William Weideman - Chief Financial Officer and Executive Vice President
Howard Ungerleider - VP of IR
Antonio Galindez - Chief Executive Officer of Dow AgroSciences
Andrew Liveris - Executive Chairman, Chief Executive Officer, President, Chairman of Executive Committee, Member of Environment, Health & Safety Committee and Member of Business Operations Committee
Don Carson - Merrill Lynch
Peter Butler - Glen Hill Investments
David Begleiter - Deutsche Bank AG
Jeffrey Zekauskas - JP Morgan Chase & Co
Robert Koort - Goldman Sachs Group Inc.
Frank Mitsch - BB&T Capital Markets
Hassan Ahmed - HSBC
Paul Mann - Morgan Stanley
Sergey Vasnetsov - Barclays Capital
The Dow Chemical (DOW) Q2 2010 Earnings Call August 3, 2010 10:00 AM ET
Good day, everyone, and welcome to the Dow Chemical Company's Second Quarter 2010 Earnings Results Conference Call. [Operator Instructions] At this time, I would like to turn the call over to Howard Ungerleider, Vice President of Investor Relations. Please go ahead, sir.
Thanks, Lisa. Good morning, everyone, and welcome. As usual, we're making this call available to investors and the media via webcast. This call is the property of Dow Chemical Company. Any redistribution, retransmission or rebroadcast of this call in any form without Dow's expressed written consent is strictly prohibited.
On the call with me today are Andrew Liveris, Dow's Chairman and Chief Executive Officer; Bill Weideman, Executive Vice President and Chief Financial Officer; Antonio Galindez, President and CEO of Dow AgroSciences; and David Johnson, Director in Investor Relations. Around 6:30 this morning, August 3, our earnings release went out on Business Wire and was posted on the Internet on Dow's website, dow.com.
We've prepared some slides to supplement our comments on the conference call. The slides are posted on our website on the presentations page of the Investor Relations section or through the link to our webcast.
As you know, some of our comments today may include statements about our expectations for the future. Those expectations involve risks and uncertainties. We can't guarantee the accuracy of any forecasts or estimates, and we don't plan to update any forward-looking statements during the quarter. If you'd like more information on the risks involved in forward-looking statements, please see our SEC filings.
In addition, some of our comments today may reference non-GAAP financial measures. A reconciliation to the most directly comparable GAAP financial measure and other associated disclosures are contained in our earnings release or on our website.
Unless otherwise specified, all comparisons presented today will be on a year-over-year basis. Sales comparisons, which exclude prior-period divestitures and recent seed acquisitions in Health and Agricultural Sciences, and earnings comparisons will exclude certain items and 2009 discontinued operations. Our earnings release as well as recent SEC filings are available on the Internet at dow.com. The agenda for today's call is on Slide 3.
Now I'd like to hand the call over to Andrew.
Thank you, Howard, and good morning, everyone. Thank you for joining us to discuss our second quarter results. If I can ask you to turn to Slide 4.
This morning, we announced another quarter of strong results both in the top and bottom line. Virtually, every financial measure is up: price, volume, EBITDA, operating rate, cash flow and earnings. All demonstrate continuing momentum.
We remain firmly on the path we laid out at the beginning of the year, and we are delivering the financial performance we promised. The best proof point that our strategic agenda is the right one, is the continued strength in our Performance businesses, which delivered more than 70% of the EBITDA for the quarter, and we believe this performance will continue as momentum continues in a positive direction for a sustained global economic recovery.
Here's some high-level takeaways from the quarter. Operating earnings were $0.54, up more than tenfold from the year-ago period and up more than 25% sequentially. This was driven by sales gains of 26%, with significant increases in both price and volume. EBITDA increased to $1.9 billion, up more than $300 million, and EBITDA year-to-date is up nearly 50% compared to the same period last year.
Our Performance businesses again showed strength and continuing momentum with EBITDA up $175 million sequentially excluding health and agriculture. A number of these businesses delivered EBITDA margins at or above our normalized targets and at pre-recessional or better levels including Electronic and Specialty Materials, which has now surpassed 30% for four quarters running.
Others include Architectural Coatings, which achieved 19% EBITDA margins in the quarter. Elastomers delivered 16% EBITDA margins. This is the largest piece of our Performance Systems segment and has delivered at levels between 15% and 18% for the last five quarters.
Our Epoxy business, driven by continued growth in electronics and our continued shift to higher-margin specialty grades in Asia delivered 20% margins and Polyglycols was more than 20% to name a few. At a division level, our Advanced Materials earnings in the first half are nearly back to the pre-recession levels of first half 2008. For the entire company, our overall EBITDA performance is particularly notable given a $1.6 billion increase in purchased feedstock cost and a $100 million increase in planned turnaround cost.
We also had several major unplanned outages that were completely unforeseen, and this cost us an estimated lost-sales opportunity of more than $300 million or at least $0.07 in earnings per share. While we clearly lost sales in earnings opportunities in these unplanned events as well as in our turnarounds, we did not compromise the safety of our operations and took the necessary time to repair them despite the difficulties created in our supply chains and our customer base. We operate a "safety first, production second" mindset at Dow, and our "Drive to Zero" global safety goals will always come first. The good news is that these outages and turnarounds are now behind us, and we have returned to normal levels.
And specifically in our Coatings business, our performance was dampened by severe global industry supply constraints, coupled with our own previously mentioned unplanned outages. This limited our ability to fully capture volume growth. These results were clearly disappointing to us. Even so, the segment showed double-digit sales gains in the quarter, and our outlook is very positive moving ahead.
When you exclude the impact of turnarounds and outages, we surpassed the $2 billion mark in EBITDA, bringing our first half run rate to nearly $4 billion. These are levels not seen since the prerecession period in 2008.
In terms of demand, emerging geographies posted volume gains at a rate nearly double that of the total company. Performance segments led the way overall, driven in particular by Electronic Materials which was up 27%. This demand improvement pushed our global operating rate higher as well, up year-over-year and sequentially to 86% excluding planned turnarounds.
