The Dow Chemical Company (DOW) Credit Suisse Chemical & Ag Science Conference Call September 17, 2013 2:20 PM ET
Andrew Liveris - President, Chairman & Chief Executive Officer
Doug May - Vice President of Investor Relations
John McNulty - Credit Suisse
John McNulty - Credit Suisse
Okay. So if you all take your seats, we’ll kick on with the next presentation. Before our next presentation we are very happy to have one of our top picks in the space, Dow Chemical.
As you know Dow is one of the premier chemical companies in the world with a large global ethylene platform that has low cost advantages in their feed fleet, as well as having a number of very high end specialty chemical and materials platforms like electronics, and ag to just name a couple of them.
With all of this, some cost cutting and significant restructuring programs in place, solid free cash generation and potential divestures. Dow has a lot of things going on, which has helped to drive earnings and creates some shareholder value going forward.
Now representing Dow today, we are very excited to have Andrew Liveris. He is the President, Chairman and CEO of Dow Chemical. Now I’m sure you know a lot about Andrew. Just to give you a little bit of his background, Andrew started his career at Dow back in 1976. Spent the bulk of his career in Asia running a whole host of businesses. He took the CEO role in 2004 and the Chairman slot in 2006. Among other things, Andrew is also the Vice Chairman of the U.S. Business Council, Vice Chair of the Business Round Table and a Member of the President's Export Council in the US.
Now also with Dow today we are also happy to have Doug May, the Vice President in charge of Dow’s Investor Relations platform.
With that, let me turn it over to Andrew Liveris.
Thank you John. I’m pleased to be with you all and look forward to your questions.
Let me go though our presentation material in a timely way. I’m really here to update you on Dow’s substantial progress in 2013, principally the steps we have been taking to continue to drive positive forward momentum, delivering strong results and fundamentally an increasingly volatile, uncertain, complex and ambiguous global economy, and reviewing our consistent achievement against our committed to self-help measures that John alluded to in his opening presentation.
Today, I’m going to share with you our intense focus on execution and how we’ve moved to actually that next level of implementing our strategy, with a strong strategic and financial lends on how we view our very large business.
I will describe our different business models, and the different actions that are embedded in each one of these different business models, with the consequence of portfolio action. In addition, there are lots of things that we are going to talk about in terms of value and value chains. These three different business models, three of them, have very different market opportunities, very different margin opportunities embedded in their markets and in the value chains that constitute their markets and how we at Dow can extract value from our position in that value chain.
I will add the dimension of return on capital that we rolled out late last year and we really have been working very hard to improve the collective ROC of the company, by taking decisions on our growth businesses, our run for cash businesses and of course candidates for better owners.
I will also talk about our growth catalyst, such as our investments in Saudi Arabia from which I’ve just returned from in Sadara, as well as on the U.S. Gulf Coast, our substantial expansions down there; our innovation agenda; and of course a little touch on the upcoming ethylene cycle; and finally I’m going to wrap up with some views on general market conditions. Apart from Saudi Arabia, I was also nine days in Europe visiting four different economies there and maybe you’d be interested in some update there.
So moving right along, as you can see here, achieving our stated objectives. Our objective is to drive higher, less volatile earnings, and that remains intact. We began to see early signals of the market slowdown in early last year around April 2012. As a consequence of that, we were early in putting in place a series of proactive actions and interventions. We intensified as I already alluded to, our ROC focus.
We restructured our businesses, particularly in struggling markets such as in the construction area for example, and in geographic regions, such as in Western Europe. And we increased our attention to cost, cash and pricing, so that we can really fine-tune the pencil in a slowing global growth market.
Over the course of these past several months, we’ve also been putting a lot of work into driving progress against our plans, continually broadening the scope of these measures to address this ongoing volatility that we continue to see. Plus, we spent considerable time reviewing our entire portfolio and categorizing our businesses as already alluded to by different business models, based on their position in the markets and the value chain. As a result, I believe we have in our full control what we needed to upgrade, our earnings and keep repositioning our portfolio with these actions.
Before I go any further, I want to really reemphasize our complete focus on improving total shareholder returns. This emphasis remains our guide for each and every one of the actions I’m about to go through
You should think about Dow’s portfolio as the graphic shows, in the following manner. More than two-thirds of our portfolio is currently located in high margin attracted sectors. Value chains where we are doing well and we can continue to grow.
As part of our strategy here, we are enhancing our leadership position via customer market led innovation at the intersection of sciences. In fact, Dow is in our view uniquely positioned in to use all these sciences without fail to grow these businesses.
In our definition, these businesses have a customer intimate model and are focused on markets where the demand drivers are strong and our competitive advantages enable us to compete and indeed lead in many of them. Importantly, the actions we have taken have already resulted in strong returns for Dow in these businesses. So our growth businesses actually have delivered strong growth and adjusted EBITDA since 2009.
