Apr 26, 2008
Operator
Good day, and welcome to the Dow Chemical Company's First Quarter 2008 Earnings Results Conference Call. Today's call is being recorded.
At this time I would like to turn the call over to the Corporate Director, Investor Relation, Kathy Fothergill. Please go ahead.
Kathleen C. Fothergill
Good morning, everyone and welcome. As usual we are making this call available to investors and the media via webcast.
This call is the property of the Dow Chemical Company and any redistribution, retransmission or rebroadcast of this call in any form without Dow's express written consent is strictly prohibited. On the call with me today are Andrew Liveris, Dow's Chairman and CEO, Geoffery Merszei, Dow's Executive Vice President and Chief Financial Officer and Jeff Tate, Manager in Investor Relations.
Around 6.30 this morning, April 24th, our earnings release went out on PR newswire and was posted on the internet on Dow's website dow.com. We have prepared some slides to supplement our comments on this conference call.
The slides are posted on our website, available on the presentations page of the Investor Relations section or through the link to our web cast. 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 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. Our earnings release as well as recent 10-Qs, 10-Ks and annual reports are available on the internet at dow.com in the financial reports page of the Investor Relations section.
Starting with the agenda on slide 3, Jeffrey will lead off with an overview of the first quarter. I will discuss the operating segments and then Jeffrey will update you on actions we have taken to advance our strategy and describe Dow's outlook for the months ahead.
After that we will move to your questions for Andrew and Jeffrey. Now Jeffrey; lets move to slide 4 and your comments.
Geoffery E. Merszei
Thank you, Cathy and good morning everyone. Now I want to start today's comments on a high note, because I believe Dow's performed exceptionally well in the first quarter, given the challenges of a weaker U.S.
economy and significant increases in raw material cost. In fact, if I could sum it up I would say this quarter was about balance.
We struck a good balance between taking fast and aggressive action on short term business challenges and making progress to our ultimate goal of transforming Dow into an earnings growth company. And here you can see the highlights of the quarter.
We delivered record quarterly sales with broad based price gains and volume growth in emerging geographies. For example, we posted volume gains of 7% in China, 4% in Brazil, 11% in Argentina and 14% in Russia.
Our stand out business for the quarter was clearly Dow Agro Sciences, which set a quarterly record for both sales and EBIT. Sales increased 27% with an 11% jump in price and a 16% jump in volume.
And once again, we posted strong and consistent equity earnings of $274 million. This was the fifth consecutive quarter in which equity earnings were above $250 million.
Now, all of this good performance has occurred despite the fact that the raw material cost rose 42%, that's $2.2 billion year-over-year. This was the largest quarterly increase in the Company's history and nearly equal to the increase we experienced for all of last year.
Now as you can see on slide five, all of this led to earnings per share of $0.99 versus $1per share in the same period last year. I believe a remarkable achievement considering the challenges we faced during the quarter.
These results are evidence of our strategy at work. Over the past several years, we have taken many deliberate steps to transform Dow to an earnings growth company, such as investing in our performance businesses and growing our global footprint.
In the first quarter, our combined performance businesses posted a volume gain of 6%, reflecting both organic growth and growth from acquisitions. From polyurethanes to epoxy systems; to Dow Wolff Cellulosics, last year alone, we announced 11 acquisitions, all of which are consistent with our strategy to preferentially invest in our performance businesses.
Now, these bolt-ons have moved Dow further downstream, where we are closer to the customer and the marketplace. And as a result, we are better able to deliver total solutions that demand higher margins.
And we are delivering value. For example, our polyurethane systems business has consistently delivered higher margins than we could achieve by selling the same products through our components business.
And as I said, Dow AgroSciences posted incredible growth. Again, this did not come by chance but because of the hard work we have done to take costs out and to grow through acquisitions and investments in new technologies and new products.
Dow AgroSciences' results in the first quarter speak for themselves. Now let's talk about geographic strength which was another important factor in our results for the quarter.
Dow has two thirds of its business outside of North America, with significant presence in many emerging geographies where growth is robust. And our joint ventures have three quarters of their sales outside of the U.S.
Now this combination of international business exposure provided Dow with protection against a weaker U.S. economy.
Growing our performance businesses and expanding our global footprint has been done with a view of the long term. We know we must also deliver solid results in the face of short term challenges as well, such as rapidly increasing raw material cost and the current weakness in the U.S.
economy where housing and automotive continue to be a drag on results. As raw material cost increased to all time highs, we moved quickly to raise prices across the company.
Here our expertise and price volume management played a critical role, both in our performance businesses, as well as in our Basic segments. Our Basic portfolio performed very well.
Basic Plastics posted robust price gains, in fact more than 30% in North America and more than 20% in Europe and Latin America. Volume was only down slightly, 3% at a global level which was partly due to capacity reductions in North America and Latin America in 2007 and to somewhat weaker industry demand.
But, the good news is we have not seen any significant decrease in demand outside of North America. In summary, I believe the first quarter was a very good quarter indeed.
One in which the balance execution of our strategy delivered the strong results. At this point I'd like to speak briefly about the performance of our joint ventures, whose results were an important factor in the success of this quarter.
Slide 6 should be a familiar slide, since we have shown it in the past. EQUATE and MEGlobal had a very strong quarter.
As Dow's Corning, the short term spike in key raw material costs negatively impacted performance. However, we still expect Dow Corning to deliver robust growth in 2008 and excellent full year results.
And in an effort to bring more clarity to the value that these JVs generate, I would like to introduce some new data on our principal joint ventures that we will be providing each quarter. By the way, a list of our principal JVs is supplied in the appendix of today's presentation.