Turning to the balance sheet. We delivered a more than $1 billion improvement in operating cash flow. Also notable, our net-debt-to-EBITDA run rate exiting the quarter was 2.4. This represents a 14% decline sequentially and is less than half the level of April 2009. We are well on the way to achieving our balance sheet goals by year end.
If you can turn to Slide 5, it brings me to milestones. We are making tremendous progress on these on both a year-over-year and sequential basis. Financially, the earnings power of the new portfolio is already here today.
Our Performance businesses comprised nearly 2/3 of sales and 3/4 of EBITDA for the quarter. Operationally, we delivered synergy and structural cost reductions of $325 million. In just six quarters, we have achieved more than $1.8 billion in cost savings, significantly improving the company's operating leverage, again, well ahead of our commitments. And strategically, we achieved several noteworthy milestones. We are forming a chlor-alkali joint venture, securing critical raw materials for our Downstream Performance businesses at a lower cost and with less capital outlays.
We have now shed more than $5 billion of non-strategic assets, well ahead of schedule. And we achieved a stair-step reduction in our net-debt-to-capital ratio, moving from 49% to 46.5%, and we are now well on our way to achieving our goal. We did all of this while maintaining our focus on growth, investing more than $400 million in R&D in the quarter.
And today, together with Saudi Aramco, we announced that our proposed joint venture project to build a world-scale integrated manufacturing facility for Performance Products, Plastics and Performance Systems businesses is now entering the final stages of the FEED study. We expect this work to be completed in mid-2011.
Together, we have also confirmed that the planned site location for the project will move to Jubail Industrial City, the largest industrial complex of its kind in the world. This new venue provides the benefit of extensive existing infrastructure and significantly enhances the capital efficiency of this project. It also provides the perfect platform for us to deploy our successful value bag concept like we have at our Dow Central Germany facility and other large Dow locations. This project aligns perfectly with our strategy to invest in key emerging regions and ensures our Downstream businesses have the competitive critical building block products they need to grow.
If you turn to Slide 6, speaking of growth, I also want to highlight that we have achieved a run rate of $684 million in growth synergies from our transformational Rohm and Haas acquisition. This represents a 30% increase versus last quarter, and we continue to make great progress towards our 2012 target of $2 billion. Let me mention a few examples achieved in the quarter.
Dow Coating Materials recorded new wins with surfactants in Asia. We landed new business with a leading multinational consumer products company, delivering new innovative formulations for hair care applications. We won new business in the Oil & Gas sector in Latin America. Our leading consumer products company has adopted our new household cleaner technology. A world-class petroleum additives company is now using our enabling chemistry to bring new technology for automotive lubricants to market.
Now I'd like to turn to a high-level view of the geographic and market demand trends that drove our performance in the quarter. Please turn to Slide 7.
We saw broad-based recovery in global demand in a wide variety of end markets as momentum continued from last quarter. This was evident in our volume growth across the entire company led predominately by the combined Performance businesses, which were up 12%. Emerging geographies collectively posted volume gains nearly double that of the total company. Here are a few examples of why our portfolio is well positioned to capture this momentum.
Electronics end markets continue to perform well driven by demand for flat screen technologies and semiconductors. Automotive end markets further strengthened in North America and Asia. Our Specialty Materials and Adhesives and Functional Polymers businesses benefited from strong demand in Latin America. From a geographical perspective, both North America and Europe continued their growth. And finally, we saw continued demand gains in Asia, particularly in our Electronic and Specialty Materials segment, which was up more than 30%.
As you can see, fundamentals remain strong across a wide variety of high-growth sectors. Of course, we also experienced some challenges in the quarter, notably, the unplanned outages especially in the coatings value chain as well as the unfavorable weather patterns in North America and Europe, which impacted results in Dow AgroSciences.
Overall, these challenges have been more than balanced by the broad-based positives we're seeing. Now Bill is going to give you some more detail on how these trends drove our results in the quarter. But as I reflect on the quarter, I'd say there are a number of areas in which we excelled, and clearly, a couple of specific areas where we could have done more. Putting it transparently, we were firing on seven of our eight cylinders in the quarter.
We know where the issues were for the eighth cylinder, and we now believe we have them fixed so we can go even further. We remain firmly on the earnings trajectory we laid out at the beginning of the year.
So let me now turn the call over to Bill who will provide more details on our results.
Thank you, Andrew. Turning to Slide 8. Reported sales were $13.6 billion, an increase of 20%. Excluding acquisitions and divestitures, sales were up 26% driven by volume growth of 7% and an increase in price of 19%.
EBITDA, excluding certain items was up $327 million to $1.9 billion. Earnings, excluding certain items that totaled $0.04, were $0.54 per share. Before I discuss results at the segment level, let me cover Dow's operating rate and the impact of turnarounds and outages.
Our operating rate continued to improve, reflecting sustained demand growth. Excluding the impact of planned turnarounds, it was up eight percentage points year-over-year. The second quarter is typically a high period of turnarounds, but this quarter was unique in several ways. As Andrew mentioned, we had more planned turnarounds than usual in the quarter, up $100 million versus the same quarter last year and up $150 million compared with the first quarter.
We also faced a number of unplanned outages, particularly in the coatings value chain. This resulted in lost sales of more than $300 million. The estimated EPS impact was about $0.07 per share.
Now let me turn to price and volume. Overall volume growth was 7% with our combined Performance segments delivering a 12% increase. Volume grew in all segments except Basic Plastics, which was down 7%. It also grew in all geographies except Latin America, which was down 3%. Both of these declines were primarily due to an unplanned outage at our facility in Bahia Blanca.
Excluding Basic Plastics, volume was actually up 9% in Latin America. We experienced particular strength in North America and Europe, Middle East and Africa, and this marked the second consecutive quarter of growth in these geographic areas.
Turning to Slide 11. We also achieved price gains across most operating segments in all geographies. In total, price was up 19%. Again, North America and Europe, Middle East, Africa, delivered the strongest performance as price was up 20% and 21%, respectively.
