Jul 31, 2009
Operator
Good day and welcome to the Dow Chemical Company’s second quarter 2009 earnings results conference call. Today’s call is being recorded.
At this time, I would like to turn the conference over to Mr. Howard Ungerleider, Vice President of Investor Relations, please go ahead, sir.
Howard Ungerleider
Thanks Regina. 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 The Dow Chemical Company 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; Heinz Haller, Executive Vice President of Performance Products and Systems; and Jeff Tate, Director in Investor Relations. Around 6.30 this morning, July 30 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 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 may reference non-GAAP financial measures. A reconciliation of the most directly comparable GAAP financial measure and other associated disclosures are contained in our earnings release or on our website.
Our earnings releases as well as recent SEC filings are available on the Internet at dow.com. Now, I would like to run through the agenda for today’s call on slide three.
Andrew will begin the call with a summary of our business results and our numerous significant achievements of the last 90 days. Geoffery will then provide additional financial context around our quarterly results, our restructuring and cost synergy efforts, as well as our improving capital structure.
As you will recall, each quarter we are focusing on elements of our portfolio that will give you better insight into key drivers of our profitability. Last quarter, we highlighted our new Advanced Materials division and today we have Heinz, who will share elements of profitability and market success across our Performance Products and Systems portfolio of businesses.
Andrew will then wrap up our prepared remarks with our outlook and what to expect in the coming quarter. With that, I’ll hand the call over to Andrew.
Andrew Liveris
Thank you, Howard and good morning everyone. The second quarter was one of, if not the, most active quarters in our company’s history.
If you look at slide four, I can run through what happened. I’m really very pleased to report that Dow has made tremendous progress against a number of strategic goals that we laid out earlier in the year.
We delivered positive operating earnings in the quarter; we accelerated cost reductions from restructuring activities and Rohm and Haas related synergies and we are ahead of schedule on both fronts. We launched both successful debt and equity issuances and eliminated all of the perpetual preferred stock from our balance sheet, improving EPS by more than $0.05 per share on a go forward basis.
We reduced our $9.2 billion bridge loan by $5 billion. We signed four definitive divestitures agreements that will further deleverage our balance sheet, and we remain on track to deliver $4 billion in asset sales by the end of the year.
We completed an enterprise wide strategic review that confirmed we are on the right path to earnings growth. Today, Dow is comprised of an excellent mix of high-margin, high-growth, lower earnings volatilities businesses.
We will continue to preferentially invest in our Advanced Materials, AgroSciences and Performance portfolios to further increase the percentage of our business that comes from these units. Businesses like Dow Wolff Cellulosics, Dow Water & Process Solutions, the evolving portfolio of Automotive systems, Polyurethane and Epoxy systems and Dow Solid Solutions all have the power to reshape our earnings profile even further toward one that is built on science and technology.
Our ultimate goal, to make Dow a company that is rewarded for its intellectual property and the value those ideas deliver. At the same time, we clearly know what is non-strategic and we are taking quick action to divest those businesses consistent with our practice of active portfolio management.
We will continue to make decisions that move Dow away from its legacy of heavily-integrated, capital-intensive business models. Our asset light strategy would deliver on this goal and we will remain committed to forming a new venture for our ethylene and ethylene derivatives business and today, we are announcing a new path forward for our styrene and aromatics envelopes as well.
I will speak more on this in a moment. So that’s the quick review of the progress we have made at a strategic level.
Let me now speak to our results in the second quarter on slide five. On an operating basis, which excludes certain items we were profitable, delivering earnings of $0.05 per share.
This was the result of accelerated cost reductions, faster synergy achievements and volume gains versus the prior quarter. In fact, this was the first time, since the second quarter of last year where we posted sequential volume gains.
Our Electronic and Specialty Materials, Coatings and Infrastructure and Performance Systems segments all posted impressive volume gains of at least 20% versus last quarter and our Basic Plastics segment also showed marked improvement sequentially, with EBITDA up more than 230% on strength in consumer and industrial packaging. We also delivered significant sequential volume improvements on a geographic basis.
Asia-Pacific was up 34%; India, Middle East and Africa up 27%, and Latin America, up 12%. These statistics also show the differences in the pace of economic recovery, as well as the competitive advantage of Dow’s broad geographic footprint.
These results fully offset a decline in Dow AgroSciences, driven by a number of unique headwinds in the Ag chemical space in the quarter. Geoffery will elaborate more on this in a moment.
Now, I would like to speak to the many significant milestones we delivered in the quarter on slide six. First, an update on our ongoing transformation, which is best shown through our acquisition of Rohm and Haas.
All major integration milestones to-date have been met or exceeded. Our cost synergy program is ahead of plan, both for the quarter and on a run rate basis.
In fact, we have already in only three months, achieved a run rate of more than $570 million against our 12-month run rate target of $780 million and we are moving quickly towards our $1.3 billion synergy commitment related to this acquisition. Another important value of this transaction will be our ability to drive growth.
Short-term and near-term efforts are underway to protect volume and market share, harmonize pricing and credit terms, cross-sell and leverage our market channels and geographic reach, with great progress being made in these areas. We have just passed the 100 day mark since the closing of this transaction.
As a result of the detailed pre-day-one planning, the excellent cooperation between heritage Rohm and Haas and heritage Dow employees and the dedication and commitment by many of our leaders, we have made an outstanding start and are confident in the continued success and value creation of this integration. As announced yesterday, Pierre Brondeau is retiring from his role as CEO and President of Dow Advanced Materials.
I would like to personally thank him for the hard work and tremendous accomplishments made by he and his team in integrating the two business units in such a short time, truly a Herculean task. He leaves, Advanced Materials in a much improved position, on track to meet its operating synergies with renewed customer focus and a stronger operating model.
As for his successor, I have the utmost confidence that Jerome Peribere is the right person to take the helm. He has both the customer-centric mindset and the internal relationships to make Dow Advanced Materials a winner and most importantly, he has successfully run an independent business unit inside of Dow.
He has also been the architect of the highly successful strategy at Dow AgroSciences that has enabled it to evolve into a higher-margin, higher-growth business. As I’ve stated in the past, Dow AgroSciences and Dow Advanced Materials have similar operating models.