We will now report on sales, EBIT and depreciation and amortization for our principal joint ventures each quarter, as shown on slide 7. Here you can also see Dow's proportionate share of these amounts.
On slide 8, we have calculated the equity earnings and EBITDA. Under the equity method of accounting for joint ventures, revenue, EBIT and depreciation and amortization of our joint ventures are not consolidated in Dow's income statement.
Just a bottom line effect of these items is included as equity earnings. So the result investor that use EBITDA as a measure may not fully appreciate the value of Dow's joint ventures.
As you can see Dow's proportionate share of the EBITDA of these joint ventures is significantly greater than their contribution to Dow's equity earnings. More information about these principal joint ventures is included in our recently updated joint venture white paper available on our website.
So, on that note let me hand it over to Kathy who will provide additional detail on the performance of each of our operating segments.
Kathleen C. Fothergill
Thanks, Geoffrey. Starting with slide 9, for the fourth consecutive quarter, Performance Plastics posted year-over-year gains in both price and volume.
In Polyurethane Systems, the higher volume came both from the HyperLast acquisition and from organic growth as we continue to shift more of our components business into downstream higher value systems. While volumes for Dow Automotive and Dow Building Solutions was down the decline was relatively modest, as growth internationally mitigated lower volume in the U.S.
The picture in Dow Epoxy was mixed. We had a good start with our Epoxy systems business bolstered by three acquisitions late in 2007.
We intend to pursue the same model with Epoxy that has been so successful in polyurethanes, moving downstream to higher value systems applications. Overall volume in Epoxy was down because of our exit from the Peroxymerics business and because we decided not to chase business in Intermediates where margins are compressed because of added industry capacity.
For the segment overall, margins were down because of higher raw material and supply chain costs despite higher volume and aggressive action on price. Moving to slide 10, Performance Chemicals had a good quarter with strong volume and higher price.
The year-over-year decline in EBIT was focused almost exclusively in Dow Latex, which was impacted by lower demand for acrylic latex used in architectural codings. Margins were also squeezed in SP Latex used in paper coating and carpet applications, where the rise in raw material costs outpaced price increases.
We saw good volume growth in SP Latex for coated paper in Europe, Latin America and in Asia-Pacific with the recent startup of our facility in China. Designed Polymers turned in a strong performance with higher price, higher volume and higher EBIT.
There are a number of high quality, high growth businesses in this portfolio including Dow Water Solutions, Dow Wolff Cellulosics and smaller businesses like ANGUS Chemical and Specialty Polymers, which contributed to top and bottom line growth. Slide 11 highlights our star performer this quarter, Dow AgroSciences, which benefited from the strong industry conditions that you've read so much about.
But these outstanding results didn't just happen. Dow AgroSciences has developed an excellent portfolio of crop protection chemicals which stands them in good stead at a time when farmers are trying to maximize the yield of high value crops.
We also saw higher price and volume in our seeds business in the quarter. Of course the weather is always a factor in Ag results.
There was a very early start to spring in Europe and early season purchases of cereal herbicides boosted sales. It later turned quite cold.
So, we are not sure how the seasonal pattern in Europe will shake out this year. However, we are confident that DOW AgroSciences will continue to show very strong growth year-over-year.
Shifting to the Basics side, on slide 12 Basic Plastic's result show our focus on price volume management. In the light of the extraordinary run-up in feedstock and energy costs, we pushed price up by 24% and we're still unable to fully recover the cost increase.
In Polyethylene, volumes up slightly in North America and Europe as customers turned somewhat cautious, buying only what they need. This lower demand in North America and Europe was partially offset by strong increases in Asia Pacific as exports from North America continued to be advantaged versus local production.
Polypropylene volume was impacted by the shutdown of our plant at St Charles operations in Louisiana in December of last year, as well as planned and unplanned turnarounds at other Dow facilities on the Gulf Coast. Industry conditions for Polypropylene were somewhat soft, reflecting ample supply and slower demand for durable goods such as carpet and appliances.
In Polystyrene, margins were compressed as higher prices were not enough to offset a significant rise in raw material costs. Year-over-year Basic Chemicals, slide 13, reported sharply higher price and slightly lower volume.
In Core Vinyl's, volume declined due to the combined impact of the weak PVC industry conditions in North America and Dow's exit of the Caustic Soda business in western Canada at the end of last year. Margins for Caustic were significantly up, from a year ago but the impact of this improvement was masked by a sharp decline in margins on the vinyl side.
As you know, chlorine has many high value uses in Dow, in polyurethanes, epoxies and agricultural chemicals for example. All of which are reported in other operating segments.
So, Dow's basic chemicals segment doesn't reflect the full value of the ECU. Ethylene Glycol reported strong year-over-year improvement with most of the gain coming from higher results at our JV's including MEGlobal, EQUATE and OPTIMAL.
One final data point, our operating rate for the quarter was 86%, down 1% from a year ago and from fourth quarter, principally because of a higher level of planned turnarounds. That wraps up the financial review of the quarter.
Now, I would like to turn the microphone back over to Geoffery for his update on strategy and outlook.
Geoffery E. Merszei
Thank you, Kathy. There are a number of notable achievements in the first quarter which support key elements of our strategy.
These elements are growth, innovation, joint ventures, and last but not least, financial discipline. Now, starting with growth, on slide 14, Dow AgroSciences announced it will further expand its plant bio-technology business with the acquisition of Triumph Seed here in the U.S.
Triumph markets sunflower, corn and sorghum seeds across the U.S. and in approximately 25 countries.
