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TRANSCRIPT
Dow.com
2014 Investor Forum
Jim Fitterling Vice Chairman, Business Operations November 13, 2014
Some of our comments today include statements about our expectations for the future. Those expectations involve risks and uncertainties. Dow cannot guarantee the accuracy of any forecasts or estimates, and we do not plan to update any forward-looking statements if our expectations change. If you would like more information on the risks involved in forward-looking statements, please see our Annual Report and our SEC filings. In addition, some of our comments reference non-GAAP financial measures. Where available, presentation of and reconciliation to the most directly comparable GAAP financial measures and other associated disclosures are provided on the Internet at www.dow.com/investors.
SEC Disclosure Rules
™Trademark of The Dow Chemical Company or an affiliated company of Dow. “EBITDA” is defined as earnings (i.e., “Net Income”) before interest, income taxes, depreciation and amortization. “Adjusted EBITDA” is defined as EBITDA excluding the impact of Certain items. “Adjusted EBITDA margin” is defined as “Adjusted EBITDA” as a percentage of reported net sales. “Adjusted EPS” is defined as earnings per share excluding the impact of Certain items. “Net Debt” equals total debt (“Notes payable” plus “Long-term debt due within one year” plus “Long-Term Debt”) minus “Cash and cash equivalents.” “Net Debt to Total Capitalization” ratio is defined as “Net Debt” divided by “Net Capital.” “Net Capital” is defined as “Total Equity” + “Redeemable Noncontrolling Interest” + “Net Debt.” “Net Debt to EBITDA” is defined as “Net Debt” divided by “Adjusted EBITDA.” “TTM” is defined as trailing twelve months. “Total Capital” is defined as total assets minus non-interest bearing liabilities. “Adjusted Return on Capital” is defined as TTM “Adjusted Net Operating Profit After Tax” divided by average “Total Capital.” “Adjusted Sales” for joint ventures is defined as sales for joint ventures less sales to Dow and/or other Dow joint ventures. “Net Debt” for joint ventures excludes debt owed to Dow and/or other Dow joint ventures. “Total Shareholder Return” is defined as stock price appreciation plus dividends paid.
Our Priorities Going Forward
Maintain strong focus on rewarding shareholders
Fully capitalize on growth levers
Make further strategic choices: Go deeper and narrower to drive the next level of long-term growth
Announcing New Segments Aligned to Dow’s Strategy
Foundation of Core Strengths Support the Entire Franchise Cost Advantaged Feedstocks in Every Region Scale & Operational Excellence Molecular and Physical Integration
Global Reach ― Marketing, Business & Operations Expertise in Science & Technology Strong Brand Value
Performance Materials & Chemicals Performance Plastics Agricultural Sciences Consumer Solutions
Infrastructure Solutions
Revenue: $14.9B Adj. EBITDA: $2.1B
Revenue: $22.6B Adj. EBITDA: $4.4B
Revenue: $7.2B Adj. EBITDA: $0.9B
Revenue: $8.5B Adj. EBITDA: $1.1B
Revenue: $4.6B Adj. EBITDA: $1.0B
3Q14 Trailing Twelve Months Revenue and Adj. EBITDA data
Chlor Alkali and Vinyl
Chlorinated Organics
Epoxy
Industrial Solutions
Polyurethanes
Dow Elastomers Dow Electrical and
Telecommunications Dow Packaging and
Specialty Plastics Energy Hydrocarbons
Crop Protection
Seeds
Consumer Care
Dow Automotive Systems
Dow Electronic Materials
Dow Building & Construction
Dow Coating Materials
Energy & Water Solutions
Performance Monomers
Hydrocarbons & Energy Advantaged Feedstocks
Running an Integrated Enterprise… Sell Out, Sell Up
Selling and R&D CapEx
SPEC
IALTY
CO
MM
OD
ITY
Dow Elastomers
Dow Electrical & Telecommunications Dow Packaging &
Specialty Plastics
Polyurethanes Epoxy
Industrial Solutions
Chlorine Carve-Out
CREATE STRUCTURAL ADVANTAGES ― Low Cost, Technology, Targeted Marketing
APPLY ‘BEST OWNER’ MINDSET
DIVEST
RETAIN FOR INTEGRATION / RUN FOR CASH
INNOVATE BACK TO SPECIALTY
Industrial Solutions — Enabling Manufacturing
Making Things Better, Faster, Cleaner Through Additive Solutions 3Q14 Trailing Twelve Months Revenue
Solvent systems for coatings
High performing industrial fluids
Fast-evaporating solvents for chip-making
Farm processing surfactants and solvents
Performance Materials & Chemicals
$14.9B Revenue
Chlor-Alkali and
Vinyls
Epoxy
Polyurethanes Industrial Solutions
Chlorinated Organics
Epoxy and Polyurethanes Delivering Improvement
Actions Major restructuring
Organizational redesign
Focused effort on manufacturing reliability and asset utilization
Shut down assets and reduce fixed costs