Both are highly differentiated and have high-growth and high-margin potential. Jerome’s global experience and understanding of Dow’s overall strategy will help him leverage his experience at Dow AgroSciences to further enhance, strengthen and grow Dow Advanced Materials.
Finally, Jerome leaves Dow AgroSciences in very good hands. Antonio Galindez, his successor is a Dow veteran of 26 years, who currently leads the Global Crops business unit.
He has also been instrumental in bringing the new SmartStax seed technology to market. I have every confidence that he will build on Jerome’s success and look forward to working together with him to make the right strategic decisions in that business.
On slide seven, I’d like to review the progress we have made on our de-leveraging plan. Since April 1, we have reached definitive agreements to divest three of the non-strategic assets we identified for sale on March 9.
We announced the sales of Morton Salt, our stake in Dutch refinery TRN, and our calcium chloride business will generate $2.6 billion of gross proceeds that will be used to pay down our bridge facility. I am pleased to report that we closed the calcium chloride transaction in the quarter.
You will note that this gain impacted EPS by $0.10 in the quarter, which is reflected in discontinued operations. This morning, we announced a fourth major divestment, an agreement to sell our interest in OPTIMAL to PETRONAS for an enterprise value of Dow’s share of more than $724 million and a net equity value of $660 million.
We expect this transaction to close by the end of the third quarter of this year. We also made great strides to improve our capital structure in the quarter.
We executed extremely successful equity and debt issuances, which raised approximately $9 billion in capital and enabled us to retire all of the Series B Perpetual Preferred shares, the most expensive element of our capital structure from our balance sheet. This move was immediately accretive to our common shareholders.
These actions when taken in total, keeps us on track to deleverage our balance sheet. As you can see, we have been managing our business with both focus and precision, and are confident we are on track to position Dow as an earnings growth company.
Slide eight, on that same point, I’d like to update you on the results of an enterprise wide strategic review we conducted in the quarter and the decisions that we have made about the future strategic direction of the company. We’ve established a five year plan that will drive resource prioritization, including capital, expense, and cost management.
A key element of the transformation will be further developing those businesses that are based on science and technology and investing in R&D, where we can achieve long term sustainable competitive advantage. On slide nine, you will see that we will also continue to drive towards higher margin, higher growth, less cyclical businesses that are based on knowledge and intellectual property, which will lead to more consistent earnings growth in the future.
On slide 10, you will see that our R&D team, led by Bill Banholzer, has done an outstanding job of refocusing our R&D efforts on patent advantage sales, which deliver much higher margins, consider this fact. Patent disclosures will have tripled in the past five years.
As you look at slide 11, you will see that we will continue to pursue investments that align with the four economic mega trends we believe will drive growth in the future, energy, transportation and infrastructure, health and nutrition, and consumerism. As I mentioned, our acquisition of Rohm and Haas is a major proof point of this commitment, and we continue to discover numerous growth synergies that will come as a result of the acquisition.
Another outcome of our strategic review was that our asset light approach to basics will continue to be a key component of the transformation, and will indeed be accelerated. As you can see on slide 12, we are committed to staying the course on moving away from our traditional ethylene based integrated production model.
This component of our strategy will enable these businesses to continue to thrive and grow with strategic partners and resource earners, while lowering Dow’s capital requirement. In addition, consistent with our practice of active portfolio management, we continue to take quick and aggressive action to right-size our manufacturing footprint by shutting down ethylene and ethylene derivative assets.
A key outcome of our strategic review was the decision to shut down an ethylene cracker and EO/EG and EDC/VCM production units in Louisiana. These shutdowns are in addition to numerous other ethylene derivative closures that have occurred as part of a restructuring program that we announced in the fourth quarter of 2008.
When taken in total, these shutdowns will reduce our ethylene demand by approximately 30% on the U.S. Gulf Coast, and as a result, we will be eliminating purchases of ethylene from the merchant market, which is approximately 3 billion pounds annually.
This will improve the company’s cost position while fully integrating ethylene production with internal demand. We are also taking action on chlor-alkali.
Since 2007, we have shut down one million metric tons of capacity in North America, again with the goal of better matching our production to internal requirements of our downstream performance businesses. On slide 13, let me close this part of the discussion by saying our transformation is on track.
We are making excellent progress on changing the earnings profile of the company, and we remain fully committed to our strategy and the tough decisions that will be needed in the future to realize Dow’s full potential. Now on slide 14, I would like to update you on the progress we are making on our ongoing divestiture program.
As we have communicated previously, we are committed to not only liberating resources for our growth businesses, but more importantly, deleveraging the balance sheet and protecting our investment grade credit rating. Although we have committed to divest $4 billion in assets by the end of 2009, our potential list of divestments totals $23 billion to $26 billion and through our successful efforts since April 1, we have definitive agreements in place for approximately $3.3 billion of divestments, keeping us on track to deliver against our deleveraging effort.
The proceeds from these sales will be applied to pay down our bridge loan. As for the other potential assets on the list, here is a brief update on where we stand.
Regarding our olefins envelope and related derivatives, outreach and dialogue continues with our Kuwaiti partners, and we continue to have parallel negotiations with two other state owned resource owners for a venture similar in scope to K-Dow. These discussions are proceeding on an orderly and timely basis, and we will have more to say when there is something to be said.
We are progressing in parallel with additional possibilities to strategically position some of these assets in several regional "asset light" partnerships. As you have seen from our results this quarter, these businesses are strong earners and are showing resiliency even in these difficult economic times.
The second grouping that you will recall, are businesses that comprise our Styrenics & Aromatics envelope. These are good quality businesses with significant value potential, but our enterprise-wide strategic review confirmed these are simply not core to our future direction.
On slide 15, you will see that today we are announcing that we are grouping these businesses and more together under the name STYRON Corporation, which will initially be a business unit of the Dow Chemical Company, with an intent to form a subsidiary at an appropriate time. We are appointing a CEO and CFO to head this new business unit.
They will be charged with first streamlining operations and improving profitability. This will better prepare the unit to do business under a different ownership structure in the future, while at the same time generating greater profitability for Dow.