And moving on to Latin America, Dow announced a feasibility study to expand TDI productions in Brazil. Dow is the number one producer of TDI in Latin America and a new expansion will help retain our leading position as well as fuel growth by meeting increasing demand for polyurethane products in this fast growing region.
We also announced plans to break ground this year on the state of the art membrane for alkaline production facility in Freeport, Texas. Now this new energy efficient facility will provide chlorine feed stocks which are critical to Dow's performance businesses.
Dow Water Solutions announced that its FILMTEC reverse osmosis membranes are being installed at three waste water reclamation and reuse facilities in conjunction with the 2008 Beijing Olympic Games. And PetroChina Petrochemical Company selected UNIPOL, polypropylene process technology, for its new facility in China.
The world-scale facility is the fourth polypropylene plant within the past 24 months to license this technology in China. Under the topic of innovation; in the first quarter 32% of sales came from new products introduced in the past five years.
Now, this is consistent with our past performance in this area. Dow Building Solutions introduced STYROFOAM SIS brand structural insulation sheathing, the first ever three-in-one solution that combines structure, insulation and water resistance in one convenient product.
We also received final approvals for an innovative new polycarbonate product. A leading optical media company, as well as two of the world's largest CD and DVD replicators, announced that a new Dow polycarbonate product will now be specified for use in CDs and DVDs and possibly high-definition DVD in the future.
Innovation at Dow Automotive was also recognized in the quarter. Automotive News Magazine bestowed its highest honor, the 2008 Pace award to Dow Automotive for its IMPAXX energy-absorbing foams, which help create safer vehicles without adding weight.
Moving to joint ventures, I'm happy to report discussions are going very well on our announced joint venture with Petrochemical Industries Company of Kuwait, and we remain on schedule to close, by latest end of the year. Our joint venture with PIC is consistent with our strategy to grow our basic businesses by creating new companies that can fuel their own growth.
As an alliance between a world-class chemical company and one of the world's leading oil producers, this new company will be well-positioned to capture growth in key geographic regions such as China, India and the Middle East. We also announced plans to build a new specialty elastomers train with our joint venture partner, Siam Cement in Thailand.
When completed, the new facility will supply customers in the fast-growing Asia-Pacific region with some of the most technologically advanced plastomers and elastomers in the world. Now, this investment is consistent with our strategy to invest in fast-growing regions, such as Asia-Pacific.
And one last comment about joint ventures, EQUATE Petrochemical Company was honored with the first Corporate Social Responsibility Award in Kuwait. The award recognizes several ambitious programs EQUATE has underway that serve its employees and society as a whole.
So let's move on to one of my favorite subjects, financial discipline here on slide 17. Capital spending amounted $359 million.
We remain on plan to deliver CapEx at a full year target of $2.2 billion, roughly equal to our level of depreciation. Now, regarding share buybacks, we repurchased 10.8 million shares in the first quarter the most shares we have purchased in one quarter in over 10 years.
Since the first quarter of 2006, Dow has spent $2.5 billion buying back 61 million shares. And as part of our active portfolio management process, evaluation of our business mix continues.
In February, we announced the formation of a new business portfolio, appropriately named Dow Portfolio Optimization. Now, the charter of this new business group is to evaluate and define a value-creating path forward for select Dow businesses.
The goal is to find appropriate growth opportunity for these businesses or to divest them. Another example of active portfolio management in the quarter was the announced shutdown of rubber assets in Berre, France.
This is consistent with our strategy to redirect technical resources and investments to performance businesses. Moving on to working capital, admittedly, here we have some work to do.
While our day's sales outstanding and accounts receivable is a very tight 38 days, our day's sales of inventory has crept up to 67 days. The reasons for this include an increase in export businesses from North America, which lengthens the supply chain.
The deliberate building of inventory and anticipation of some second quarter turn around and changes in product mix. Now this said, we are committed to optimizing our inventory levels.
And finally, on financial targets return on capital was 14% and return on equity was 19%, both solid numbers. So, as we wrap up today's prepared remarks, let's spend a few minutes on our outlook.
At a macro economic level, we are seeing softness in the US and customers here are taking a more cautionary approach to their business. As for Europe, Western Europe is slowing by holding out well and Eastern Europe remains strong.
And the rest of the world remains healthy. Turing to DOW, we expect second quarter to be another good quarter.
We anticipate continued growth in region outside of North America and robust growth in emerging geography, which constitutes today 28% of our sales. With more than two thirds of our exposure internationally, we are well positioned capture growth in Eastern Europe, Latin America, Asia Pacific, India, and the Middle East.
We also see another strong quarter for DOW Agro-sciences plus continued growth from other performance businesses. At the same time, we know raw material cost are going to be a key challenge, so we are keeping the pressure on price volume management across our entire portfolio.
In closing, I believe our strong global footprint promises.... I believe our strong global footprint, promising growth opportunities of both a geographic and business level and continued focus on price and volume should deliver another solid quarter.
Thank you very much, at this time, I would like to open it up for questions.
Kathleen C. Fothergill
Thanks Jeffery, that wraps up our prepared remarks. For your reference, the copy of these remarks will be posted on Dow's website later today.
Now we will move on to your questions. Before we do though, I would 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.
Clarissa would you please explain the Q&A procedure. Question And Answer
Operator
Certainly [Operator Instructions]. We do ask that you limit yourself to one question and one follow-up.
We will take our first question from Gregg Goodnight with UBS.
Gregg Goodnight
Good morning all.
Kathleen C. Fothergill
Good morning, Gregg.