Now, looking at other portions of our portfolio. We have roughly $10 billion in revenue represented by a group of good, solid businesses that operate in what we define as a products offered business model. These businesses have some competitive advantages, but are commoditizing and they need repositioning.
We are putting new plans in place and seeing positive outcomes already in these groups of businesses and in addition then, the remainder of the company, roughly $6 billion in revenue are in businesses that are traditionally operationally excellent, have already commoditized under a run-for-cash mode. It is highly likely that we will move to different ownership models for these businesses.
Lets take a closer look at each on of these, starting with our Customer-Intimate businesses. Agriculture, packaging, electronics, water and other specialty advanced material businesses with a strong technology and highly competitive cost positions are driving gains in attractive parts of the value chains and end use markets that continue to grow.
These areas of our portfolio are poised to continue growing earnings and revenues well above GDP, fully benefiting from our scale, our reach, our brand and our integrated science capabilities.
Let me give you a closer look at how we are enabling strong returns in a few of these key growth markets, starting with agriculture. Agriculture is basically a $100 billion addressable market. AgroSciences is large, with very attractive growth rates between 6% and 8%.
With our unique position as a global leader in both chemistry and biology, we are commercializing differentiated solutions that address the next generation of unmet needs; farmers who need better answers. Dow leverages its strong size in chemistry position, as well as our scale, our integration and our resources to enhance our competitive market position. Our focus on this business model is delivering strong results and we have a strong track record of outperforming every benchmark in our industry.
For example, our nearly $5 billion Crop Protection business achieved 10% sales revenue growth in 2012. Our seeds, traits and oils business a strong $1.5 billion franchise, has realized 23% sales growth so far this year. Both businesses performance exceed that of their major peers.
Different parts of the world need different components of what our Agricultural Sciences portfolio brings to the table and both portions of this portfolio need Dow. Our scale, our integration and our capabilities are very set at the intersection of sciences, but fully realize their potential.
Take for example the topic of glyphosate resistance. Our Enlist weed control system is the next generation solution that combines innovated traits and novel herbicides in corn, cotton and soybeans, demonstrating how the technologies and expertise in the our crop protections and seeds businesses are both intersecting to deliver high performing deferential solutions that farmers need.
This is a clear example of why, and as we continue to examine our portfolio and the strategic markets where Dow can deliver maximum value, while we are excited about the unique capability that we bring to this sector.
We are an investor in Agro Sciences and we have doubled the value of this business in the last five years and importantly, we can see that same value upside in the next five years, based on our portfolio and our technologies.
Turning next to the Packaging Market, where we are addressing – have an addressable market of more than $100 billion that is grow at 4% annually. Over the course of our history in plastics, we have changed the business to that of a more customer intimate business, working closely with brand owners across our value chains and leveraging our competitive advantage to deliver innovative solutions that meet high value market needs.
Dow has completely reshaped our plastics portfolio since the withdrawal of KDOW in 2009. We have exited the commodity portions of the portfolio and are aligning with market sectors that value technology driven solutions such as packaging. Our ability to deliver consistently strong returns based on this participation strategy is clearly illustrated by the businesses attractive return on capital performance, well above 20%.
Electronics has an addressable market of more than $95 billion. In this value chain we have been working closely with our customers, locating our stores where they are located and investing the immerging technologies that satisfy consumer demand for lighter, brighter and more efficient electronics. This customer intimate approach and short cycle innovation capability, together with Dow’s scale and innovation expertise, are enabling Dow to deliver needed solutions in a timely manager to a market that’s growing at more than 5% per year.
We are a preferred supplier of material sciences solutions to all the major OEMs. Overall Dow will continue to be disciplined in allocating our scarce resources, to organically grow businesses with strong competitive position and attractive markets, applying our customer intimate business model and market driven focus, and as we move ahead you can think about our participation strategy narrowing to a few markets, to address a fewer set of markets. And as we preferentially select the investment and resources in these attractive businesses, we’ll be deselecting areas that no longer fit our strategy.
Further to grow the portfolio, we have put in place a series of game changing investments that will provide short to medium term catalysts. Let me quickly highlight a few of them. First as I’ve already said, our differentiated innovation engine. We have targeted directly what very few can do, use these section of sciences, material science, chemical sciences, biological sciences and enable sustainable growth at those intersections.
Of course, we are also leveraging the boom of the U.S. shell gas dynamics, demonstrated by our named investments on the U.S. Gulf Coast. The restart of the St. Charles ethylene project came online in December 2012 and is running very well. Our incremental EBITDA contribution from this facility has recently ramped to a $250 million annual run rate and is heading higher. Our second project in Louisiana, an Ethane flexibility project will contribute another $250 million in EBITDA when it’s fully operational in 2015.