In addition to S/B Rubber and S/B Latex, STYRON Corporation will now include polycarbonate compounds and blends, ABS SAN resins, expandable polystyrene, and polystyrene and styrene monomer. These businesses together have revenues of around $5 billion and employ more than 1,500 people with more than 40 manufacturing locations worldwide.
These businesses serve a broad array of applications, including packaging, durable and consumer goods, coatings for paper and the automotive industry. Our newly appointed executive leadership is well prepared to lead the new company.
Both the, CEO, Mark Remmert, and CFO, Celso Goncalves, are more than 30-year Dow veterans, and each have significant experience in these businesses and are ideally suited for this entrepreneurial challenge. We also believe carving these businesses out as a separate subsidiary makes them more attractive to potential investors or potential acquirers.
The ultimate goal here is to form a subsidiary at an appropriate time in the future. Jim Fitterling, Vice President of Corporate Development, will have executive oversight to guide Mark and Celso, as they execute the best strategic option for Dow.
A third grouping is several standalone businesses, the Rohm and Haas powder coatings business, the FTC-required divestitures, Dow AgroSciences, and others. We continue to pursue strategic options around the businesses on this list, and when the status of any of these officially change or an agreement is reached, we will update you promptly, specifically, with regard to Dow AgroSciences.
Based on our strategic review and our desire to move to higher growth, technology driven, and innovation based business platforms, I can tell you that our current thinking and my personal preference is that this business should be part of Dow’s long term future. With that said, we remain open to exploring all options that will strengthen Dow AgroSciences and position it for growth, while at the same time maximizing value for our shareholders.
As we have said in the past, these options include a strategic alliance and/or part monetization, inclusive of a partial IPO. The important point to remember is, we remained committed to our deleveraging plan and to maintaining our investment grade credit rating while completing our strategic transformation.
Before I turn the call over to Geoffery, I would like to quickly discuss the reporting structure for the new Dow. As you can see on slides 16 and 17, and as you know, over the past year Dow has undergone a period of important change and with this change comes the realignment of our operating segments.
We listened to your requests for additional clarity and transparency and we believe our new operating structure will give you greater insight into the elements of market success and profitability for the new Dow Chemical Company. Now, I would like to turn the call over to Geoffery for an update on our financial performance in the quarter.
Geoffery Merszei
Thank you, Andrew and good morning. Let’s now take a closer look at our financial performance this quarter.
Now beginning with slide 18, on a pro forma basis we reported sales of $11.3 billion, 40% lower than the same period last year, driven by 20% declines in both volume and price. Now, it should come as no surprise that, on a year-over-year basis, our business was down.
Given the current economic conditions, I believe comparisons to the prior quarter offer more insight as to where we stand relative to the steep declines that we experienced in the fourth quarter of 2008. Therefore, most of my comments will refer to pro forma comparisons versus the prior quarter.
With this view, we are observing a number of positive trends. On a sequential basis, we saw 5% improvement in volume, which gained momentum as the quarter progressed and price held flat with the prior quarter, reflecting the hard work of our commercial team.
Our aggressive cost-cutting and expense management actions yielded positive results in the quarter as well. Structural costs were down more than $375 million in the quarter and more than $600 million year-to-date.
EBITDA, excluding certain items, improved 64% to $1.6 billion versus the first quarter. I’m on slide 19.
That said, on a GAAP basis, Dow reported a loss in earnings per share of $0.47. This result was impacted by certain items that reduced earnings per share, such as, the one-time step-up in the valuation of inventories acquired from Rohm and Haas and sold during the quarter of $0.13.
A restructuring charge totaling $0.43 and acquisition-related transaction costs of $0.06 per share. As well as the impact of discontinued operations related to the sale of our Calcium Chloride business of $0.10.
Excluding these items, operating earnings were $0.05 per share in the second quarter. Now, I would like to speak to the volume trends we are observing as seen on slides 20 through 22.
So, here are some specific examples. In Electronics and Specialty Materials, volume was up 22% from the prior quarter on increased demand from inexpensive cell phones, low-cost netbook computers and flat-panel TVs and in Coatings and Infrastructure volume was up 21%, as demand for architectural coatings began to stabilize and traditional seasonal demand patterns kicked in although they were not at an historical level.
June was the strongest month of the quarter and the first time we have had flat year-over-year sales volume since the fourth quarter of 2006. Volume was also up in Performance Systems, where government spending aimed at the automotive sector helped drive demand in geographies such as Brazil, Germany, and China.
We also posted a significant volume increase in Basic Plastics. In fact, up 7% from the first quarter, on higher demand from industrial and consumer packaging.
The positive volume trends improved our operating rates seven percentage points from the first quarter to 75%, which certainly helped us on fixed costs. So, while demand is still well below last year’s levels, destocking appears to be over.
We believe most value chains still have a very low inventory level as customers seek to optimize working capital requirements, matching their production to demand. So, these improvements fully offset a decline in Dow AgroSciences and here I would like you to refer to slide 24, which confronted a number of unique headwinds in the quarter.
Unusually wet weather in the U.S. and Europe, coupled with extreme drought conditions in Argentina, reduced weed pressure tremendously.
In addition, rapidly-falling firm commodity prices changed farmer sentiment as they looked to reduce their input costs, resulting in lower demand for Ag chemicals and the collapse of glyphosate pricing in the quarter, led by the weather conditions I just mentioned along. With increased pressure from imported generics, led to steep declines in the value of inventories on hand and the results also reflect lower licensing revenues versus the prior quarter and some unfavorable currency impact versus the same period last year.
So, despite these headwinds, seeds, traits, and oils continue to deliver impressive growth. Corn sales were up 76% year-over-year, and cotton sales doubled.
We also continue to make investments in research and development, as these are yielding great results, like last week’s news on U.S. EPA and Canadian Regulatory Authorization of our SmartStax seeds.
Now this is a key enabler for the business to achieve double-digit corn share in the coming years and for us to develop our corn seed platforms into a billion dollar business. Another key area that contributed to our results in the quarter is a strong focus on cost control.
Here I’m referring to slide 25. We have reduced structural costs on more than $600 million in the first half of the year, with SG&A down $150 million in the second quarter versus a year ago and this is on a pro forma basis and R&D spending was down $35 million versus the same period last year, and this despite an increased investment of $10 million in Dow AgroSciences.