Gregg Goodnight
Could you please update us with respect to your anticipated start of timing for your major projects, I am referring to the HPPO project and the EQUATE II project. And secondarily, do you expect either of these projects to deliver meaningful earnings this year or is it next year that we will see more of the impact.
Andrew Liveris
Hi, Gregg, it's Andrew. On the HPPO project with BASF in Antwerp, that project has had some delays, so we expected to be back half this year in terms to start up on the EQUATE expansion that will come up in phases, the third quarter will see the ethylene and EG ...EOEG plant come up and the poly ethylene will come up in the early part of next year so there will be some impact from that and the PO project later in the year.
Gregg Goodnight
Okay, outstanding. Would you also comment on your anticipated margins for HPPO, just directionally, would you think that your, when the unit gets running, you going to deliver margins in excess of what are currently being seen by alternate technologies like POSM?
Andrew Liveris
Well, clearly the announcement that both Dow and BASF made when we announced the building of that plant, we referenced to lower capital intensity, more energy efficiency and lower waste as three major improvements compared to POSM. We stick by those three statements and that was in an energy world of three years ago.
In an energy world of today, that's even better so, obviously you have a new asset, so you've got to; of course, go through a high capitalization base but we believe it's competitively advantaged versus POSM. And I believe, as a consequence of that, and I speak for Dow, our strategy of Geoffery, referred to it in his remarks value-add by taking the PO to rigid polyols and onwards to PU systems.
This will add new margin to us over the short to medium-term.
Operator
We will take our next question from Don Carson with Merrill Lynch.
Don Carson
Thank you, a couple of Ag questions. First, Andrew, can you talk a bit about your U.S.
corn seed outlook, both near-term and longer term? Specifically, just wondering whether you think you can gain share this year with your improved trade offering.
And I know that Jerome Peribere set a pretty ambitious goal of becoming the number three U.S. corn seed company say by 2012 or so?
Do you think you are on track for that? And then the second question on Ag would be, typically you do about 35% better in the first quarter.
Was this a real pull forward, given some of those unusual weather conditions in Europe or do you think this kind of strength is sustainable into the second quarter?
Andrew Liveris
On the first, good morning Don, on the first, the market share is pretty much as is right now. The real accelerator for us, as I indicated and Jerome indicated late last year was the SmartStax announcement, will really occur a couple years out from now so the fact that we're holding steady against, as you know, formidable competition in the corn sector is a strong statement of Dow Agro-sciences current position, but doesn't speak to share gain, to answer you specifically.
And really, as we look at sequential quarters here, we'll see the same pattern as last year's Q1 to Q2. We expect the same to repeat this year.
Still a very good quarter for Ag, but at the same time, to the extent there's been a little bit of pull-through, Kathy referenced the seasonality factor within Europe, where it started early but it went cold. So, we expect the same pattern
Operator
We will go next to David Begleiter, Deutsche Bank.
David Begleiter
Thank you, good morning, Andrew, as we approach the conclusion of the PIC, JV, is your thought process still the same, that there are no large acquisitions visible, you would deploy that cash to share buybacks more aggressively.
Andrew Liveris
Yeah sure, good morning David, I mean, clearly, as we go through the year, I've repeated to many of you and so has Geoffery, that our discipline is intact on the M&A front. We've had several years of strict discipline, financial and strategic criteria, we are going to go through the year and frankly, the share buyback option as the Kuwait deal looms to close, becomes more and more probable and we've always said we're going to preserve our optionality in case one of the targets we've been interested in now, not just for a month, but for years if these targets become more realizable, we will look at them, but I think the probability waits heavily to share buyback, to your question as the year goes by, what you'll see from us is patience and prudence and discipline and as the Kuwait deal, as Geoffery mentioned in his remarks gets closer and closer to- through the higher due diligence phase to close, the chances of share buyback increase quite dramatically.
David Begleiter
Should we expect Q1 level of buyback to be similar for Q2 and Q3, 11-12 million shares?
Geoffery E. Merszei
Yes, David, Jeff here. I think we've been pretty consistent with how we've been executing this program.
We've been averaging about $400 million worth 10 to 11 million shares and we also indicated to you early last year that we probably complete program by mid this year and we are on target.
Operator
Our next question comes from Jeffery Zekauskas with JP Morgan.
Jeffery Zekauskas
Hi, good morning.
Unidentified Company Representative
Good morning (multiple speakers)
Jeffery Zekauskas
I couldn't follow your comments on epoxy and urethanes as well as I might have so, Performance Plastics had EBIT down about 25% in the quarter year-over-year, is that the order of magnitude that epoxies and urethanes was down on an EBIT basis or were there EBIT you know better or worse than that 25%?
Kathleen C. Fothergill
We are not going to give you EBIT business by business, Jeff.
Jeffery Zekauskas
And just is it more than 25 or less than 25?
Kathleen C. Fothergill
I would say that those two probably let' see, I'm looking at these things here. Not too different probably a little bit less than 25.
Jeffery Zekauskas
Okay,
Kathleen C. Fothergill
Because you have housing you know you'll have the housing business, which would be down certainly on a percentage basis more than that.
Andrew Liveris
And if I would just try, Jeffery, they are difference because, exactly where Kathy just ended up, they expose different things. Epoxy is much, much more exposed positively to electrical laminates and the growth in Asia.
So they saw what I would call mix issues out there and slowdowns that occurred, which will catch up, so we're not worried about that at all. Their coatings exposure is not as housing-related as polyurethanes, because they're in industrial coatings and the oil and gas business, and all the stuff they serve in coatings is very robust.
So it's disproportionate.
