Dow Chemical Profit Trails Estimates on ‘Bleak’ Demand

Dow Chemical Co. (DOW), the biggest U.S. chemical company, reported larger-than-estimated declines in second-quarter earnings and sales and said the outlook for global demand for the rest of the year is “bleak.”

Net income fell to $734 million, or 55 cents a share, from $1.07 billion, or 84 cents, a year earlier, Midland, Michigan- based Dow said today in a statement. The average of 15 estimates compiled by Bloomberg was for 64 cents. Revenue fell 9.6 percent to $14.5 billion, trailing the $15.6 billion average estimate of 10 analysts.

Chairman and Chief Executive Officer Andrew Liveris is struggling to increase earnings as contracting economies in Europe and slower Chinese growth curb demand for products such as plastics used in packaging and autos. Sales fell around the world, led by a 15 percent decline in Europe, the Middle East and Africa, Dow said. Liveris plans to boost cost-reduction efforts by $500 million to counter weaker global economies.

“These are about the worst operating conditions we have seen since 2009,” Liveris, 58, said today in a telephone interview. “That gives you a fairly bleak outlook, and it’s a weak one for the rest of 2012.”

Dow fell 3.6 percent to $29.18 at the close in New York, paring its gain this year to 1.5 percent.

Profit Declines

Dow’s factories ran at 78 percent of capacity, down from 84 percent a year earlier. Profit fell in four of six divisions, including a 21 percent decline in plastics, Dow’s largest business. Profit rose in the agriculture unit on sales of genetically modified seeds and earnings in the electronics unit were unchanged.

Average prices fell 5 percent in the quarter and sales volumes excluding divestitures declined 1 percent, Dow said. Most of the price decrease was due to a weakening euro and other currencies, reducing revenue by more than $400 million, Dow said.

“This quarter really illustrates the tie between economic growth and commodity chemical demand,” Jeff Windau, a St. Louis-based analyst at Edward Jones & Co. who recommends selling Dow shares, said today in a phone interview. “It really took a toll on Dow.”

Weak economies in Europe are reducing demand around the world, including in China where many export factories aren’t running, Liveris said. China’s actions to boost domestic demand should improve that economy in the second half, he said.

‘Poster Child’

Still, global demand will remain “choppy” for the next 12 to 24 months, partly because democratic institutions aren’t implementing “growth policies,” he said.

“You can’t get there just cutting all the time,” Liveris said. “Europe is our classic poster child.”

The U.S., where economic growth is slower than anticipated, isn’t sliding into recession, he said.

Slower global growth will delay Dow’s ability to reach its earnings targets, Liveris said today on a conference call with analysts, without specifying how long the delay will be. He forecast in October that earnings before interest, taxes, depreciation and amortization would climb to $10 billion in the next one to two years. Ebitda declined 14 percent in the first half to $3.67 billion from $4.27 billion a year earlier.

Cost Reductions

Dow plans to increase its cost-cutting program to $1.5 billion a year, from $1 billion now, by limiting capital spending and cutting expenses, particularly in Europe, Liveris said on the call. The cuts won’t affect Dow’s expansion plans for the U.S. Gulf Coast and Middle East, he said.

Dow and Saudi Arabian Oil Co. are spending $20 billion on factories for making petrochemicals from low-cost oil and natural-gas derivatives at the Saudi port of Jubail starting in 2015. Dow plans to spend $4 billion to expand production of ethylene and propylene in Texas, including construction of its first U.S. ethylene plant since 1995.

In May, Dow was awarded $2.16 billion in damages to be paid by Kuwait’s Petrochemical Industries Co. because it canceled a 2008 agreement to buy a stake in Dow’s plastics business. Kuwait has asked the London High Court of Justice to reconsider the award without contesting the ruling that the contract was breached, Liveris said on the call.

Dow, founded in 1897 as a bleach maker, is the world’s biggest producer of chlorine, epoxy resins and polyethylene plastic. It’s the world’s second-biggest chemical maker behind Germany’s BASF SE. (BAS)

To contact the reporter on this story: Jack Kaskey in Houston at jkaskey@bloomberg.net

To contact the editor responsible for this story: Simon Casey at scasey4@bloomberg.net

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