Capital expenditures amounted to $629 million on a pro forma basis for the first half of the year and we remain on track to reach our commitment of $1.4 billion in capital expenditures this year and finally, net cash flow from operations was $140 million, up $220 million from the first quarter. Now, moving on to the topic of synergies here on slide 26 and I’m pleased to report, we have made excellent progress on capturing cost synergies related to our acquisition of Rohm and Haas, as well as on our restructuring program we announced in the fourth quarter of 2008.
On slide 26 and 27, you can see that we have already realized $228 million of cost synergies related to the acquisition. These consist of $118 million in purchasing savings from leveraging supplier contracts between the two companies, $55 million from accelerating existing Rohm and Haas restructuring programs and $45 million from corporate functions where shared services have been optimized.
As you can see, we are on our way to achieving our 12-month target of $650 million in realized cost synergies. This puts us at more than 70% towards our 12-month run rate of $780 million.
Turning now to our restructuring efforts on slide 28, here we are also making excellent progress. As you can see, we are already 77% towards our 2009 goal on a run rate basis and regarding workforce reduction, while these decisions are always very difficult.
They are a key part of our total cost savings effort and we have already achieved 60% of our stated goals. The second quarter was also marked by several other important financial developments.
First, as Andrew mentioned, we had an extremely successful equity and debt issuance in the quarter, which raised $9 billion in capital. In fact, our debt issuance was met with overwhelming interest in the market and was oversubscribed by more than three times and this enabled us to repurchase the $2.5 billion of Perpetual Preferred Series B shares from our capital structure.
This, coupled with converting the Series B preferred shares to common stock, vastly improved our financial flexibility, while at the same time improving our net income, which benefits, of course, our shareholders. In fact, this quarter’s results included higher financing costs related to the Series B and C preferred shares, which were in our capital structure for about half of the quarter.
These preferred shares had an unfavorable impact of more than $0.05 per share on an EPS basis and these costs have now been eliminated, of course, going forward. We also made significant progress on paying down our bridge loan, which currently stands at $4.1 billion.
As Andrew said, down more than $5 billion from our initial draw on April, 1 and inline with the commitments we made earlier this year. Now, all of these actions we expect to achieve a total debt-to-capital ratio of less than 50% by the end of this year.
Now, I’d like to turn the call over to Heinz, who will talk in more detail about our Performance Products and Performance Systems segments. Heinz.
Heinz Haller
Thank you, Geoffery and good morning. I appreciate the opportunity to give you a brief overview of Dow’s Performance Products and Systems portfolio.
In fact, more than $20 billion this portfolio ranks above most of the industry’s standalone performance and specialty chemical company. As you can see on slide 30, this is a portfolio that is focused on integration, size, differentiated technology, and intellectual property.
As shown on slide 31, at one end of our Performance Products segment, were our technology, global reach, and low cost supply capabilities make us the largest producer of many key building blocks for our customers, as well as many of Dow’s downstream businesses. At the other side of the spectrum is Performance Systems, where we deliver tailored solutions to customer needs.
Here, rapid product development, marketing expertise drive faster commercialization of market focused and technology driven solutions. Today, I’d like to give you a few examples of how Dow’s performance portfolio is delivering value for shareholders.
Let’s start with the key building block business, Dow polyurethanes and their new hydrogen peroxide to propylene oxide technology, also known as HPPO, highlighted on slide 32. Dow and BASF jointly developed and commercialized this new technology to manufacture Propylene, which is a key raw material for our Polyurethanes and Systems businesses.
The new HPPO process offers both economic and environmental benefits. It requires 25% less capital to build, uses 35% less energy in production, and reduces wastewater by 70% to 80%.
The world’s first commercial-scale HPPO plant started up this year at BASF site in Belgium. Dow is building a second major HPPO plant in Thailand, expected to come on stream in 2011.
This project is an example of our ongoing investment in integration of our building block businesses that support our downstream Performance portfolio. In addition, it shows the economic and environmental benefit we’ve achieved by applying Dow’s vast R&D capabilities towards new manufacturing breakthroughs.
Turning to slide 33, let’s move downstream to the Systems side of the portfolio. Here, Dow Automotive systems is providing customer tailored solutions for fuel efficiency, safety, light weighting, and cleaner power.
Let me share a few examples. Protecting lives is essential to vehicle engineering and our automotive solutions help to enhance crashworthiness.
Already being use on various model made by Audi, Daimler and Jaguar, better made structural adhesives meets demanding specifications for bonding strength to enhance vehicle safety, while enabling reduced weight and lower manufacturing costs. Our BETAMATE adhesives platform was used on the current flagship BMW 7 Series to structurally bond the aluminum roof with the steel frame of the car, two materials that are very difficult to join together.
This enabled BMW to use advanced materials and design, while at the same time delivering lighter weight and production efficiencies. Reducing emissions is another priority, and with our new AERIFY diesel particulate filter, which reduces exhaust emissions and improves fuel economy without compromising engine performance.
We are also focused on the next generation of drivetrains. Dow recently announced a proposed joint venture for a lithium ion battery manufacturing facility to develop power for future hybrids and electric vehicles.
Dow Automotive Systems also offers solutions that make vehicles tougher and lighter, increasing both energy efficiency and overall vehicle quality and appeal. These are just a few examples in the Dow Automotive Systems of the technology driven solutions that create higher margin and more stable growth over the long term.
Last, I’d like to talk about the acquisition of Hyperlast Limited that we made in May 2007. This acquisition supports Dow’s strategy to drive growth in Polyurethane Systems, showcased on slide 34.
Again with the goal of generating more consistent earnings over the long run. With this acquisition, Dow gained critical expertise in fully formulated polyurethane and specialty elastomer systems to serve markets that require complex solutions, such as deep-sea pipe protection with Dow Hyperlast fantastic elastomeric foam.
By combining Dow’s raw material integration, extensive geographic network and experiencing polyurethane chemistry with Hyperlast’s experience in spray and cast elastomers, we reconnected the entire value chain from low cost building blocks to delivery of the fully formulated solution for specific customer needs. The chart on this slide shows the benefits of gross margin by selling formulated solutions, rather than just polyurethane components.