Jeffery Zekauskas
Thank you. For my follow-up, can you remind me again when the PIC deal is supposed to close, precisely and whether there is any change in financial terms since you disclosed the Memorandum of Understanding?
Geoffery E. Merszei
Yes, Jeff, let me make a few comments on that. First of all, we don't expect any change in the financial terms.
And the discussions in fact, our discussions are taking place as we speak. There have been no showstoppers.
The site visits have been completed and we are very confident that we will close the transaction still this year.
Operator
Our next comes Mark Connelly, Credit Suisse.
Mark Connelly
Thank you if we look at the ag chemical part of the business and we stripped out new product launches can you give us a sense of what pricing and margins are doing on the existing business? I'm trying to get a sense of what relative pricing power is like?
Kathleen C. Fothergill
The new product launches, I would say, are relatively small part of the total. They represent a fairly small percentage of the total revenue.
So, the margin stuff that you're seeing for the total segment is principally indicative of what existing businesses are like.
Mark Connelly
Okay. And average prices are they up low single-digits, mid- single digits?
Kathleen C. Fothergill
No the prices are up, in Ag we have what was reported externally, it was it was like 16% in Ag prices
Mark Connelly
Across the chemical side?
Kathleen C. Fothergill
Well, it's mostly again chemical is most of our portfolio.
Mark Connelly
Right
Kathleen C. Fothergill
So, you are going to see that in But they were up in a similar manner actually, both in chemicals and in seeds.
Mark Connelly
Okay. And just a follow up on with respect to the Dow Corning you said it was short terms spike in raw materials I'm just wondering did the nature of the volatility give you any different view of the normalized contribution of that JV or its ability to help you in a cyclical trough?
Unidentified Company Representative
No, Mark, in fact this was a unusual kind of spike and in some raw material cost that occurred late January through February in fact the prices have come down and so in fact overall we don't expect it to negatively impact the performance that was planned for Dow corning for 2008 and we expect continued growth in the earnings that we've been that the experienced and scene coming out of Dow Corning over the last couple years.
Kathleen C. Fothergill
Okay. I just want to make one comment, Mark, I apologize I was looking at the volume column the price in Ag is, its 11%.
But it is similar in both chemicals and in seeds.
Operator
Our next question comes from Sergey Vasnetsov with Lehman Brothers.
Sergey Vasnetsov
: Good morning
Unidentified Company Representative
Good morning Sergey.
Sergey Vasnetsov
I heard some initial positive comments in the industry on extra ethane availability in Kuwait, and this could allow more of the highly efficient plants for you to build there in the future ethane Glycol maybe even a cracker, what's your outlook for the chances for the Kuwait 3?
Andrew Liveris
Yes Sergey the comments you have been hearing and staying in the public domain speak to the north field and I think that's what you are referring to and yes its wet gas and I think there's many companies who are, you know, from oil and gas point of view looking at partnering with Kuwait Petroleum. Clearly, our incumbency with PIC, KPC, EQUATE I, EQUATE II and that all opens to and now, the opportunity that will North Fields will present us is one of the, you know, basic reasons, why this partnership makes enormous sense, I mean, we clearly as a new joint ventures as we launch our company here the one have closed this year, and will look overseas for investment in the Chinese and India's, but for sure they will look home and home being Kuwait so we think there is great likelihood of a new project out there in the future, we won't make any public statements our partnership cements that, but no question...
that availability looks increasingly likely.
Sergey Vasnetsov
And that's good news. Could you please give us some update on the Russian oil project?
Andrew Liveris
Doing well, you know, as we promised and as we've talked about since we announced out Kuwait deal. One of the things that we said is that every joint venture stands alone and the interfaces between joint ventures is something that we are pretty good at and so we've been working very hard.
Making sure as we get closer to the Kuwait deal that very critical project as Saudi ARAMCO rest in your project is as critical to Dow as any project we have out there in fact, probably a defining project in terms of the building blocks for our performance businesses as well as some basic businesses is going very well. We will get to the stage of that this year, everything is on track, the partnership is great.
You know we are in regular dialogue as Geoffery said, with the Kuwaitis at a team level we had equal amount of resources pointed at the Saudi project and we are very, very, confident as it that will proceed as county plant.
Operator
Next we will go to P.J. Juvekar with Citi.
P.J. Juvekar
Yes hi good morning.
Unidentified Company Representative
Good morning P.J.
P.J. Juvekar
Couple of questions. First, on the financial side, your unallocated expenses were about 132 million which was quite low compared to any of the quarters last year and I know hedging gains go in here was there anything particular in there any hedges or any items that you benefited from?
Geoffery E. Merszei
Yeah, P.J., let me quickly address that and you're correct. We're a little bit out of the range.
If you recall, I think in the past what we've said was that, well, first of all, we regularly see quite a bit of movement in that category. And what we said for planning purposes, you should use a level of around $150 million to $200 million per quarter, which I think is a reasonable estimate.
Now, it just so happens that last year, we were above that range because we had some unique items we had the $40 million that I think was franchise tax accruals. And a special performance-based employee bonus that brought it up to a level of 250 something million, $257 million.
This quarter, we had lower accruals for performance-based compensation and for our employee stock purchase plan because, of course, the lower level of the stock price. And we also had some benefit coming from an excellent performance from our insurance operation as well as some hedging gains as you have pointed out.
P.J. Juvekar
Okay. Were the hedging gains significant or...?
Geoffery E. Merszei
No, Nothing out of the ordinary. It's all part of hedging some of our operational exposures.
P.J. Juvekar
Okay, and one question for Andrew. I know everyone wants to know what are you going to buy.