Construction continues to move forward according to plan on our new propane dehydrogenation unit in Texas, which would deliver an annual EBITDA improvement of $450 million from increased margins and lower raw material volatility, when it comes online in the first half of 2015, less than 18 months away.
In 2014 we expect to begin construction on our new world-scale ethylene facility in Texas and together with the expansions of our industry leading performance plastics franchises, we expect $1.5 billion in incremental EBITDA at its full year run rate. In total, our collective Gulf Coast projects will deliver incremental EBITDA of approximately $2.5 billion went online and fully operational in the 2016, 2017 timeframe.
And as already mentioned, further there is Sadara. Our huge investment in low cost feed stocks in the Middle East, that will serve growth investments and demand in the emerging world, where we already have a strong franchise with 34% of our total company revenues in this last quarter coming from the emerging world.
We completed the major project financing in June and construction as I witnessed myself a few days ago, it’s about 25% complete. Sadara is on track to start up in 2015, transitioning from a use-of-cash right now to a source-of-cash and in fact increasing our average general equity earnings to Dow by $500 million per year over the first 10 years.
These strategic catalysts are mostly independent of macro conditions. Of course with improvements to global demand growth and further tightening in ethylene operating rates, Dow’s earnings growth accelerates on top of the investments that I’ve just outlined for you. Collectively, this combination of actions I just highlighted are focused on further driving value creation and enabling strong returns.
Let me now pivot to a portion of our portfolio, where commoditizing markets are driving us to apply what we have defined as a more product offered approach. Let me give you some granularity on our less differentiated products of the businesses. Beginning with this $10 billion of revenue in these businesses that I mentioned earlier, where we are really seeing improving market conditions and the opportunity for Dow to reposition itself, especially on its cost position and also innovation expertise and those particularly apply to our polyurethane’s and coatings business.
In these businesses, although we see the return of attractive market growth, which we have seen now for these last several quarters, we have intervened and put in place and initiated self-health programs, and are aggressively managing the portfolio to accelerate near term returns.
Our committed to cost and cash actions are ahead of our targets, with 19 of the 29 previously announced shutdowns in these areas completed, including assets aligned to this group of businesses in a large way, especially in Europe.
Our workforce reduction trends are ahead of schedule and will continue to quiet hardly prioritize our investments in these businesses, selecting only those that we see as critical to returning maximum value.
Looking ahead in the medium term for these businesses, these businesses will strongly benefit from the investments that I outlined in propane dehydrogenation and Sadara, further enhancing the competitive positions once those projects start up. As a result, we believe these businesses will demonstrate meaningful improvement as a result of these proactive measures we have taken in these last many months and will continue to put in place over the next 24 months.
Let me now turn to the remaining, nearly $6 billion in revenue, where on our second quarter earnings conference call in July, many of you heard that we announced the need for additional aggressive portfolio actions, as these operationally excellent businesses in our view are increasingly commoditizing and as a result being run for cash and therefore potentially have better owners.
In these businesses, it is clear that the market structure will remain challenging and ultimately our position in the value chains that they represent will no longer generate the high returns that drive our resource allocation decisions and the value that we expect that meets or exceeds our expectations. Therefore applying a best owner mindset, we have identified epoxy and chlorine derivatives in some portions of our building and construction business as areas of our portfolio, where we are actively exploring broader, more aggressive options.
We will continue to provide granularity to all of you as we work through these options, but today I want to share with you that you should think about our transaction or transactions as likely, including a joint venture, a sale and particularly in the epoxy and chlorine derivatives areas. And from a timing perspective, you can think about these additional actions taking place over the next 12 months or so.
Importantly, the value we expect to realize from these measures will be on top of the $1.5 billion in divestments that we have already announced. As the case with any portfolio action, we are taking a carefully orchestrated surgical approach and as we look at the potential divestments, we also are looking at other ways we can reduce the complexity of our portfolio, while understanding the complexity of the divestment and the carve out itself.
So therefore additionally, as we are looking broadly across the company and ensure that we are optimizing the value for all of our assets, we are looking at different parts of our portfolio and the first one I want to talk about is our joint ventures.
You may not realize this, but we have 75 joint ventures in our company. This is a complex portfolio. We are well on the path of evaluating each and every one of these joint ventures, to ensure it fits within the hither 2-4 mentioned strategic approach I outlined for you today and that is generating full value for our company and its shareholders.
These are valuable assets and we want to make sure they are positioned for success and maximum return. This is a discussion that is and will continue to take place with every single one of our partners in these ventures and one which will have more to say in these coming months and quarters. The second group of assets are our non-direct assets, including rails, pipelines, caverns, etcetera, where we really have about $5 billion of replacement asset value in these assets.