Now turning to our segment overview on Slide 12. Electronic and Specialty Materials recovery continued in electronic end markets particularly in Asia, where the business saw volume growth of 25% or more across all its business units. This was driven by sustained high-utilization rates at chip foundries, strong demand for consumer electronics and high operating rates at major flat-panel display manufacturers. Our Electronics business recorded several wins in the quarter and places next-generation VISIONPAD technology with a large Japanese customer. Our Water business also continues to achieve volume growth in all geographies in its Ion Exchange Resin and RO Membrane business lines.
Turning to our Coatings and Infrastructure segment. Dow Coating Materials grew sales 10% and expanded margins sequentially due to price increases and lower raw material cost despite monomer supply issues in the quarter.
We also saw a double-digit sales increase in our Building and Construction business, with particular improvement in insulation products led by our STYROFOAM brand insulation. And finally, our Adhesives and Functional Polymers business achieved double-digit volume growth, with the strongest improvement seen in Asia and Latin America.
Moving to Health and Agricultural Sciences. This segment experienced solid volume improvement due to ramp up of new ag chems as well as gains in Seeds, Traits and Oils business, which included the successful launch of SmartStax technology. This segment continues to hold significant growth potential going forward, and Antonio will provide more detail shortly.
Performance Systems saw improvement across all geographic areas in every business unit. We are benefiting from a strong rebound in automotive end markets, particularly in Asia and North America. And demand for our technology-differentiated products used in acoustics and body structure applications grew in excess of 25%. And in Formulated Systems, energy efficiency and infrastructure applications drove growth in the quarter.
Finally, on this slide, you'll see the primary drivers in performance products. Volume growth was recorded in all geographies except Asia, where our Polyurethanes business shed low-margin sales. Other key drivers in this segment included strong demand in electronic laminates in our Epoxy business and demand growth in our Polyglycols, Surfactants and Fluid businesses for heat transfer fluids used in solar power applications. The Basic Plastics on Slide 14, double-digit price gains in all geographies drove performance.
Notably, strong industry demand for polyethylene continued, primarily in North America and Asia. However, our overall sales were negatively impacted by the previously mentioned outage in Latin America. And finally, in Basic Chemicals, recovery continued in the alumina and the pulp and paper industries, which drove price up year-over-year.
Now turning to our joint ventures. Equity earnings were up significantly. This was driven by our joint ventures in Kuwait and by Dow Corning, where demand in Silicones and Polysilicon segments has returned to pre-recession levels. Equity earnings were down sequentially from the record levels of last quarter due to planned turnarounds at MEGlobal, EQUATE and Kuwait Olefins Company.
Before I wrap up, I'd like to highlight our tight control on working capital. DSO was 46 days, down one day versus the same period last year. DSI was 67 days, down three days from a year-ago period. We reduced inventory units by 3% versus the same period last year.
Our CapEx spending was under $400 million, and we remain on track toward our $2 billion goal for 2010. Cash flow from operations was $1.3 billion, and free cash flow was $650 million, up nearly $1 billion versus the same quarter last year.
Our net-debt-to-total-cap declined 250 basis points to 46.5%. Progress here reflects a $1.9 billion decrease in net debt driven by proceeds from the Styron divestiture and our operating cash flow generated in the quarter. Please note that for modeling purposes, you should expect a $1 billion quarterly impact on revenue from the Styron divestiture. Our net-debt-to-EBITDA multiple improved to 2.8, and we are at a run rate of 2.4 exiting the quarter.
Finally, our progress in cost synergy and restructuring goals. We have now surpassed our $1.3 billion run-rate target for cost synergies associated with the Rohm and Haas acquisition two quarters ahead of schedule.
That wraps up my review. Now I'd like to turn it over to Antonio for a discussion on key growth and profitability drivers for Dow AgroSciences.
Thanks, Bill. I'm glad to be here today to talk about AgroSciences' growth strategy and our technology progress.
First, let me discuss the quarter. While we encountered some short-term headwinds, our growth strategy remains on track. We predicted early in the year that crop protection market conditions will reach a normalized level this year, meaning that 2010 will look a lot like 2007, which was a more stable year in agriculture versus the two previous years.
The good news is that the first half of 2010, we increased EBITDA by more than $90 million versus 2009. And compared with the same period of 2007, our EBITDA was over $40 million higher. This takes into account more than $150 million of additional growth investments we have made in R&D and SG&A, and these investments are paying off. For example, our new product launches illustrate our technology power as sales from new ag chemicals are up more than 40% in the first half of 2010 versus last year.
Another area of progress is our Seeds portfolio, which reported a 15% increase in first half sales over last year's. These gains are a direct result of new products such as SmartStax, our biggest biotech launch ever, as well as our outstanding cotton varieties, the strength of our germplasm in Latin America and the performance of acquired seed companies.
However, these wins were masked in our results for the quarter due to the price pressure in commodity ag chem products and poor weather conditions in the northern hemisphere, which limited some product applications. So while the quarter was not what we expected, we did improve our results versus last year and 2007, and we believe the long-term fundamentals of this industry are strong. Why? Because growth in this sector will be driven by the need of an increasing amount of food, feed and even fuel. The agricultural industry must produce more food with limited land, less water and fewer resources to feed a population that will reach 9 billion in 2050.
There is a global consensus among leading institutions about the challenge of feeding the world. Here's a fact from the Coalition for a Sustainable Agricultural Workforce: "Over the next 40 years, we must produce more food than has been produced over the past 10,000 years combined." Technology is one of the answers, and it is a critical one. While we expect some short-term market challenges as supply-demand dynamics balance out for commodity crop protection products, there is no doubt the need to enhance farmers' productivity is a critical challenge.
Please turn to Slide 19. So let me talk about our Ag Chem pipeline, which is the best we have ever had. We continue launching new proprietary agricultural chemical solutions that contribute to our growth objectives and generate cash flow. For example, sulfoxaflor insecticide will open new markets for us in 2012. And we have new herbicide and fungicide solutions coming next that are very promising.
In total, we expect new product sales to reach $500 million this year, it's 25% from our original estimates of $400 million. And we are projecting this number will grow to $800 million by 2013.
Our portfolio strategy is one of balance between biotechnology and crop protection, and our Seeds and Traits advances are truly exciting. Today, we have SmartStax, which is the only, I repeat, the only commercially available product approved for a 5% reduced-structure refuge requirement for both below- and above-ground pest. We had a very successful launch. In fact, we sold out everything we had planned to and more.
