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The Dow Chemical Company (NYSE:DOW) is scheduled to release its earnings for the fourth quarter of 2012 on January 31. The chemical giant posted a mixed set of third quarter numbers with net sales declining 7%, even as overall volume rose 2% y-o-y. The decline was primarily driven by broad-based price declines led by Europe, where currency exchange rates had a huge negative impact. However, the company’s volume growth was driven by low-cost feedstock advantage due to its largely integrated business approach. Here we look at some of the key trends to watch out for in the Q4 release.

See our full analysis for Dow

Plastics Business To Drive Better Volume, Margins

Chemicals such as ethylene, chlorine and propylene are Dow’s foundation of value-adding chemical chains and key enablers of its downstream businesses. They serve as raw materials for the production of a variety of products that support a wide range of industries including appliance, automotive, agriculture, building and construction, oil and gas, packaging, paints, personal care, etc. Dow’s strategy has been to integrate extensively into these basic chemicals, which provides both, supply certainty as well as cost advantage to their downstream businesses. With the shale gas supply boost in the U.S. Gulf Coast region resulting in a cheap source of ethane, the company is more focused on playing out its long term strategy.

Dow recently restarted its St. Charles Olefins 2 plant in Louisiana after four years to accelerate investment in the U.S. Gulf Coast region. (see Dow Restarts Louisiana Plant Amid Gulf Coast Expansion) The company also plans to construct a new world-scale ethylene production plant at Dow Texas Operations in Freeport, Texas, which is expected to become operational by 2015. [1] Overall, Dow plans to invest $4 billion into the U.S. Gulf Coast to increase ethylene and propylene capacity through 2017. We expect the company’s performance in plastics and materials segment to benefit from this strategic approach in the long run, both in terms of volume and EBITDA growth.

Agricultural Science Products To Show Volume Growth

Agricultural science products division is a research intensive and high growth division in the chemical industry. Big players like DuPont (NYSE:DD) and Monsanto (NYSE:MON) are increasing their investments in the R&D department to outpace the industry growth through innovative products. We see huge growth potential in the agricultural science business with growing adoption of genetically modified seeds for higher yields and better traits. To back this trend, rising population and declining availability of arable land are all indicating towards higher demand for more sustainable technological solutions for the agriculture sector.

Dow’s market share in the segment was 3.8% in 2009. In 2010 the company launched SmartStax, a brand of genetically modified seed made in collaboration with Monsanto Company. The technology used in SmartStax takes advantage of multiple modes of insect protection and herbicide tolerance, and was a great success. This helped the company grow its market share to 4.5% by 2011. We expect the positive trend to continue with increased penetration of SmartStax hybrids like Refuge Advanced (a convenient, single bag solution for refuge compliance) and other new products. [2] The company’s Enlist E3 soybean brand is the industry’s first ever, three-gene herbicide tolerant soybean. Once approved, Enlist E3, is expected to hit the markets around 2015 and holds bright prospects for Dow in the segment. [3]

Restructuring Charge To Hit Bottom Line

In Q3, Dow had also announced a mega-restructuring plan, aimed at reducing costs and improving operational efficiency. As a part of the plan, they announced eliminating 2,400 jobs, around 5% of the workforce and closing 20 plants in order to reduce costs, amid deteriorating macroeconomic conditions. The successful implementation of this restructuring plan is estimated to achieve annual cost savings of $500 million in the coming years. However, the company also announced that they would be posting a restructuring charge of up to $1.1 billion during the last quarter, which is expected to hit the company’s bottom line quite significantly. [4]

Notes:

  1. Dow to Build New Ethylene Production Plant at Dow Texas Operations, Dow Investors, April 2012, Dow Investors
  2. Dow AgroSciences Advances Corn Seed Performance in the Americas, December 2012, Dow AgroSciences
  3. Enlist E3 Soybean Brand Announced, December 2102, Dow AgroSciences
  4. Dow Chemical Sees Restructuring charge of Up to $1.1 Billion, October, 2012, WSJ

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Source: Dow's Earnings: What We Are Watching