But is there anything that you want to divest, particularly in specialties. And maybe that's the goal of your portfolio optimization group.
Because as you pointed out in the past, commodity specialty products are getting commoditized and rather waiting for them to be a complete commodity, why wouldn't you sell them or put them in the Kuwaiti joint venture?
Andrew Liveris
Well, Yes, I mean, P.J. as always, you're very good at putting the answer to the question you pose in your question, which is great.
I mean, all of you who are following us know exactly what you just articulated. One, we have a business portfolio optimization group for a reason, and you pointed out the reason in your question, which is the commoditization of certain businesses and assets, and whatever you categorized them at, including the performance businesses.
And that speaks to, obviously, what we've done in the last several years, which is 92 factories shut down, and 42 sites exited, and 38 businesses sold. You'd expect us to continue to prune from the bottom as these new feedstock hydrocarbon commodity realities become, obviously, alive.
And secondly, the solution that you spoke to, yes, we're going to get our joint venture formed and we will. But once that joint venture forms, that creates an interesting and future possibility at home for some of these pseudo-commodities and we don't dismiss that, nor do we dismiss it in the Saudi ARAMCO opportunity, by the way, so, you can expect Dow's asset-light strategy to keep coming to life in terms of how we become number one in the world in terms of competitiveness, given these new input costs.
Operator
We have a question from Peter Butler, Glen Hill Investment.
Peter Butler
Good morning.
Andrew Liveris
Good morning.
Peter Butler
I'm hearing from my Kuwaiti source that, in fact, that you guys may be expanding the scope of this Kuwait joint venture in your negotiations? Is that correct?
Andrew Liveris
Morning, Peter. As I just seem to cater in the answer to P.J.'
s question, the opportunities to do more are clearly top of mind for both of us. And we really do have job one, which is closed to be as announced, as intact, as promised in our early announcements, both of us are very committed to doing that.
The due diligence is working perfectly but I think your notion of doing more and as indicating to Peter's question, will be of top of mind and there is some good logical fits that can occur and frankly, creating this powerhouse of a joint venture, this unbelievable opportunity to marry a feedstock-rich company, state-owned feedstock-rich company that has global expansion in its sites with a petrochemical franchise like ours gives us more scope opportunities, but frankly Peter, you know, trying to keep this all orderly and managed in scope has closed the deal and then we will go to phase 2, clearly that's on top of mind thought here. But no (inaudible) dismiss your hypothesis or even the statement you made.
Peter Butler
Okay, I'm a bit puzzled by your statement in the guidance for the second quarter, you are saying that, you know, this is with the background that your fourth quarter earnings were down, and first quarter was a little lower and yet you are saying you expect another the second quarter to be another great quarter. Does Dow have a new standard for earnings now and the ambition is to have you know just a small decline?
Geoffery E. Merszei
Peter, you know, these comments are in the context of the environment that we were working, I mean, you know, when you face increased hydrocarbon energy costs in one quarter, it equals a higher cost equal to the entire, closely equal to entire of the year, prior year and then ending up with these type of results with an economy that is highly cautionary here in the United States, in that context, I think we have done extremely well.
Andrew Liveris
And Peter, if I can add, everyone on the call I'm sure is very conscious about strategic drive here. Strategic drive, we've said it over many quarters now, is to create an earnings-ridge, not a decline to a trough.
And we've made statements, I made it on the last earnings call that we would earn north of $3 at the next trough. I'm the last to keep wanting to see a decline on a year-on-year or sequential.
But given these headwinds Geoffery just referenced, given our strategic moves paying off already through the portfolio moves we've made, inclusive of our joint ventures, we have arrested the decline and despite these headwinds, we still have got very good cash flows and earnings power here, and frankly, it's because of our strategy working and we've committed ourselves to changing our earnings profile. That's our strategy.
The day that will arrive, when that profile is transformed, we will start talking about year-on-year earnings inclines and quarter inclines, which is what this management team is driven to do.
Operator
Our next question comes from Scott Burk, with Bear Stearns.
Scott Burk
Just one final question about how the cost increases are going sequentially? Significant cost increases year-over-year, but what does that look like sequentially, fourth quarter to first quarter?
Kathleen C. Fothergill
Sequentially, that's about $500 million.
Scott Burk
Okay. And in terms of the price increases that you pushed through in January and February, is there going to be a benefit going into the second quarter that, you've had some of the cost increases slowed down, it sounded like in I'd say, March.
Are you going to have a benefit that may help boost second quarter numbers? And how does that look going out to the second half of the year?
Andrew Liveris
Well, clearly I think there is no question that we had a phenomenon cost-push based price increased environment in the first quarter and to the extent that some carry over on, some of the bigger products like Polyethylene that's being customers push back as you might expect. There is a slow down in the US we have been very upfront about that and no question was seen that volume slowdown having an affect on price increase environments in the second quarter.
What we are saying is that internationally would better off because of our mix and because of the robustness of the demand cycles out in the China, India's, the Russia's etcetera., In addition everyone is seen the oil price, all of our competitors have Naphtha and Naphtha crossing 900 bucks a ton, out in Asia means many the crackers out there that even cover cash cost. So, there is a price momentum even on the most basic of products in our competitive base and I know the Middle East producers including ourselves has an advantage but so far whether EOEG or polyethylene or fundamentally they follow the price increases.
So, I would say there is some carry over, it's not as strong in the US clearly but international helps. And, that's basically what you saw in the first quarter.
Scott Burk
Okay, and can you say exactly how much you spent on share buyback in the first quarter?
Geoffery E. Merszei
Just slightly above $400 million.