Our SmartStax Refuge in the Bag concept will extend this leadership by providing the convenience that growers want, combined with the best technology. And we have the next industry breakthrough, with our DHT family of Traits. We already submitted DHT-stacked corn for regulatory approval in September of last year, and the soybean trait was submitted in December.
We will continue hitting all our technology milestones, while increasing channel access through licensing, collaboration and bolt-on seed acquisitions. Combined with the launch of SmartStax and both Refuge in the Bag and DHT on the horizon, we are now on our way to reach our goal of having a $1 billion global corn business and achieving double-digit share of demand in North America.
And our collaborations in key row crops will catalyze the growth of the Seeds, Traits and Oil platform. We will move the mix in our portfolio closer to our 50-50 vision versus its 15% level today. We will do this, not by making Ag Chem smaller, but by making Seeds and Traits larger.
In summary, we are on track to deliver our targets as we continue growing the top and bottom line in an industry where long-term fundamentals are compelling. We are achieving our new product sales targets and, most importantly, key R&D milestones, while investing in a strong pipeline products and capabilities.
Thanks, and back to you, Andrew.
Thank you, Antonio, for sharing your insights regarding Dow AgroSciences' growth. The long-term fundamentals for this sector remains strong, and we will continue to execute our build-and-collaborate strategy.
In the time that remains, I'd like to provide some granularity on our expectations for the back half of the year. So let me first start with the ethylene chain. If you look at Slide 22, there's been a great deal of discussion recently regarding the supply-and-demand dynamics of ethylene. From our perspective, fundamentals have not changed.
We've long discussed that margins would likely contract in the second half of this year as new capacity comes online, thereby defining the trough. The reality is this new capacity is not ramping up as quickly as some predicted, and this effect, plus unplanned outages which always occur in this industry, coupled with 2010 GDP forecast that continue to project stronger growth than expected, makes for a better-than-expected scenario. And we are seeing that today, evidenced by the strong first half our Polyethylene Business delivered.
On Slide 23, you can see that this growth is due to real underlying demand and can be seen in North America at different places in the value chain. At the converter level, railcar days and destination are down about 20% versus the long-term average. And at the producer level, the ACC June data confirmed a 200-million pound draw-down, which dropped inventory by five days. Both are strong proof points that industry inventories remain at low levels.
As I mentioned, this underlying demand was evident in our tremendously strong performance in the first half of the year, where we averaged $700 million of EBITDA per quarter.
On Slide 24, we had the most competitive Ethylene and Polyethylene business in the industry. Plus, as mentioned last quarter, our U.S. assets will continue to benefit from the unfolding and positive domestic shale gas dynamics. We expect other factors, like new fractionation capacity that is coming online this year and next, to the tune of 7% each year, will even further improve the competitiveness of our U.S. cost position.
So while we continue to expect some margin contraction in the second half, we believe these positives will mitigate the downside. As a result, we could see profitability in the Polyethylene business decline by only about $150 million in the third quarter.
Our view is that our PE business will be entering peak margin territory over the next few years, and that the exiting from the trough will occur late 2010, early 2011. This decline in polyethylene in the second half, as modest as it is, will be more than made up by our new portfolio of businesses which will capitalize from the ongoing positive macroeconomic fundamentals and increasingly gain market position with new technology offerings and with continued pricing power.
On Slide 25, I'd turn you to our overall outlook. With another quarter of top- and bottom-line growth delivered, we are confident that the momentum continues to build in the global economic recovery. Our U.S. macroeconomic view remains guardedly optimistic and we see continued demand growth from both business spending and a slow return of the consumer, albeit at a tempered pace.
In other industrialized regions, particularly Europe, monetary stimulus continues to provide support against headwinds, such as tighter fiscal policies. And in the emerging world, especially Asia, we will continue to see strong growth. From a sector perspective, there are many areas of strength: Electronics, consumer staples, food, pharmaceuticals and personal care are all showing signs of growth.
And in Electronics, global tech spending will continue to be robust, benefiting from a combination of increased business investment and consumer-led demand as we ramp for the end-of-year buying season. Transportation has been robust and should see a more typical seasonal decline as the industry once again prepares for new model launches. The good news is, year-over-year, we expect continued strength.
In Construction, while the commercial sector remains challenged, we expect programs in the U.S, such as Home Star, to provide incentives that will boost residential improvements and drive demand higher. We continue to see this sector as a key indicator to our robust recovery.
If you turn to Slide 26, based on these aforementioned strong geographic and sector fundamentals, we expect high demand for our products in our downstream, market-driven businesses, as well as in our Polyethylene business. As you can see, the vast majority of our portfolio is perfectly positioned to capitalize on these trends.
And just to mention some specifics for you: our momentum in Electronic Materials continues; we recently started up a new OLED facility and are building a new R&D center, both in Korea. Asia is the largest market for coatings in the world, and we are investing in additional emulsion plants that will meet growing demand.
Our new STYROFOAM brand insulation continues to gain market share. And we have received DOE funding to develop the next generation of advanced insulation systems. Also we broke ground on our joint venture manufacturing facility to produce lithium-ion batteries for next-generation hybrid and electric vehicles.
Our Elastomers businesses announced today a technology breakthrough that expands capacity for polyolefin elastomers and positions us to take full advantage of future growth. And just last week, the EU announced that it has approved biotech corn products, enabled by our leading Trait technology for import.
And as you heard me say earlier, today, we announced a huge joint venture with one of two world's leading companies going to the next step, how Saudi Aramco partners and ourselves would move to the final stage of engineering design of what would be one the world's largest, freestanding industrial complexes. These are just few of the many examples that bode well for our ability to outpace the overall economic recovery and drive our earnings growth and reward our shareholders.
Let me wrap up, if I can, with our priorities. If you turn to Slide 27 for the second half of the year. We remain focused on executing our strategic and financial plan. From a strategic perspective, we are well ahead of our revenue growth goal and have already exceeded our year-end growth synergy run rate, with more to come. Operationally, we surpassed our commitments to deliver our Rohm and Haas acquisition cost synergies and reduce structural cost. Financially, we exceeded our two-year divestiture goal ahead of schedule and are on track to deliver our net-debt-to-cap and free cash flow targets.