As you can see, this provides more consistent and stable earnings growth because of the diverse technology driven customer base. This is the type of business that can further enable our transformation to an earnings growth company.
Turning now to slide 35, as you have seen, we’ve targeted investment into our building block businesses in developing complete, fully formulated, custom tailored solutions in our downstream Systems businesses, Dow’s performance portfolio is delivering higher margins, higher growth, and more consistent earnings over the long term.
Andrew Liveris
Thank you, Heinz. Your portfolio clearly shows how our business is transforming to more consistent earnings growth.
So I’d like to now spend a few minutes talking about our outlook and priorities moving forward, before we turn it to questions. On slide 36, you’re going to see that we now view, there are clear signs that stabilization is occurring, and we are seeing strong growth in Asia Pacific.
We have noticed some very strong numbers, as more evidence shows that China’s massive stimulus program is yielding dividends. For example, new bank loans there rose almost fivefold in June from a year ago.
Car sales in that country rose a staggering 48% in June on a year-over-year basis, the biggest jump since February of 2006, after the government cut retail taxes and handed out subsidies in rural areas to help spur demand. Meanwhile, we expect the recovery in Europe and the U.S.
to be slow, as unemployment continues to be a drag on consumer spending. Based on these factors, our operating plan for the balance of 2009, does not count on material improvements in market conditions.
We believe this is prudent, given the growing uncertainty in the global economy. On slide 37, you can see what our priorities are for the balance of the year, where we will remain focused on continuing the smooth integration of Rohm and Haas, and further accelerating the achievement of both cost and growth synergies.
We will continue our restructuring efforts, which include right-sizing our manufacturing footprint to reduce our exposure to Basics, while better matching production to demand of our downstream Performance businesses. These actions will take up to $2.5 billion of structural costs and will be key drivers of improved profitability in the coming quarters, since we are not counting on any help from improving economic conditions.
We will also continue to execute on our deleveraging plan to further strengthen our balance sheet and provide us with more flexibility in how we execute our divestitures. We’ve remain committed to our goal of a total debt-to-capital ratio of less than 50% by the end of the year.
As I said in my opening comments, this was a very active quarter for Dow and it was a successful one on many fronts. We managed our business with a dedicated focus.
We achieved our objectives and we delivered ahead of our stated commitments and we will continue to manage our business in the quarters ahead to do exactly the same. Most importantly, and just stepping back a bit, we are confident that we are on track to achieve our ultimate goal, something that we have been working on for quite a number of years, and that is to position Dow as an earnings-growth company.
So I would now like to turn the floor back to Howard for the Q-and-A period.
Howard Ungerleider
Thanks, Andrew. That wraps up our prepared remarks.
For your reference, a copy of these comments will be posted on 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-and-A. Regina, would you please explain the Q-and-A process?
Operator
(Operator Instructions) Our first question will come from PJ Juvekar with Citigroup.
PJ Juvekar
Yes, Good morning Andrew.
Andrew Liveris
Good morning PJ
PJ Juvekar
Your prices have declined sequentially in most of the segments and your large German competitor made some cautious comments today on their call. Does it worry you that if volumes don’t pick up, that pricing may not hold?
Can you comment on that price-volume dynamic, please?
Andrew Liveris
Yes, of course variable by type of business, but to stay on the commodity side for a second, clearly we are seeing operating rate improvements because of sequential volume improvements, especially in the emerging world, PJ, and so exports out of the U.S. are occurring again in our commodities, and that’s really good news.
Of course, we’ve done some right-sizing of the asset footprint, but really that doesn’t reflect very much in the operating rate in the first half. Most of that stuff will appear in terms of decreased capacity in the second half on a run rate basis.
So, when you look at the commodities in particular, they’ve been either able to hold price or even increase price a little bit, based on cost push. Remember, oil went down to, whatever it was $30s and $40s and naphtha to its equivalent.
It’s now back up to the $60 mark and naphtha followed it up. So, it’s more cost push pricing, not so much on snug supply demand, but on the rationale that costs are increasing and in fact, many producers, especially those who crack naphtha, can’t make money even on a variable-margin basis and you will notice any just announced taking down a cracker in Italy just the other day.
There are lots of capacity, 9 million tons, we figure, that’s coming out of the system this year because of variable margin dynamics in the commodities. So, we believe there is some price momentum in the commodity side.
Now, on the specialties, it’s much harder. It’s got nothing to do, really, with the cost push.
It’s got everything to do with supply demand in this sector and the most promise there is really in the sectors that are showing sequential volume improvements of a great order of magnitude we tabled those. Electronic and Specialty Materials was up 22%, sequentially.
The IT sector is showing some robustness, especially in Asia. Coatings and Infrastructure up 21% also showing robustness, also in Asia, Performance Systems, up 20%, also showing robustness now, not just in Asia but actually around the world.
Dow’s have got decent price environments because of really large sequential improvements. So, I would say to you, I’m not strong on the price curve right now, yet.
I don’t think we’re very aggressive on it. I would say we are holding and maybe a little bit of atrophy in some areas.
PJ Juvekar
Okay, that’s helpful quickly on K-Dow; you mentioned that there are a couple of parties interested. Would you give us your thoughts on the valuation?
And would you like to sell this business at the bottom of the cycle? Thank you.
Andrew Liveris
I think it’s a great question in the context of the business we now have. The improvements we’ve made on the balance sheet this year to give us the flexibility to make the right decision, not just on K-Dow or its successor deal, but also on other units in Dow, is really the big headline that we’d like to articulate.
We now have the flexibility to do what we have to do. On our pro forma balance sheet, with all the divestitures we’ve done, the equity raise, we are actually at the same point on debt-to-total cap that we would have been had we concluded the K-Dow deal, and that’s a significant statement that we’ve performed against in the last five months.
We’re ahead of plan, which really means that we have retained all of that asset and as that asset performs, you notice Basic Plastics performed very well in the quarter. We really understand the point that you’re making, which is this is bottom of the cycle.
We have no desire to monetize a precious asset at the bottom of the cycle. So, the people we are talking to, we had lots of inquiries, but some of them were very opportunistic, that were doing what you were just suggesting.
The two we are talking to are long-term owners. They’re like the Kuwaitis.
