INSIGHT: Dow looks for smarter growth as portfolio is trimmed

23 April 2014 17:08 Source:ICIS News

By Nigel Davis.

LONDON (ICIS)--Dow Chemical did well in the first quarter despite battling what CEO Andrew Liveris has called “slow growth and volatility”. The company expects much of the same in the coming months and is, not surprisingly, focused on further efficiency gains.

Those first-quarter helped to lift cashflow from operations by an impressive 30% and helped push earnings before interest, tax, depreciation and amortisation (EBITDA) 4% higher year on year on an adjusted basis to $2.4bn.

Dow’s total sales in the first quarter of 2014 rose by 1% on the same basis to $14.5bn. The increase was achieved on the back of strong gains for performance plastics, based largely on higher prices as the company confronted bad weather in North America and, in Asia Pacific, the re-balancing of China’s economy.

Europe looked a little better for Dow in the quarter, with the company’s coatings and infrastructure segment businesses showing double digit growth in the Europe, Middle East, Africa reporting region.

Group sales growth in Asia Pacific was achieved despite the clear challenges facing China as the economy is shifted towards what Dow sees as smarter growth.

“Current China is a China of less growth,” Liveris admitted in a conference call with financial analysts on Wednesday, but he emphasised that “smart urbanisation” is producing different needs for the plastics and other chemicals that Dow makes.

“We are seeing growth in high value add sectors,” Liveris said. Demand for the company’s agrochemicals sector products grew significantly in China in the first quarter, for instance. Performance plastics demand in China was also up strongly as was demand for coatings.

Dow is likely to benefit in the second quarter by stronger growth in North America as the US economy possibly begins to expand faster.

The American Chemistry Council on Tuesday suggested that the economy was emerging from the deep freeze of the past few months.  

“Economists around the country are coalescing around the idea that the fundamentals of our economy may be healthier than previously believed,” said the trade group’s chief economist Kevin Swift.

US manufacturing output rose for the second consecutive month in March. Industrial production growth was 0.7% higher than many analysts predicted. Data from the Federal Reserve show that capacity utilisation was the highest since June 2008.

Dow's group-wide capacity utilisation rate was 83% in the first quarter compared with 82% in both the first and fourth quarters of 2013.

 “As 2014 unfolds, our actions to generate margin improvement will gain further momentum – evidenced again by our sixth consecutive quarter of year-over-year earnings growth,” Liveris said.

“All of our key investments remain on track – especially Sadara and our PDH [propane dehydrogenation] unit in Texas – and are expected to deliver increased earnings beginning in 2015.”

Dow needs the new propylene capability, based around currently cheap propane from shale, to help iron out feedstock volatility. The harsh winter weather in North America put pressure on its gas feedstock costs in the region.

The company said that it had lifted its adjusted EBITDA margin by more than 60 basis points year on year to 16.6% with increases across all operating segments and despite a $300m increase in the costs of purchased feedstocks and energy.

“Looking forward, we expect a global operating environment of continued slow growth and volatility. Against this backdrop, we have intervened and remain resolute in achieving our short- and medium-term stated earnings targets,” Liveris said.

Dow is expecting to make monetary and strategic gains with its carve out of chlorine and epoxy assets which could be achieved by the end of 2015. The company’s increased divestments target is $4.5bn to $6bn of cumulative proceeds as it focuses attention on what it calls strategic end-use markets.

“This, coupled with the completion of our $4.5 billion share buy-back program by year-end, demonstrates our continued focus on increasingly returning value to our shareholders,” Liveris said.

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By Nigel Davis