In summary, our earnings trajectory continued once again this quarter, with our robust innovation pipeline, our broad geographic reach and our leadership in high-growth, profitable sectors leading the way. We remain focused on realizing the full potential of our new portfolio and lean cost structure, while executing on our innovation engine.
We believe we have the plan, the people and the technology to deliver continued earnings growth for our shareholders. I will now turn the call back to Howard.
Thanks, Andrew. That wraps up our prepared remarks. For your reference, a copy of these comments will be posted in Dow's website later today. Now we'll move on to your questions.
Before we do, though, I'd like to remind you that my comments on forward-looking statements and non-GAAP financial measures apply to both our prepared remarks and to anything that may come up during the Q&A. Lisa, would you please explain the Q&A procedure?
[Operator Instructions] And our first question comes from David Begleiter with Deutsche Bank.
David Begleiter - Deutsche Bank AG
Andrew, in your Seed business, did you gain share in corn seed this year in North America? And what was the actual amount of your SmartStax acreage sales this year?
One of the best parts of this call is I have Antonio right here. Over to you, Antonio.
In our businesses in corn, it's early because we are waiting for the returns, but we are convinced we have gained share. We have slightly gained share. Remember, we start from a much smaller -- part thanks to SmartStax and thanks to our portfolio today. We have sold everything we have on the SmartStax today. We also gained significant market share in our Cotton business. In the USA, we had 10% market share last year. We believe we have grown more than three points in that market, over 13%. And with Seeds and Traits, volumes have grown 20% this year. So then where we are, we are looking for the launch of our -- consumer launch of SmartStax next year. We think we'll have SmartStax in about close to 50% of our grain hybrids next year. And the challenge in launching a new technology is it takes time to build up the production, but we are very pleased with the results of SmartStax. We haven't disclosed much at this moment, but we are very pleased with the launch this year. We sold everything we had.
David Begleiter - Deutsche Bank AG
Antonio, in crop chemicals is the pricing pressure, in your view, structural secular or is it just transitory in structure?
I think there are a number of -- I don't think they're structural. I think there are a number of factors that have come together this year. If you take the high inventory level, you take some supply and demand on balances on the commodity side, you take the weather conditions in some places in Europe and North America. You put all that together, and coming from the increases of prices in '08, '09, all that together put even more pressure than what was expected in the pricing markets. So it has been tough this first half, but I don't think it's structural. I think, as we look forward, I think the second half will settle. I think we're going to see still pressure in the second half. But as we get into 2011, I think we'll balance. And then we'll go into what is expected in this segment, which is a more balanced, slow, but growth over the next couple of years as the fundamentals provide. Now in our case, we have the new products. And our new products are helping us to, I would call, outperform the market and grow. And when we look to our EBITDA results, we're very pleased as the growth over '09 and '07.
Our next question comes from Sergey Vasnetsov with Barclays Capital.
Sergey Vasnetsov - Barclays Capital
Andrew, once you talked about volume gains, the work quite noticeable, but at the same time quite a bit lower than for many of your other peers. And actually, I was quite pleased to see your results, that even in the absence of strong volume, you were able to deliver the results today that you talked about. Can you comment on this besides others -- just sort of any other factors in this quarter?
Yes. We really, Sergey, there's a couple of major factors here. We had lost sales, as I said, both Bill and I talked about, that does about three percentage points on volume. And STYRON, no one factored that into the forecast, and we sold STYRON close to mid-June. So that's another percentage point. So we would have seen 11% just on a like-and-like basis. If there was, didn't have these unplanned outages. I can't stress enough how strong an impact these unplanned outages were across our chains. Coatings had a great quarter, but actually would have been a much better quarter. I mean, if you look at our other peer groups or even look at downstream from our sub-customers, they all reported strong numbers. Our Coatings numbers were strong, but would have been much stronger, more in line with what they reported, and that alone would've bumped up the volume significantly. Plus plant turnarounds hit us, we would have an operating rate of 6% if we didn't have the plant turnarounds, forgetting the outages themselves. And in fact, if you look at the number of plants that were down through the quarter for various periods of time, 120 of our 600 plants were down, that's a big impact to any company. And I would tell you that, therefore, going forward, we see very good positive volume momentum, so again we are not concerned. These were one-time events. They are over with. We've fixed them. The plants are running safely, as I said on the call. So frankly, as you say, we see the positive of the point even though, of course, it didn't help us in the quarter.
Sergey Vasnetsov - Barclays Capital
It's good to hear you're being optimistic on Saudi Aramco joint venture. And by the way, congratulations on the progress on this important project. And Dow has also additional premise and large project for coal to chemicals in China. And I'm just wondering, if Dow could undertake both joint projects in the same timeframe hopefully, let's say, 2012 to '15.
Well, I think the most important part of that, thank you for your comment on Aramco, is these are sequenced for different mixes. One is in-market and competitive because of coal, that's the China one. One is export-oriented because of where it's located and access to feedstocks of the oil-and-gas kind. The key on sequencing for us is a equity-like structure and these are building blocks. If we build a PL plant on our own, that's a billion dollars. The fact that we can make it part of an industrial complex where we are partnering, and in the case of Aramco, 35% will go to public. So we'll end up earning 35%. You end up getting more back for your capital, in this case, equity back. So we believe the way it'll sequence is, the next several years, we'll get the Aramco project, the Jubail project, up and running in the mid-part of the decade, and the China project will come in the latter part of the decade.
The next question comes from Paul Mann with Morgan Stanley.
Paul Mann - Morgan Stanley
You mentioned feedstock costs were up $1.6 billion, but prices in your performance products and performance systems were up 23% and 10%, respectively. Could you quantify the EBITDA effect of the feedstock by selling those divisions. And secondly, propane logistics, I believe you've got a new propane dehydrogenation plant starting up. I think it is quarter perhaps even last week or this week, which should be propylene prices have touched. But I believe, you've got a supply contract that may result into cheaper propylene going forward. Can you just talk through that arrangement and what effect that have on your margins going forwards?