They understand the value of this franchise. They understand that this franchise has a tremendous upturn just in front of it, in the next several years, as the cycle turns and so, normalized earnings and normalized valuations are the way we’re thinking about it and that’s the way those two counterparties are talking to us.
Howard Ungerleider
Thanks, P.J. next question Regina.
Operator
Our next question will come from Don Carson with UBS.
Don Carson
Thank you. Andrew, question on Dow AgroSciences.
You mentioned that, you are now thinking that you, because of its growth, it should be an ongoing part of the Dow portfolio. Is that really reflect the fact that you are not able to get the kind of strategic premium that you think the business is worth?
Andrew Liveris
Don, we have obviously always carefully positioned ourselves here on Dow AgroSciences and that continues on this call. Dow AgroSciences is a very, I would say valuable property to everyone we’ve talked to and of course that includes, how we view Dow AgroSciences and we were very, very deep into a full divest process, because frankly, there was no choice a few months ago.
During that period of time, we had to make a lot of decisions about how much of that process would go all the way versus our alternatives. As we undertook that process, it was clear there were buyers out there that viewed this property with the same value that we viewed it, but obviously, negotiations didn’t get down to an exclusive.
We believed that, if it went that far, that we would definitely realize a good valuation on Dow AgroSciences. The key question really, is would that be good for Dow’s shareholders and when I say that, the EBITDA potential of Dow AgroSciences demonstrated and into the future feeds our income stream and our ability to be an earnings growth company and helps us on our gross debt-to-EBITDA ratios.
So, it’s counterintuitive to sell it at anything less than a full premium and I think that’s really the mindset we are in right now. We are still having ongoing discussions.
They include part monetizations and they include strategic alliance with key players in the sector and we are still maintaining full optionality on that unit and at this point in time, though as I said on the remarks, my personal preference is to retain it in the portfolio and seek enhanced collaborations with others.
Don Carson
As a follow-up, do you think if you retain it in the portfolio that it will be properly valued in what’s really not obviously in Ag portfolio or is that why you also consider options like a partial monetization, partial IPO?
Andrew Liveris
Yes, I think your question answered your question. I mean, in essence the way you phrased the answer is exactly the way we think about it, Don.
Don Carson
Okay, thank you.
Howard Ungerleider
Thanks Don. Regina next question, please.
Operator
Our next question will come from Bob Koort with Goldman Sachs.
Bob Koort
Thank you. Good morning.
Andrew Liveris
Good morning. Bob.
Bob Koort
Andrew, I think maybe you and or another of the speakers intimated that if you benchmarked your revenue base, you would argue that you could be the biggest specialty chemical company. I’m curious, when you benchmark against margin structure, how do you compare against that industry?
Andrew Liveris
Yes, Bob, it’s obviously work in progress. As you can see from even the announcements we’ve made this quarter on Styron Corporation, we still have low-margin businesses in the portfolio.
When you run a large diversified like ours and we’re not, where there is a few out there like us, like BASF, for example, as well as DuPont to a lesser degree. As we seek higher margin territory with our business in Dow AgroSciences, Dow Advanced Materials, half of Heinz’s portfolio, Performance Systems, you look at businesses like Dow Water and Dow Wolff; they are all very great comparators to the specialty universe and the way we think about it is, it’s about $35 billion of our ‘08 revenue, which of course, we’re off in ‘09, but $35 billion of the, roughly $50-odd billion, $55 billion ‘08 revenue for Dow, that’s in a true specialty universe valuation based on margins.
Bob Koort
Andrew, what would be wrong with this argument, that if you’re going to get out of the commodity business, you need to do it quickly, because if it takes another year or 18 months, by that time you are at the cusp or insight of the potential up-tick and based on historic stock valuations, you’re going to get to ride some of that potential optimism and enthusiasm as you come out of the commodity cycle. So, would it be fair that if you can’t do something quick, it could actually be detrimental to shareholders to do something in the mid to long term?
Andrew Liveris
Well, I think it’s a really good observation and it really comes down to the inflection point that is imminently in front of us. You pick when you see it, but if you take the statements and if you look at our sequential volume improvements and you look at the stuff Geoffery reviewed on the call and you look at the stuff Heinz talked about.
There is no question, we believe the trough is priced in now and so, the question really is, is there an inflection point on your point on the cycle, and we believe there is. We believe in the next 12 to 18 months, we are going to see exactly what you are talking about, which is why we are patient negotiators, Bob.
We are not rushing this out the door. We believe that the value on a normalized basis can be realized if we are patient, along the lines you just talked about and we believe we have earned the right to be patient with the actions we’ve taken, and I think the most important intervention decision that we’ve announced on this morning, apart from the OPTIMAL divestment, which is a non-strategic asset, is Styron Corporation.
Really what we are saying is we have other things we can do that are non-strategic. So, that we can take advantage of cycle and valuations on the business that is a strategic, which is the Polyolefins business.
Howard Ungerleider
Regina next question please.
Operator
Our next question will come from Sergey Vasnetsov - Barclays Capital.
Sergey Vasnetsov
Hi, good morning.
Andrew Liveris
Good morning, Sergey.
Sergey Vasnetsov
I think we need to bring Cassie out of retirement to enforce one question policy. So, my question was just on Dow AgroSciences business.
So, there are three factors you mentioned.
Andrew Liveris
Sergey, sorry that’s all the time we have for today.
Sergey Vasnetsov
Okay, alright.
Andrew Liveris
I’m just kidding. Go ahead Sergey.
Sergey Vasnetsov
In Ag chemicals sector, results were somewhat lower than expected since you mentioned three factors. Can you just help us to break how much each factor contributed to the lower numbers?
Andrew Liveris
Geoffery.
Geoffery Merszei
How much is what? I didn’t hear the question.
Sergey Vasnetsov
How much each factor contributed to the lower profits?
Geoffery Merszei
Each component, I’m not sure we can answer you precisely, Sergey. So, why don’t you let us take it offline?
We have a sense of it, but we would rather give you a precise answer. So that means you can have another question.
Sergey Vasnetsov
Okay, alright. Next one is easy.
So, as we make all the 2015 models for Dow Company for the full cycle, should we have K-Dow in them and because I’m a little bit confused by the recent answer?
