; and achieve our stranded cost removal target. We will also remain steadfast in driving improvements to our free cash flow – demonstrated by our recent debt redemption announcement, which will use the cash payment from the Nova judgment. These actions enable us to manage the current environment and place us in a strong competitive position when the industrial economy rebounds.”

https://www.businesswire.com/news/home/20191024005421/en/Dow-reports-quarter-2019-results