Yes, exactly on your first question, Paul. We have a 2% hit to our EBITDA margin based on the situation between price on propylene. The most important thing on propylene is the arbitrage between U.S. and Asia didn't work in our favor in the quarter. You'd normally -- U.S. propylene is discounted by about 20% versus Asia. We have the exactly the inverse through the quarter. Asia propylene stayed artificially low. And in fact, the spread at the beginning of the quarter was $0.21 versus by exiting the quarter was $0.07. So in essence, U.S. propylene was artificially high, and we believe that will return to equilibrium in the third quarter, which will allow margin expansion on our Performance businesses to come through in the Q3 versus what we're expecting in Q2. So we will play catch-up in the third quarter. So that really takes care of the whole issue of margins and Performance businesses in the second quarter. In the third quarter, this whole point you made on the PDH unit, yes, GBP 1.2 billion starting up in August, we're 50% of the offtake. This will help us enormously on propylene competitiveness in the United States and enable us to have margin expansions. And the related effect, the fact that we have this propylene arbitrage, the fact that we didn't have the ability to export to Asia -- also, I heard the previous question on volume, we lost volume in Asia because we couldn't successfully export because of the propylene arbitrage, which was an extra point of Sergey's earlier question. And last but not least, we're taking care of it not just in the U.S. but also in Asia with the start up of our big propylene derivative facility in Thailand next year. So that will take care of that propylene structure imbalance in Asia. All of the remedies are in place and should handle the questions you asked.
Our next question comes from Robert Koort with Goldman Sachs.
Robert Koort - Goldman Sachs Group Inc.
Andrew, is it fair to say based on that prior comment that you would expect all eight cylinders will be firing in the second half of the year?
You can count on my commitment to that point, Bob. I mean, look, I'm not able to stop the unforeseen. So you've got to give me a little bit of respite on a bit of a stutter here, but that cylinder was not there because of unplanned outages and that was really something that, frankly, disappoints. But having said that, we are already past the fix. We won't have any unplanned outages -- we won't have any planned turnarounds in the third quarter of any substance, only a few minor ones compared to the very big ones we had in the second. We, frankly, have the propylene arbitrage in the right direction and unplanned outages are over with. And we've got some allocations still going on, but we are satisfying all the customers we need to satisfy.
Robert Koort - Goldman Sachs Group Inc.
And just to clarify the propylene comment, I guess we saw U.S. prices were marked down very aggressively. Are you suggesting they weren't marked down as aggressively is what happened in Asia?
Correct, exactly what I'm adjusting. And if you look at the comparables for us, year-on-year, propylene was up $300 million sequentially and was up $40 million. So on average, it was up. Now if you do the trajectory for the quarter, the velocity of the propylene price is coming down through the quarter in the U.S., but the average didn't help us. And that particularly hurt because of the Asia number being so much lower than the U.S. number, so we couldn't actually raise prices successfully in Asia at the speed we needed to nor could we export. So we had a double whammy, and I don't believe any of you guys had that in your models. And frankly, our businesses have been block and tackling that throughout the latter part of the quarter and already are on top of it for the third quarter.
Our next question comes from Don Carson with Susquehanna International.
Don Carson - Merrill Lynch
I want to follow on Ag with Antonio. Antonio, in your Slide 21, you talked about a longer term goal of 10% share in U.S. corn market. Now you're only about 4% right now. I know you've done some acquisitions. You've got a germplasm venture with DEKALB. But do you have the pieces in place that you need to get from 4% to 10%, or do you need to make a major acquisition? And then just as a housekeeping item, what was the year-over-year impact of the glyphosate downturn on your earnings?
Well, let me go to the second one in a second. But on the seeds, on the corn side, we need to have a few things. The first one is we need to have the best technology available in order to succeed to get to that 10%. We're on our way. We have in SmartStax, we'll have Refuse in a Bag in two years, and we'll have the SmartStax Plus, the best herbicide trait coming, the first one to come in 2012, 2013. So from a technology point of view, I think that we are enabled for that. You take the germplasm, and we are investing significantly. We are very pleased with the advancement we are getting, and we also have the Monsanto exchange of material in germplasm that is coming from this Monsanto exchange [ph]. The bolt-on acquisitions we made, they are performing today. Will we make more? We are looking for them, and we'll continue to look for it. But it's not a major acquisition, what we believe is going to take us to 10% is all these together plus some other collaborations we are doing and so on, is what is going to take us there. We are confident that we'll get there, but then all those things need to happen. And that's the reason we are significantly investing in resources in R&D at this moment in that area. In relation to glyphosate, like we said it took a big hit, that was 50% of the price declines so throughout of this quarter. And obviously, as we told you before, glyphosate for us is 5% to 10% of our sales. But the price drop was significant, and it took 50% off of our numbers.
Our next question comes from Peter Butler with Glenhill Investments.
Peter Butler - Glen Hill Investments
Well, if you guys are hitting on all eight cylinders, does that mean we can expect a restoration of the dividend? The Dow's stock and the dividend are well below previous levels.
Yes, Peter, the dividend question has had discussion with our board. We are clearly, clearly very mindful at the board. This is a board decision that we are not where we need to be long term. Having said that, our primary responsibility has been, of course, to ensure that our capital ratios are intact. Our balance sheet is intact, and the economic growth that we are now starting to see is intact. And I believe the power of the portfolio as you look at the next year or two will enable your question to be answered in the affirmative. I can't promise that, but that's certainly something that is top of mind for the reasons you raised.
Peter, Bill Weideman. Just to add to Andrew's point, our priority continues to be, first priority, to pay down debt. But if you look at our EBITDA for the quarter and you adjust for these, our actual EBITDA was closer to a $2 billion number, and if it does continue, going forward, with the economy, we certainly have a lot more options going into next year.
