Thursday, July 26, 2007

Dow's Quarterly Results: A Brilliant Management Job

It what perhaps could be the toughest operating environment in over a decade for Dow Chemical (DOW), management did a brilliant job with company and the results were earnings growth in what was expected to be a flat or declining quarter (especially after DuPont's (DD) recent earnings release).


-- Sales for the quarter set a new Company record, rising 6 percent from
the same period last year to exceed $13 billion for the first time in
Dow's history.
-- Earnings were $1.07 per share, up from $1.05 per share last year.
-- Equity earnings for the quarter increased to $258 million, up 11
percent from 2006.
-- Solid cash flow in the quarter supported investment in organic growth
and acquisitions, as well as $400 million in share repurchases.
-- Purchased feedstock and energy costs surged by almost $700 million
compared with the first three months of the year - the highest ever
sequential increase. Year over year, costs increased by more than $550
-- Strong volume increases in Asia Pacific, Latin America and most
operating segments in Europe offset continued weakness in the North
American housing and automotive sectors.

How many businesses could experience a record increase in input costs of almost a billion dollars and still produce a year over year increase in earnings? A key factor was the Joint Venture strategy Dow has embarked on that to date in 2007 has produced 11% year over year earning growth. As new ventures are announced monthly, shareholders have to be excited about their potential.

Said CEO Andrew Liveris, "We have a very clear strategy, with well-defined priorities, which we are executing with discipline to deliver strong financial results for the Company."

"During the quarter, our global strength, diverse business portfolio, focus on price/volume management and commitment to joint ventures combined to overcome an unprecedented rise in feedstock and energy costs.

"In addition, we continued to invest in exciting new joint ventures, such as the recently announced Dow Crystalsev project in Brazil, in our Performance businesses with acquisitions like Wolff Walsrode, and in strong organic growth programs - implementing a strategy that can deliver a consistent earnings growth profile through the years ahead."

I had been expecting earning a small decline in earnings and Dow being able to pull of an increase is just fantastic new. Here is some math. Currently 50% of Dow input cost are the raw material costs that are skyrocketing. Many of the recently announced venture will be in areas that will enable Dow to obtain feedstock at less than a third of their current costs. If we translate that to their current structure, that means Dow will recognize those costs going from 50% to around 20% for most of it's major product lines. These are cost savings that will drop directly to the bottom line as Dow sells in global markets so their end selling price will not be affected. Theoretically, this means Dow could be looking at 30% eps growth just from cost savings alone. The fact that eps from the current ventures grew 11% while non-JV earnings grew 1.5% in the recent quarter only serve to back up this assertion.

Dow transition to a JV models will have a compounding effect as high cost revenues are replaced with dramatically lower ones, compounding their eps effect.

Commenting on the Company's outlook, Liveris said, "We expect global GDP to remain healthy, as the U.S. economy stabilizes and growth around the world continues to be strong.

"We anticipate solid demand through the third quarter, although Agricultural Sciences is likely to see a typical seasonal decline. Feedstock and energy costs are expected to remain relatively high and volatile through this quarter. Our performance through the first half of the year reinforces our view that our strategy is working and that we will continue to deliver strong results for the Company and for its shareholders."

So far so good...


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