Improve total variable margin
Reduce SARD
Improve working capital
Gain market share
Organizational redesign complete
Overall $200MM improvement through cost reductions
8 assets shut down
Double-digit fixed cost improvements in Polyurethanes
Significant SARD reductions in 2014, more to come in 2015
Single digit volume increases in Polyurethanes YTD
Results
Bridge from Management Book to Chlorine Carve Out Financials
Pro Forma EBITDA Bridge for Chlorine Carve-Out
As Chlorine Carve-out
~$500
Ongoing Business Productivity Actions
Net Sales Between Dow and NewCo
As Dow
$300―$400
$MM
$30―$60 $75―$125
With Upside Potential
Timeline
YE 2014
Offers
1Q15 2Q15 Today
Selection
Signing Close
YE 2015
Innovations to Improve Functionality and Sustainability
PACXPERT™ 100% PE Stand Up Pouch Two-Piece PE Bottle
Differentiated Innovations in Sustainable Packaging Through Close Value Chain Engagement
0 4,000 8,000 12,000
CNPC
Ineos
NPC-Iran
Abu Dhabi Gov't
Royal Dutch/Shell
LyondellBasell
SINOPEC
ExxonMobil
SABIC
Dow
MT 0 5,000 10,000
NPC Iran
Braskem
Ineos
Chevron Phillips
IPIC
SINOPEC
LyondellBasell
SABIC
Dow
ExxonMobil
MT
Top Global Ethylene / Polyethylene Producers
Dow is the Biggest Ethylene Producer in the World Source: Dow, IHS
Ethylene Capacity Polyethylene Capacity
Source: Dow, IHS
0%
2%
4%
6%
8%
10%
12%
14%
16%
18% 2
01
3 A
dju
ste
d R
OA
*For comparison purposes only, the ROA for Dow Performance Plastics shown above includes ~20% allocation of Corporate segment. Corporate segment allocation based on Dow Performance Plastics' % of total assets. Excluding this allocation, Dow Performance Plastics has a ROA of ~22%, see Reg G file.
Source: Dow, Capital IQ
Low Cost and Focus on Attractive Markets Drive Consistent and Higher Earnings
Adjusted ROA: Adj. EBIT*(1-Tax) / Avg Total Assets
Do
w P
erf
orm
ance
Pla
stic
s*
Peer List: AXLL, BASF, BMS, CE, CF, DD, EMN, FMC, HUN, LYB, MOS, POT, PPG, SEE, WLK
Chemicals Companies
Investments Enhance High-Return Franchise
Sources of Value in Performance Plastics
Mix and Application
$200‒$300/MT
PE Cycle
Dow Value Comes from Four Sources
$600‒$1000/MT
Oil to Gas Spread Ethylene Cycle
$100‒$200/MT
Advantage ― Dow… Innovation in Plastics
Dow Customers Depend on Assets, Innovation and Customer Intimacy
Assets ― Advantaged feedstock in
5 regions ― Specialized asset technology
Innovation ― Best in class material science ― High throughput R&D ― IP protected technology
Customer Intimacy ― High-performance PE, adhesives,
barrier, tie layer materials ― Industry leading brands ― Value chain intimate approach
Price Competition
Complexity
I n n o v a t i o n
QUALITY & SERVICE OFFERING
COMMODITY
PREMIUM
$100-$200/MT
Derivative Operating Rates Nearing Peak Conditions
Near Term Strengthening Pricing power continues to strengthen
North America continues to be sold out
European duty discourages imports improving S/D dynamics
Peak May Extend Into Mid-Term Further start-up delays /
postponements likely (i.e., USGC, China CTO, etc.)
1% increase in global GDP would increase global O/Rs by 2%
Assumptions Base GDP growth 2.8%, 3.4% and 3.7%
for 2014, 2015 and 2016, respectively
Source: Dow
83.9% 83.9%
85.2%
86.3% 87.0%
87.5%
80%
85%
90%
2012 2013 2014 2015 2016 2017
Op
era
tin
g R
ate
Demand Exceeds New Builds
Industry Global Polyethylene Operating Rate
Global Ethylene Operating Rates Entering the Peak
Source: Dow, IHS, Global Insight (8/14)
Operating rates continue recovery from the 2008 lows
Expect peak scenarios in 2016-2018, with pricing power improving through 2014 into 2015
92
84 85 85
86 87
88 89
91 93
94 94
80
82
84
86
88
90
92
94
96
98
0
20
40
60
80
100
120
140
160
180
200
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Op
era
tin
g R
ate
, %
Eth
yle
ne
, Mill
ion
s o
f To
ns
Ethylene Production=Demand Nameplate Capacity Industry Op Rate
Global Insight GDP
4.1% 1.7% -1.9% 4.3% 3.0% 2.5% 2.6% 2.8% 3.4% 3.7% 3.8% 3.7%
Low Case 2.8% 2.9% 3.0% 3.0% 3.0%
Cycle Pricing Power will Add ~$2.5B/yr for Dow
The Loaded Spring… Growing Commodity Demand Per Capita Demand for Plastics, etc. Increases Driven by:
Urbanization
Spread of middle-class in emerging world
Population growth
Higher than OECD growth in GDP
Non-OECD demand is not driver of current market tightness
Recovery in non-OECD will have double impact of increased per capita use and stronger GDP
Source: Dow, IHS
0
10
20
30
40
50
0 1000 2000 3000 4000 5000 6000 7000
Africa India
Other Asia
Latin America
Eastern EuropeChina
Middle East
Japan and KoreaWestern Europe
United States & Canada
11.8 kg per person20
14
-D
em
and
pe
r C
apit
a (k
g p
er
pe
rso
n)
Population (millions)
33.1 kg per person US & W.
