July 25, 2013 / 11:15 AM / 4 years ago

Dow Chemical to prune portfolio, profit beats estimates

Cars drive past a plant of U.S. chemical producer Dow near the eastern German village of Lippendorf south of Leipzig March 25, 2004. Reuters/Arnd Wiegmann

(Reuters) - Dow Chemical Co (DOW.N) reported a better-than-expected quarterly profit due to strong margins at its plastics business and higher pesticide sales, and said it was looking to further prune its business.

Dow Chemical has divested non-core businesses representing about $8 billion in revenue since 2009 and is seeking buyers for its polypropylene licensing and catalyst business and its plastics additives unit.

"One-third of our business is in low-cost commodity, cyclical-type business, where my competition is state-owned enterprises," Chief Executive Andrew Liveris said in an interview to CNBC on Thursday.

"My competition is racing to commoditize my products. That means I have to keep working them out of the portfolio and keep moving to areas of high-margin, high-technology..."

Dow Chemical is part of an industry-wide shift among chemical makers away from low-margin commodity businesses into more lucrative products such as pesticides and seeds.

Bigger rival DuPont said on Tuesday it planned to exit its titanium paint pigments business to focus on its growing agricultural unit, where higher sales helped its second-quarter profit beat analysts' estimates.

A Dow Chemical spokeswoman, Rebecca Bentley, did not name the non-core assets the company was looking to divest.

Some analysts pointed out that Dow Chemical's commodity business still accounted for a large portion of its profit and offered a cautionary note on the divestments.

"Dow has to be careful with how much of the commodity business it offloads, given that is what is generating their margin upside," said Stephen Hoedt, a senior equity research analyst with Key Private Bank.

"While a lot of people will be interested in seeing Dow Chemical move up the food chain and be more focused on the specialty businesses, you've got to be careful how far you go there."

Dow shares rose 1.5 percent to $35 in early trading on the New York Stock Exchange.

BETTER SECOND HALF

Dow Chemical said it was well-positioned to deliver year-over-year earnings improvement in the second half of 2013.

A steady climb in U.S. farm income has increased demand for biotech seeds and pesticides to the benefit of both Dow Chemical and DuPont (DD.N).

Dow Chemical's agriculture sciences business gained in the second quarter from strong demand for crop protection products such as herbicides and insecticides, particularly in Latin America.

Sales at agribusiness, which supplies seeds, oils and farm chemicals, jumped 10 percent in the quarter, the highest growth among its six operating segments.

Margins at the performance plastics unit, Dow Chemical's biggest, jumped to 27.5 percent in the second quarter from 20.5 percent a year earlier. The unit reported its sixth quarter of growing margins.

The business, which supplies plastics to toymakers, builders and carmakers among others, generated nearly a quarter of the company's total sales.

Margins of U.S. chemical companies have improved vastly due to cheap shale-derived natural gas, used to produce ethylene, a building block for plastic.

They are investing billions in plants that run on ethane to gain an edge over their European and Asian rivals, who mostly use naphtha, derived from expensive crude oil.

Dow Chemical's net income rose 72 percent to $2.34 billion, or $1.87 per share, in the second quarter, helped by the $2.2 billion it received in damages from Kuwait's state chemicals company for pulling out of the K-Dow petrochemical venture in 2008.

Excluding the arbitration award and other one-time items, Dow Chemical earned 64 cents per share, edging past the average analyst expectation of 63 cents.

Reporting by Garima Goel and Swetha Gopinath in Bangalore; Editing by Saumyadeb Chakrabarty

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