Here we are taking a look, a very close look to make certain that each one of them its realizing its fullest value within the portfolio. We will be pursuing options for those that maybe more value to a better owner. Again, an action taken specifically to ensure our focus on ROC and that our investors are getting full value for these properties, while we do not loose strategic control to operate the company.
In addition as noted earlier, our cost and actions – cost and cash actions are reducing corporate and structural parts to liberate further low return resources and to drive efficiencies and ongoing simplification. We are making considerable process in our previously communicated target of approximately $1.5 billion in proceeds, from divestitures that we announced earlier this year for mid to late 2014, and as we continue and re-evaluate those assets and businesses that are not strategic to us, wherein you expect us to add to that number.
Now I want to disclose something very critical. This is not a fire sale. This is to extract maximum value, to enable us to make sharper portfolio decisions against our resources to grow the business so that we can grow. So therefore, if we cannot receive full value, we will walk away from an offer that does not provide our shareholders that maximum value. We are focusing our portfolio on these high value businesses by returns, but we do not need to sell business that do not meet these expectations. We can just simply run them for cash.
A case and point is plastic additives. This is a valuable business that is currently being undervalued by buyers in the market. As a result, we are pulling the transaction off the table and we are quite comfortable with running this business for the next several years.
All of these actions that I’ve just outlined, show that we are committed to significantly increasing the returns of our total portfolio, even in a potentially slow economic recovery environment. In fact these aggressive actions that I’ve just outlined to you today, along with their expected impact, will unlock shareholder value in the very near term in the next 24 months. So importantly just to repeat, we are intensively defining our business models, approving business strategies based on those models and they are positioned in the value chains.
Deselecting lower ROC businesses and slow to no-growth markets, while reducing complexity, liberating cash from the non-strategic line to performing assets; maintaining our growth momentum in key investment projects and value drivers; and above all, strengthening our balance sheet and rewarding our shareholders.
We have not and will not waiver from our relentless execution against our priorities for cash as evidenced by our recent application of the paid out proceeds from the arbitration award to reduce debt, and now we have debt ratios at levels not seen since prior to the crisis.
As I wrap up, lets go to outlook and our view on outlook is as follows: As we look at how the third quarter and the back half of 2013 is playing out, I would like to share with you some notable shifts with the perspective I provided in July. China continues to experience slower than expected growth this year, but we expect the strategic growth area to be back on its growth trajectory in late 2013, albeit at lower than prehistoric growth levels.
Coming out of Europe, I can definitely endorse the next statement. We feel Europe’s recovery period remains uncertain. However, in our view the market is down bottom and is now bouncing along bottom and depending on the week of the month, more positive signals coming out of Europe that we’ve seen in the previous three years.
Finally we see the United States as the world’s only bright spot, continuing along the positive path that we describe in July, albeit still not at full speed. However for Dow as we continue to move forward, we maintain our prudent approach as once again to repeat, we continue to operate in a volatile, uncertain, complex and ambiguous environment. We believe that the new normal evident this quarter by the chemical events in Syria and their impact on the hydrocarbon costs.
As a result, the way we are planning is that long-term outlook will be uneven at best and you have to run it with an agility like never before, to attenuate to the environment that presents itself in the moment.
Companies like Dow, those are the strong technology positions, marketing and innovation expertise applied to specific attracted markets, the geographic diversity and competitive cost positions. We are going to be able to actively manage our way through this and deliver long-term earnings growth.
Our strategy has been to run our portfolio based on a series of deliberate investment choices, and maintain our earnings growth focus with company specific catalysts and targeted portfolio actions fully in motion, including the accretive innovation high return investment that I’ve outlined, such as Sadara and the U.S Gulf Coast; our customer intimate approach that I’ve outlined for you today in key growth market sectors; and our self help on cost and cash actions, which continue to ramp, lifting from $500 million in 2013 to an expected $1 billion run rate in cost savings and $750 million in cash saving by year end 2014.
Collectively as catalysts, together with our business model and ROC focused approach, lead us to broad based growth opportunities, each offering a sort of risk hedge against the other. Further, we expect to receive an additional boost from accelerators such as the upcoming ethylene cycle and rising interest rates, which could lead to lower pension expense in 2014 and a positive earnings tailwind for Dow. Therefore, even as this near team volatility and medium term uncertainly persists, our company, our earnings profile and our momentum will continue.
In short, we’re a company that has navigated the chemical industry for more than 100 years. We have demonstrated many times that we know how to adapt to changing tides and changing environments. We are confident we have the right levels in place and are taking additional aggressive actions within our portfolio and our business model to further accelerate returns. We are steadfast in our efforts against generating strong earnings and cash flow, and above all to consistfully and increasingly reward our shareholders.
With that, please let me move to your questions. Thank you.
Earnings Call Part 2:
- Dow Chemical