2000
2005
2010
Global PE Consumption Per Capita
33.1 kg per person US & W. Europe
0
30
60
90
120
150
180
0
5
10
15
20
25
30
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020
Natural Gas Brent Oil
Peak Pricing Power versus Feedstock Advantage
Cracker Margins Expanded by $200/MT–$300/MT in Last Three Peaks Dow Produces ~10MM tons/year
US
Nat
ura
l Gas
($
/MM
BTU
)
CRUDE : GAS Price Arbitrage
Bre
nt
Cru
de
Oil
($/b
bl)
Source: Bloomberg
Cycle Peaks
Advantaged Positions Across the Globe
USGC Investments
US shale Low cost
Access to Asia
Alberta advantage
Sadara
European LPG
Revamped Alberta
Advantage
Established Key Alliances
in Latin America
Extending US shale advantage
Abundant LPG for Europe
Growing ethane
Next large shale development
Jan
Feb
Mar
Ap
r
May
Jun
Jul
Au
g
Sep
Oct
No
v
Dec
Vo
lum
e
2012 2013
2014
U.S. Shale Gas Production
65%
70%
75%
80%
85%
90%
20
13
20
14
20
15
20
16
20
17
Dow’s Feedslate in the Americas — Moving Lighter
SCO2 Restart
Argentina Initiatives Rejuvenate Ethane Supplies
Actions Drive Canada Ethane
Long
LA-3 Project
TX-9 Startup
Source: Dow
Do
w E
than
e C
rack
ing
Cap
abili
ty
for
Eth
yle
ne
Pro
du
ctio
n
Jan
Feb
Mar
Ap
r
May
Jun
Jul
Au
g
Sep
Oct
No
v
Dec
Vo
lum
e
2012
2013
2014
Shale Drives Growth in NGL Supplies in U.S. and Europe
Dow Europe LPG Contribution ― $MM Dow Europe LPG Cracking Volume Increasing
-
50
100
150
200
250
2010 2011 2012 2013 2014 YTD
Improved efficiency in Terneuzen
Doubled capability in Tarragona
More to come in 2015 Source: Dow
Value of Gulfstream Investments at Authorization
Project HH Gas Ethane Propane Brent Cap Ex ROC Full Run Rate Auth EBITDA
St. Charles Ethylene Restart $6.00/mmbtu $0.69/gal $1.41/gal $109/bbl $160MM 37% $250MM/yr
Freeport PDH $5.30/mmbtu $0.70/gal $1.60/gal $132/bbl $1,200MM 16% $450MM/yr
PDH Infrastructure $400MM
Plaquemine Feedstock Flexibility & Debottleneck
$5.60/mmbtu $0.75/gal $1.67/gal $136/bbl $250MM 57% $250MM/yr
Freeport World Scale Ethylene & Derivatives
$6.00/mmbtu $0.59/gal $1.36/gal $129/bbl $3,400MM 23% $1,500MM/yr
Cracker & Derivatives Infrastructure $1,000MM
Value of Gulfstream Investments at Authorization versus Today
Today’s Cost Structure
$3.80/ mmbtu
$0.22/ gal
$0.87/ gal
$85/ bbl
Project HH Gas Ethane Propane Brent Cap Ex ROC Full Run Rate Auth EBITDA
EBITDA
St. Charles Ethylene Restart $6.00/mmbtu $0.69/gal $1.41/gal $109/bbl $160MM 37% $250MM/yr $280MM
Freeport PDH $5.30/mmbtu $0.70/gal $1.60/gal $132/bbl $1,200MM 16% $450MM/yr $600MM PDH Infrastructure $400MM
Plaquemine Feedstock Flexibility & Debottleneck
$5.60/mmbtu $0.75/gal $1.67/gal $136/bbl $250MM 57% $250MM/yr $270MM
Freeport World Scale Ethylene & Derivatives $6.00/mmbtu $0.59/gal $1.36/gal $129/bbl $3,400MM 23% $1,500MM/yr
$1,800MM Cracker & Derivatives Infrastructure
$1,000MM
Today’s cost structure as of 10/27/14
Executing on Our Growth Levers
Polyurethanes: Streamline and sell out
Industrial Solutions: Narrower, deeper, more
Chlorine and Epoxy: In the market, closing in 2015
Performance Plastics: $4.4B EBITDA… the peak is coming
Plans on Track, Delivering Today, Upside to Come 3Q14 Trailing Twelve Months Adj. EBITDA data