Peter Butler - Glen Hill Investments
Your press release noted that the Rohm and Haas integration was going -- was seamless, I guess, was the way you put it. And talking to some of my Rohm and Haas sources, it looks like almost all of Rohm and Haas' key managers have left. Obviously, including Pierre Brondeau and Raj Gupta, but also their key top associates. And maybe the results short term is you have better earnings due to cost reductions. But in a people-intensive business, this could be a huge problem longer term.
I would agree with you Peter. If these individuals that left and each one of them was an individual decision, it was a sign of something bigger. But if you look at Guillermo Novo running, for example, our Coatings business today; Carol Eicher, running our Building Solutions business; if you look at Neil Carr, who is running our Adhesives and Functional Polymers business and Packaging business, these are just three names on top of my head of legacy Rohm and Haas' who have stayed with the new division, who are firmly believing in the potential and the growth of the division. I could go on more. Cathie Markham in our Electronics division. I could go to Dominic Yang in our Electronics division as well. I mean, I can give you name, chapter and verse of all the people who've stayed. In fact, of the top 70 leaders of Dow's Advanced Materials division, 50% of them are legacy Rohm and Haas. High-profile departures will always happen. Company outsize, we will always lose good people because of the nature of being a good company. It's happened. In your generation, you saw Enrique Sosa left, if I recall. So good people will leave for their reasons. Pierre wanted to be a CEO. He's doing a great job over where he is, and I can go on and on. We are not concerned. In fact, we are over delivering on the growth synergies.
Our next question comes from John Hirt from Citi.
Just a quick question on Electronics. You're pricing was down about 1% year-over-year. Can you shed some light on which areas saw the biggest price declines?
It's pretty much, I mean, I don't think -- Howard, unless you've got some adds on this one -- I don't think we saw anything notable.
No, I would say -- I mean, John, it's really normal for that segment to have essentially flat pricing. So what happens is it's a fairly quick life cycle business. As you know, every two or three years, we're changing over the whole product wheel. And what happens is we bring in new products at higher price, and then over time, as those products mature, they come off, but nothing out of the ordinary in line.
And your volume growth in Electronics was pretty strong. Again, your volumes were up about 5% in Asia. Can you talk about what maybe drove that?
Well, I mean, we had some pretty big new wins in Semiconductor Technologies, Interconnect Technologies. And interestingly enough, some of these wins in new complete product areas don't show up yet as big volumes but they will. And if you look at some of the things that are going on in Asia, I mean, we've expanded our Trimethylgallium capacity. You won't see that volume yet, but it's about to start up. We also have wins going on in the photoresist area with the 193 [nm anti-reflectant] in particular. In those applications, you won't see that turning up. I think that's the sort of stuff that we're so excited about. We have Electronics at 30% EBITDA margins without being at the volume levels they were two years ago with all these new wins going on. We are defending our CMP business. We've kept our 80% share there very successfully, but it's pretty hard to grow from an 80% share point. So real volume gains in Asia, in particular, from the new businesses.
Yes, and John, just to follow up, to give you a little bit more granularity. Electronics Materials in China was up 32%.
But the big business we have is in particular in Korea and Japan and Taiwan.
Our next question comes from Kevin McCarthy with Bank of America.
Andrew, in addition to the Aramco joint venture in Saudi, you announced a fairly sizable chlor-alkali JV with Mitsui at Freeport. Just wondering if you could comment on the strategic rationale there, and whether or not that is likely to replace some existing capacity to be rationalized on the Gulf. And second piece of it if I may, with regard to your existing chlor-alkali assets, should we expect Dow to seek a partner for those businesses as well?
The strategy is very clear, and that is we basically backed our way into a large complex in Freeport and a smaller complex in Plaquemine, Louisiana, and those two complexes exist in chlor-alkali to serve our downstream businesses like Antonio's. 70% now of our chlorine footprint with this announcement will do that. The 30% that doesn't overtime, you can expect to see us find answers to that in an asset-like, equity-like construct. And so over time, we'll see more of that in developed geographies, in particular like our North American assets I just mentioned, but also our European assets where we own 100%. And we are backing out of merchant EDC, and we only are in EDC for flywheel purposes or to serve downstream VCM/PVC customers like the Shintech's, like the Mitsui's. So our intent is to keep driving to the point you're making, use the chlorine and have a competitive chlorine molecule for our downstream value-add businesses.
Next question comes from Frank Mitsch with BB&T Capital Markets.
Frank Mitsch - BB&T Capital Markets
Andrew, you don't need me to tell you that Dow has a great reputation on operating of assets. So it's very surprising to see a $0.07 negative impact due to unplanned outages. Can you comment further on the timing of those outages? I mean, here we are in August, I know you said everything's back up and running. But was there some leakage into the third quarter? And was that $0.07 negative impact, was that predominantly in Basic Plastics? I think you said maybe Coatings also had some of that. Can you give some more color on those outages?
Yes, I would say Frank, and thank you for your comment on Dow's operational excellence, and I would totally 100% on the line that we are very focused on these particular incidents as onetimers for very onetime reasons. If I take the three major ones, the Bahía Blanca incident was totally based on water shortage, nothing to do with plant operating. The site could not get water. So we were down for a month of the quarter, which is a big impact for us in Latin America. And actually, if you look at our results in Latin America, outside of that, we did great in Latin America. But it's just such a big part of our business down there. So as a consequence, that one had nothing to do with operational excellence. The other two, we had a very unfortunate incident in one of the heat exchangers in the phenol plant, very tough duty. Actually, hasn't happened to us before, so we did the root cause. It's fixed, but that affected the entire downstream Coatings chain. And then the biggie was the MMA [methyl methacrylate] incident that we had down in Deer Park. Now Deer Park is the only legacy Rohm and Haas site that is a petrochemical site. Frankly, we've had to pull all of our people over Deer Park to let it run to its potential. And that's why safety first, pound second. We've take taken the opportunity to root-cause investigate not only MMA but the entire acrylics production units there so that they run to Dow's standards. And that's, in essence, what answers that question. They're all onetimers, 2/3 Performance, 1/3 PE. So the impact was in Coatings and Infrastructure in particular, but also in the other Performance Products. We believe the $315 million [ph] loss revenue, as a consequence, is a onetimer.
Frank Mitsch - BB&T Capital Markets
And that was all in the second quarter?