Kathleen C. Fothergill
Yeah, it's about I think 410.
Geoffery E. Merszei
Around 410.
Operator
Next we will go to Mike Judd with Greenwich Consultants.
Mike Judd
Yes, good morning. You mentioned that you have got some new business in your polycarbonate resin business and I guess I were to assumed that CDs and DVDs, are I'm looking at it's being sort of a durable type of application, in that business do you have some sense as to how much of that business is durable versus your non-durable type applications that's my first question and then secondly, I'm interested in what is Dow's position globally in terms of pounds or whatever way you want to be basically described it?
Andrew Liveris
Well, I'll tackle the last question first, around polycarbonate, which as, I think you know, is destined for our new joint venture with the Kuwaitis. So, that will go in there one of the reasons we have done that is but frankly, the position DOW has globally, is we are number five in the world and you know building ourselves to the top one or two from the position we are in we just didn't feel that that was something we could do on our own and that we needed some big stock back integration, which we can get with the our new partnership, as you know key raw materials there relate to aromatics and that's very key in our Kuwait partnership.
In terms of our position though, we do have two excellent joint ventures one in Japan and one in Korea. It's respectively with Sumitomo and LG.
One of these joint ventures are actually the star of the shop. Both of them perform very well and most of these - and most of their end-use markets is what the Asian market is all about, which is optical media, which speaks to your question, and so you take those two joint ventures - which you don't see consolidated in our top line because they are joint ventures, and if you if you add our share of those joint ventures in our total Polycarbonate business, you will actually see much more balance between optical media and durables.
But if you take the pure Dow business, which is US and Europe, it's more centered around durables, much higher percent and, so I don't know if I am getting at your question, Mike but that's basically to the balance.
Mike Judd
But your position and lets say packing type application or bottles and things like that would be extremely small part of the overall portfolio?
Andrew Liveris
Oh, yeah, very small and if you are relating the question on our baby bottles and all that, we made a deliberate decision to not be in that business, it's less than 1% in packaging as a whole.
Mike Judd
Fair enough; thank you.
Andrew Liveris
Sure.
Operator
Our next question comes from Kevin McCarthy with banc of America Securities.
Kevin McCarthy
Yes, thanks, good morning. Geoff, I appreciate the additional disclosure on joint ventures.
If I wanted to take the EBITDA numbers outlined in slide seven and use those to compute an adjusted EBIT to EBITDA ratio for Dow, I was wondering if you could help me out with the numerator as well. I mean do you have a sense of what Dow's proportionate share of the financial leverage would be for the joint ventures in the aggregate?
Kathleen C. Fothergill
What I was thinking of, Kevin, I don't know if you looked at the JV White Paper that we had earlier... I mean to get an idea of the leverage of the joint ventures we do have at least for the principal joint ventures, what their total debt is and total equity.
I haven't done the calculations, but that is in the JV White Paper. So, is that what you were looking for too?
Kevin McCarthy
I will take a look at that.
Kathleen C. Fothergill
That just has it annually and we won't be able to get that for you quarterly, but we can... you can at least look and see what the leverage of these principal joint ventures is.
And as we have said a few times, the principal joint ventures make up the vast majority of our financial exposure in joint ventures. So you can use this number and then leverage it for the total picture.
Geoffery E. Merszei
Kevin, just a rule of thumb most of these joint ventures have a pretty similar kind of a financial policy to our own. And as you know, our practice has been as a debt to total cap of roughly 40%, give and take 5% up and down.
So, I think that will be probably a pretty fair kind of assessment across most of the joint ventures.
Kevin McCarthy
That's helpful, thanks. And then, Andrew, will you provide us with an update on your Styrenics joint venture with Chevron?
And in general efforts to improve the profitability of that chain.
Andrew Liveris
Yeah I think, Kevin, expect the new joint venture Americas Styrenics to begin operations very shortly, probably next month. We are obviously, once that joint venture launches and we'll look at its envelope and begin to expect the synergies the two parents are very much wanting to get.
The first, of course, is on the downstream, which is polystyrene, which is mostly our contributions, and the second is the upstream, which is styrene. I think the new joint venture management and the new joint venture Board will be intensely focused on making that the number one business in the Americans, I would tell you the focus from the two shareholders remains pretty intense and putting that company together for improving profitability and making that business a growth business again was the reason we formed it.
So no specific announcements but you can expect that joint venture to get right at your question as it launches.
Operator
Our next question comes from Frank Mitsch with BB&T Capital Markets.
Frank Mitsch
Good morning and Andrew congratulations on evening up the series last night?
Andrew Liveris
Thank you Frank I remember the question.
Frank Mitsch
Yes. Your commentary regarding TIC is...
the JV, is very helpful. But in terms of what you're going to do with the cash and I'm curious does the timing of that announcement...
is it predicated on actually the closing of the transaction might we make an announcement before the transaction closes. If you can give any color on what your thought process is there?
Andrew Liveris
Well, the color I provide I think it may be proceed in the first question asked today is around our continual focus on discipline on M&A, I mean in essence I think we've said many times, including on these calls, that the hurdle that has to be overcome with any M&A is share buyback. And we understand accretion is instant on share buyback and takes time on an acquisition.
But we've also said the type of properties we're looking at are basically for growth. And yes, cost synergies play a role in making affordability work.
But we want to grow and we're putting in place a new earnings profile. So focusing in on the businesses and markets that we've talked about, our market-facing units and our performance businesses, many of which we've referenced on this call, means that we're looking at clean buys or as close to clean buys as we can get.