Andrew Liveris
Well, I think it’s an important question and I think you should know that, based on Bob Koort’s question that it’s a fairly digital answer Sergey. Our strategic pathway is clear.
It hasn’t changed since ‘04, ‘05, which is really to find a petroceutical partner, to use your term, okay for our polyolefins asset is the right answer for Dow shareholders. So you should be assuming that by that time, we have definitely found that partner.
We are very driven. I spend, Geoffery spends, and our team spends, Juan Luciano an awful lot of time in negotiations and discussions with the right partner, the right partners to form an asset-light joint venture in petroceutical.
That’s our drive and I know this is something that you’ve been hearing a lot about and many of you want an announcement. We’re not going to give you one of those.
We’re going to work on the right answer, but you should be thinking that will be put in place by that timeframe.
Sergey Vasnetsov
Thank you and good luck.
Andrew Liveris
Thank you, Sergey.
Operator
Next we will hear from John McNulty with Credit Suisse.
John McNulty
Good morning.
Andrew Liveris
Good morning.
John McNulty
Can we get an update in terms of what the cash flows looked like for the quarter?
Geoffery Merszei
Yes John. I mean we improved our cash flow, as I mentioned.
The net cash flow from operations improved by over $200 million to $140 million. In that $140 million and that takes into account that we had a whole bunch of nonrecurring cash outflows that were related to the financing, to the bridge, as well as to the Perpetual Preferred and so if you add that all up, it’s about $200 million, okay.
So, based on the number that I quoted earlier in my formal remarks of 140, you could add another 200 and then in addition to that, we had an unusual amount of dividends, receipt of dividends in the first quarter. So the delta, in fact, is even better than the way I described it in my formal remarks and going forward, you can expect us to report positive cash flows.
John McNulty
Great. Thanks a lot.
Geoffery Merszei
Thanks, John. Regina, next question please.
Operator
Now will be Frank Mitsch with BB&T Capital Markets.
Frank Mitsch
Already, good morning, folks.
Geoffery Merszei
Hi, good morning, Frank.
Frank Mitsch
To follow-up on the selling of commodity assets not at the bottom of the cycle, can you give us an idea as to what the EV-to-EBITDA multiple was that you’re realizing for OPTIMAL?
Andrew Liveris
Yes, Howard is going to dig it up for you, but it’s roughly, on a 12 month trailing basis, I think it was around six.
Howard Ungerleider
That’s right. That’s correct.
Frank Mitsch
Alright. Presumably you might be looking for more than that for the K-Dow valuation, given its strategic positioning in an advantaged feedstock part of the world.
Andrew Liveris
Yes, clearly, Frank, that would be, you remember we got 7.2 from the Kuwaitis a year ago or less than a year ago when we renegotiated the deal on normalized, on a 2006 basis. On a normalized basis, that’s different, of course.
So really, we don’t believe that peak multiples are going to be available to us if we go in the next six months. Remember what I said, we’ve earned the right to be patient, okay?
So, we’re going to take our time because, as you just are implying, unlike OPTIMAL and unlike STYRON Corp., this is an incredibly important franchise to many people, including ourselves. So finding the right partner, putting it in the right place, and then doing a joint venture, so it’s not a sale, right?
It’s not a divestment. No control premium, then it’ll yield a multiple that makes sense for the future.
Frank Mitsch
Okay, great. You’d mentioned that June was the strongest month that you’ve seen this year.
July is basically over. How is July?
Andrew Liveris
While we can’t, we don’t want to give strong indications. Remember, this is the, well, every quarter is a strange quarter, but the third quarter almost always is strange because of August and holidays in Europe, and Europe is not good, generally speaking.
So throw on top of that holidays, you’ve got yourself weakness in the first part of the month. So July is a little off from June, but not a lot off.
More critically, you should know that, especially with the Rohm and Haas legacy businesses, we’re having very strong numbers, even in July, coming out of our electronics unit in Asia, in particular. In fact, we’re on a global call this morning and the leader of the unit out there corrected me in saying that, it was strong.
He said, “It was very strong.” So, we, I would tell you that, most of the quarter gets made in September.
The third quarter is really made in September, but we do believe that the trends that Geoffery talked about, the sequential improvements, will continue in the third quarter.
Frank Mitsch
Great. Thank you.
Andrew Liveris
Thanks, Frank. Next question, Regina.
Operator
Will be from Peter Butler with Glen Hill Investment.
Andrew Liveris
Hi, Peter.
Peter Butler
Hi, guys. Hello.
For my one question, could you guys kick around raw materials a little bit? I don’t think you mentioned it so far on your presentation.
What are you guys looking at for future oil prices, U.S. natural gas prices?
Have you been significant buyers ahead? What is your hedge position, et cetera?
Could you kick that around, please?
Andrew Liveris
So, obviously, Peter, we are a beneficiary of the feedstock and energy costs decline that we all have seen, mostly because of demand destruction, which you’re well aware of, right? And so, and especially here in North America, natural gas has dropped considerably because of the increased supply.
So you’ve got the two factors, demand destruction and increased supply. So whether its natural gas sitting in the mid $3 ranges here in the U.S.
and oil in the 60s and the equivalent effects on naphtha, which as you know ethane does not follow natural gas. Naphtha does follow oil.
We consider the declines to be basically at their bottom, and so in essence going forward, there should be some inclines on the hydrocarbon side. In fact, we are expecting several hundred million dollars’ increase, third versus second, on ethane, on NGLs, on naphtha, and that’s the way we’re thinking about it, which feeds the question on price that I got earlier.
We really are out there still pushing price on some of our basic plastics, in particular. So I would tell you that the way we are looking at this right now Peter, is that the hydrocarbon cycle is probably at its bottom, and there will be inclines from here, unless there is a double dip recession, which of course is a whole other factor.
We are doing some physical hedging, okay and we have some of that. We normally don’t talk much about that, but we are doing some of it.
Geoffery Merszei
Let me just add a couple of points. U.S.
crude oil inventories are still at very high levels. In fact, they are about 7% above the five year average.
Then, also when you look at natural gas, the inventories here in the U.S. are about 18% higher than the five year average.