Frank Mitsch - BB&T Capital Markets
And then in terms of these very strong results on the Basic Plastics side, you talked a little bit about JVs in other areas. Can you give an update on potential JV activity on the Basic commodity side?
Yes, we have, as we said on the last call, we are definitely very interested in a PE asset-like, equity-like strategy for the right reasons, for the right partner, for the right competitive advantage on existing assets and new assets. The Aramco announcement is a new asset. The Kuwait investment, the expansion down there is a new asset. But over time, we believe our relationships with those two places as well as other places will yield an opportunity for us in polyethylene-existing assets. We are driven to get an answer there, but we have a newfound competitive advantage with U.S. shale gas that helps us. Once we execute that strategy, we will do it at the highest possible valuation going into peak earnings rather than living through trough earnings. So you'd expect us to time it better and right versus right now. And it will help tilt our portfolio more to specialty, which will decline the volatility of the portfolio.
Our next question comes from Jeff Zekauskas with JPMorgan.
Jeffrey Zekauskas - JP Morgan Chase & Co
It seems that the largest difference between your results and results of comparable companies is the growth in Latin America and Asia. Even if your Asian results are dimmed down by a couple of percent, most companies are reporting 25% to 40% volume growth. And in Latin America, most companies were reporting 15% plus and you said that your Electronics business is doing exceptionally well. So what's really the source of the slowness in these regions compared to North America and Europe where you seem to be doing better than your competitors?
Actually, if you exclude our incidents, the ones that I just referenced in the previous call, Latin America, I mean, you take Latin America Electronics, and if you look at it versus the same quarter, or year-on-year, 27% up. If you look at Coatings and Infrastructure, 14% up. Performance Systems, 22% up. Even Performance Products, that had some of the issues, 13% up. So truly, Latin America was very impacted, Jeff, by the polyethylene issue with Bahía Blanca. If you look at China, Electronics, up 32% as Howard already referenced. There, we had more of an impact than we did in Latin America because we have less in-market assets. So the big export opportunities that were propylene derivatives, acrylics, polyurethanes, epoxies, were all very tilted to be impacted in the emerging world where we import those products in. As I've mentioned already, our Thai complex and ultimately, our Saudi complex, should take care of that because these assets are dedicated for the Asian growth. But we were disproportionately affected compared to our competitors because of, in particular in Asia, this propylene arbitrage I mentioned.
Jeffrey Zekauskas - JP Morgan Chase & Co
What was the operating cash flow in the quarter,
The cash flow from operations in the quarter was, from operating activities, was $1.2 billion and our free cash flow was a little north of $600 million, which is about $1 billion improvement over the same quarter last year and also prior quarter. And we actually did use operating cash flow to pay down the $1.9 billion debt in the second quarter.
And our last question comes from Hassan Ahmed with Alembic Global.
Hassan Ahmed - HSBC
Quick question about the commodity side of the business. Of late, we've been hearing, obviously, a fair bit about Iran in particular. And the couple of stories that seem to be coming out are first and foremost trade sanctions, obviously reduced trade because of that. Secondly, issues of companies with regards to garnering letters of credit and the like. And finally, of late, we've been starting to hear about potentially a privatization of MPC. And if at all that happens, the escalation of the gas price regime over there. So now as one thinks through all these different elements, in your mind how do all these things sort of click together when thinking about near and medium terms for the supply-demand balances?
Yes, I think all the points you made, not to repeat them, we would agree with Hassan. And on top of that, add an extra point which is implied in your question, which is at the end of the day, competitive price gas and therefore, ethane in the Middle East has a very short time frame. Now when you look at crackers being announced in that part of the world, there will be mixed speed crackers and using NGLs and maybe naptha. As a consequence of that, you're going to find that everyone's going to start having a rising tide on gas and ethane price. And the MPC privatization and changing the gas price structure there, which we believe is also inevitable, will change the -- if you like the competitiveness of those crackers vis-a-vis product making its way either to Europe, and in particular to in-market crackers in Asia, in particular in China. So I believe that's why our Aramco joint venture is so important. It's really going to be one of the last large complexes. And the way we designed that with Aramco is to tilt the Performance businesses, propylene oxide, epichlorohydrin, acrylic acid, all these businesses that are building blocks that can take advantage of the competitive feedstock being both gas, NGLs and some naptha. I think there will be less and less of that available out of the Middle East.
Hassan Ahmed - HSBC
And a quick, quick follow-up, again, sticking to the region. This morning, there was some sort of speculation about the Kuwaitis looking at BP's chemical assets. Now as one thinks about that, how should we think about your arbitration that's going on over there or even potentially the Kuwaitis revisiting K-Dow?
Yes, I can't speculate on a speculation. I think you'd appreciate that Hassan, but we're in very good joint venture partners with the Kuwaitis. We have this issue, which is being arbitrated. We're still very positive about that. We believe we have a strong case. It doesn't affect our existing assets there. It's being done with all the right procedures. And early next year, we should have an outcome. And of course, as Kuwait PIC seeks to expand, we always get asked and talked to, and it has to fit our strategy up to and inclusive of whether they want to buy into any of our assets.
Okay. Thanks, Hassan. We're going to have to end the Q&A at this point. I'd like to turn it over to Andrew just to make a couple of closing comments.
Yes, I would just wrap up by thanking everyone for the call and the questions. We believe that we had some issues in the quarter. We weren't very happy with them. We did fix them. We also believe we had a strong quarter. We actually looked at all of our key indicators. We had momentum in demand, margins, EBITDA, cash flows, synergies. Advanced Materials is outperforming. Our synergies are ahead of schedule. We have good strength in a lot of our other businesses including Basics.
So I would say to you that going into the next quarter, we believe the outlook is good. Our business is strong, and we have marginal momentum and we can deliver on the R&D and innovation promise of this new portfolio. So I would say that we've got the issues behind us, and we're into the second half of the year with strength.
All right. Thanks, Andrew, and thanks to all of you for joining us this morning. We appreciate your interest as always in The Dow Chemical Company, and we look forward to speaking with you more soon.
And that concludes today's teleconference. Thank you for your participation.
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