And frankly, Frank, the value proposition has to be right. And as a consequence of that, the discipline has to stay intact.
So therefore, we say no, or we reject books more than we kind of go to the next step. And at any one time, we're looking at many things, but at any one time, it's not likely that something will drop.
And it's based on history. As you can see, we've done 11 smaller acquisitions, as Geoffrey mentioned in his remarks.
The probability is that they will stay small until the right opportunity presents itself that's bigger. Meantime, then, the deadline, if you want to use that term, of the close of our Kuwait deal increases the probability that share buyback will become a reality.
And we're fine with that. I mean, we're preserving optionality and we're doing share buyback.
It's a big and. And that's how we're managing the Company.
That's how we're managing the precious cash our shareholders give us the right to manage. Geoff?
Geoffery E. Merszei
You can... I mean, just one last point, as you know that our $2 billion program, if we stick to the recent trends, will expire by middle of this year as we buy back more of our shares and complete the program.
You can assume, and we've been saying that all along in the last couple of years, that we will have buyback programs in place to... at a minimum, cover dilution and of course subject to board approval, we will regularly be in the market buying back our stock.
Frank Mitsch
Terrific, I think I have received the message there. And in I know Kathy during the discussion of the trends, you said...
mentioned that the second quarter would feature some turnarounds. Can you talk about proportionality between turnaround impact 1Q and 2Q and along the same lines licensing fees proportionately was 1Q an unusually high appearing in terms of licensing fees?
Kathleen C. Fothergill
Let me do the turnarounds first and higher order of magnitude probably going to have around $50 million more of turnarounds in the second quarter roughly than the first quarter and that's more of an increase...that's about the same kind of increase versus last year in a ballpark. And as far as licensing, I can't possibly predict licensing.
That... that really does comes around, but no, first quarter was not unusually large.
It wasn't a whole lot higher than has been in other quarters. Okay?
Operator
Our next question comes from Hassan Ahmed with HSBC.
Hassan Ahmed
Good morning guys.
Unidentified Company Representative
Morning.
Hassan Ahmed
So, clearly commendable that despite this $2.2 billion run up in feedstock costs, you guys essentially reported flat year-on-year EPS. I guess my question is that how much of an offset to those high raw material prices did currency provide.
Now, I fully understand that you don't quantify sort of ForEx benefit and the like but if you could just generally speak about earnings benefit or reduction going forward from currency translation and export opportunities, if the dollar does indeed start strengthening?
Geoffery E. Merszei
Yeah Hassan, let me address that question on currency. I mean we do have a very, very strong international presence.
That, of course, does translate into the benefits of a weaker U.S. dollar.
But keep in mind, our international footprint is very much with a local presence. In other words, we have very large fixed assets.
In fact, if you take, the Euro is really the largest component on the currency side. And in Europe, 30% of our Company's fixed assets and employees are located in Europe.
So, of course, we have a fairly sizable offset on the cost side. I can tell you that on the pricing side, less than one-third of the price increase is attributed to the stronger Euro or the weaker U.S.
dollar. And then, of course, don't forget that in the last quarter or two, there's been a very strong correlation between the commodity prices, i.e., oil and the U.S.
dollar. Historically, the correlation may have been considerably lower, maybe 10%.
But certainly over most recent times, there's been a flight from the dollar to commodities, the metals and oil. And so I would expect that if there were a major correction in the currency market, that you would see a similar kind of a correction on the commodity side which would, of course, also benefit us.
So, that's pretty much what our exposure is.
Hassan Ahmed
Thanks very much.
Kathleen C. Fothergill
Okay, we have time just for one more question.
Operator
Thank you, that question comes from Bill Young with Chemspeak.
William Young
Good morning. I was kind of surprised, given the big increase in polyethylene prices over the last 12 months that your equity earnings in Basic Plastics were higher than they were, given the relatively stable raw material costs in EQUATE.
I realize you mentioned there were some offsets in Equipolymers and Siam Polyethylene, but maybe you could add a little flavor to the situation for us?
Geoffery E. Merszei
Well, you actually answered the question. I mean, we did have offsets coming out of Siam cement and EQUATE.
That's pretty much it. I mean and...
Kathleen C. Fothergill
EQUATE was up. EQUATE was up year-over-year, Bill, as you would expect, because prices are higher.
As you said, and as Geoffery was saying, it was Siam Polyethylene and Equipolymers that were bringing it down which is what we're saying.
William Young
Maybe I'm just giving too much emphasis to the size of EQUATE relative to the others. And secondly, how long do you think the pain will last in the ethylene overcapacity cycle over the next, whatever number of years, realizing that you still expect to earn $3.00 at the trough?
Geoffery E. Merszei
Well, so, the pain, and pain is always relative, right, Bill? I mean, we clearly have said quite a few times and I believe CMAI and others agree with us that we're going to see capacity at the back end of this year that will cause oversupply.
But frankly, the Iranian stuff is still sputtering and it's not all going to come on seamlessly. And to the extent that '09 will have some little more capacity than '10 will have a lot more, then clearly '11.
I think you've got yourself a jagged ride down to an ethylene trough. But remember, we have announced our Kuwait deal.
We've announced all of our low cost investments. We've got Peter Butler's question about or someone's question about the EQUATE expansion; not just the one we're talking about, but the one that we'll talk about maybe in the future.
So we've got mitigants that gives us confidence that our proportionate share of that decline can still, on a proforma basis reach the target we talked about $3 of the trough.
Kathleen C. Fothergill
Okay, well, thank you all I would like to thank you for joining us on this call and we look forward to talking with you on our next conference call in July. Good bye.