So the pricing on the oil side is really as a result of market optimism that the economic recovery is underway. Having said, there’s still high inventory levels.
Peter Butler
Okay, thank you.
Andrew Liveris
Thank you, Peter.
Geoffery Merszei
Thanks Peter.
Andrew Liveris
Before the next question comes, I just want to make sure I’ve got the OPTIMAL number right. It’s six times multiple on a forward basis, but on a 2009 basis, it’s a 15 multiple.
Operator
Our next question will come from David Begleiter, Deutsche Bank.
David Begleiter
Thank you, good morning.
Andrew Liveris
Good morning.
David Begleiter
Andrew, can you discuss the importance of the chlorine envelope in the new transformed Dow?
Andrew Liveris
Very clearly, Dave. Chlor-alkali is positioning Dow to be a feedstock for our Performance businesses.
I mean, that’s the way we think about it. We will get advantaged energy in the emerging world, whether it be in Saudi Arabia, whether it be in China.
So that we can build chlor-alkali for our Performance businesses and there is a whole range of Performance businesses that use chlorine, as you know. So caustic, in that sense, is a flywheel.
It moves market caustic to suit how much chlorine we produce. To the extent that we need second bite of the apple, which you’ve heard a lot about from us, which is to make excess to feed EDC.
We will be an EDC producer, but really in partnership with vinyl PVC producers. We have, obviously, a very important one here in the U.S.
with Shintech. We’ll have more of those as we build in the emerging world.
David Begleiter
Really ties into my next question. In terms of the Ras Tanura and China coal to olefins project, do those still make sense for Dow in this current structure?
Andrew Liveris
Yes. Clearly, it’s really an important question.
I’m glad you asked it. So the way you should think about us going forward is the market value added businesses, really in the main, don’t need building blocks, but the Performances businesses do need building blocks.
So we will do those projects because it will get us access to advantaged building blocks, Propylene Oxide, epichlorohydrin, acrylic acid, all the aromatic building blocks, but to the extent that we are partners with other people who want to build the Basics side of that, that’s fine. Because we have technology we will license and we will be an equity participant, but our participation is totally driven by the building blocks of the Performance businesses.
David Begleiter
Thank you.
Geoffery Merszei
Thanks Dave. Regina, question please.
Operator
We’ll go to Kevin McCarthy, Bank of America/Merrill Lynch
Kevin McCarthy
Yes, good morning.
Andrew Liveris
Hi, Kevin.
Kevin McCarthy
Andrew, I was wondering if you could elaborate on your decision to form STYRON and discuss how much of that was due to the commodity nature of some of those molecules versus things like growth prospects and benzene integration. The second piece of it, given that you’ve re-segmented, I was wondering if somebody might help us with where these reside today.
How much might be in Basic Plastics versus other segments of the company?
Andrew Liveris
On the first question, we looked at STYRON Co. as a group of businesses that are not just commodity, but also specialty.
When you look at them, they rely on the styrene benzene integration point you just made, as well as bisphenol. So, they do have a degree of integration, but more critically, we believe from a Dow Chemical point of view, we have better businesses in our new portfolio that we need to feed to grow.
So when you run a portfolio model, you have to make decisions on businesses that you can’t grow, as well as other businesses you can grow, and so clearly they fit that footprint. They can grow in the emerging world.
We believe businesses like S/B Latex and polycarbonate and compounds and blends have good growth prospects in the emerging world. The new ownership structure can feed that growth.
It’s quite possible that we will partner with people there. We will be a minority player.
That could be one of the structures, because they all want us to be the operator, but in the main, these are businesses that, in our view, can’t compete for capital and R&D dollar against the greater Dow. I am sorry, the second part of your question, Kevin?
Kevin McCarthy
Just how much might be in Basic Plastics today, given the re-segmentation?
Andrew Liveris
It’s about 75% in Basic Plastics, 25% in Performance.
Howard Ungerleider
Thanks, Kevin. We’ll have time for Regina, we have time for one more question.
Operator
Now Jeff Zekauskas with JP Morgan.
Jeff Zekauskas
In the first half, the non-recurring charges were about $1.1 billion. What should they be in the second half and for next year?
Geoffery Merszei
Yes, Jeff. I can’t comment yet on next year, but I think that we will have for the second half of the year some non-recurring charges which are related primarily to some of the severance activities related to synergies for the integration for Rohm and Haas and that’s probably the largest component.
There still maybe, in the second half of the year, up to about $100 million that is related to the various financing that we have in place, i.e., the bridge. So, that’s probably the way I would comment for this year.
For next year, it’s just frankly too early.
Jeff Zekauskas
So, order of magnitude for the second half. Is it, say, more than $500 million or less than $500 million?
Geoffery Merszei
No, no, no. I would say $200 million or $300 million.
Jeff Zekauskas
$200 million or $300 million and what is a good number for your interest expense going forward in the second half?
Geoffery Merszei
Okay. Jeff, interest expense for the second quarter was 525.
Now in there, that includes some amortization fees and then fees that related to, again, to the bridge, etc. By the end of the year, we should have an interest expense run rate of roughly about $425 million, which assumes, of course, also a lower debt level as a result of the proceeds of the asset sales of, let’s say, around $3 billion.
So, take about a $20 billion debt level with a run rate of about 4.25.
Jeff Zekauskas
Okay, thank you very much.
Andrew Liveris
Thank you and we’re going to bring this to a close. We’re sorry because we’ve run over time a little bit.
I just want to reiterate that what you’ve seen from us over the last two quarters is what you’re going to see more from us in the next two quarters and beyond. We have done our strategic reviews.
We know what businesses we want to grow. We understand which businesses we’re not going to grow.
We are ahead of schedule on deleveraging. We will continue to earn the right to earn investment grade rating.
We have earned the right, though, to be patient in our deliberations and what we achieve. These milestones will continue to be achieved ahead of schedule, and as we create this new portfolio, we believe we will continue to surprise on the upside in terms of our results.
We have done a lot of hard work to get us to this point. You should see us continue to do that.
Thanks for your great interest in our company.
Howard Ungerleider
Thanks for joining us on the call today. Our team looks forward to speaking with you again soon.
Operator
Thank you. Again, that does conclude today’s conference.
Thank you for your participation.