Dow CEO & CFO Analyze 1st Quarter Earnings

First Quarter 2015 Earnings
The Dow Chemical Company

April 23, 2015

Quarterly Earnings Conference Call/Webcast With
Investors, Financial Analysts and the Media

Remarks By:

Andrew N. Liveris, Chairman and CEO
Howard Ungerleider, Executive Vice President and CFO
Jack Broodo, Vice President, Investor Relations

J. Broodo

Good morning and welcome. I am Jack Broodo, Vice President of Investor Relations.

As usual, we are making this call available to investors and the media via webcast. This call is the property of The Dow Chemical Company. 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 Chief Executive Officer and Howard Ungerleider, Executive Vice President and Chief Financial Officer.

Around 7:00 a.m. this morning, April 23, our earnings release went out on BusinessWire and was posted on the Internet on Dow.com. We have prepared slides to supplement our comments in this conference call. These slides are posted on our website, and through the link to our webcast.

Some of our comments today include statements about our expectations for the future. Those expectations involve risks and uncertainties. We cannot guarantee the accuracy of any forecasts or estimates, and we don't plan to update any forward-looking statements during the quarter. If you would like more information on the risks involved in forward-looking statements, please see our SEC filings.

In addition, some of our comments reference non-GAAP financial measures. A reconciliation to the most directly comparable GAAP financial measure and other associated disclosures are contained in our earnings release and on our website.

Unless otherwise specified, all comparisons presented today will be on a year-over-year basis. Sales comparisons exclude divestitures and Hydrocarbons and Energy. EBITDA, EBITDA margins, return on capital and earnings comparisons exclude certain items.

Some of our comments may also contain statements about our announced agreement to separate a substantial portion of our chlor-alkali and downstream derivatives business and merge it with a subsidiary of Olin Corporation. In connection with that transaction Dow and Olin will be filing materials with the SEC that will contain important information and we advise you to read them. These filings will be available free of charge from the SEC or Dow or Olin as applicable.

The agenda for today's call is on slide 4. I will now turn the call over to Howard.

 H. Ungerleider

Thank you, Jack, and good morning, everyone.

Turning to slide 5.

The first quarter of 2015 proved to be yet another strong quarter for Dow. Our results clearly demonstrate the consistency with which our strategic agenda and our focus on execution are driving higher and more predictable earnings.

We remain firmly on our growth trajectory – a fact you can see across multiple fronts. This marks our tenth consecutive quarter of year-over-year operating EPS, EBITDA and margin growth. The strength of our portfolio enabled Dow to deliver operating earnings of $0.84 a share. Operating EBITDA was $2.4 billion.  Four out of our five operating segments delivered earnings growth in the quarter.  Dow Automotive Systems achieved an all-time EBITDA record and our Dow Electronic Materials, our Energy & Water, our Polyurethanes and our Packaging & Specialty Plastics each achieved first quarter EBITDA records. EBITDA margins expanded to the highest levels since 2005, up 284 basis points versus the year-ago period. Performance Plastics, Performance Materials & Chemicals, Infrastructure Solutions, and Consumer Solutions all drove margin expansion in the quarter.

Our results illustrate that we were focused, and we executed. We delivered operating cash flow of $1.2 billion – a first quarter record and up more than $660 million. We returned $977 million to shareholders in declared dividends and repurchases. And we made further progress against our portfolio management targets – most notably through the signing of a definitive agreement to divest Dow Chlorine Products, bringing the total of our portfolio actions well above our stated targets.

We are proud of the performance the company delivered in the face of a 49 percent year-over-year drop in oil price combined with a 15 percent year-over-year Euro headwind, it is clear that this is not the commodity-driven Dow Chemical from a decade ago.

This business model successfully navigated the fast-moving market dynamics with catalysts that will further propel our growth.

I’ll provide an update on these in a moment. But first, let’s take a closer look at our operating results in the quarter.

Turning to slide 6; revenue was $12.4 billion, with solid demand for Dow products across all geographic regions excluding divestitures, with particular strength in our emerging geographies – most notably China, which was up 10 percent.

Volume increases were led by Performance Plastics, up 6, and Performance Materials & Chemicals and Consumer Solutions – both up 5, despite 15 percent price declines at the company level primarily due to significant oil and currency headwinds.

Let’s turn to segment highlights on slide 8. Agricultural Sciences delivered sales of nearly $1.9 billion and EBITDA of $409 million.

These results, as expected, reflected more normalized weather conditions in the first quarter versus last year. From a macro perspective, crop protection sales trended with the industry across most regions except for Asia Pacific…where we drove double-digit volume gains reflecting, in part, sales of new rice herbicide products, although pricing was down, due to currency.

We continue to gain traction from the launch of new products – in fact, demand for new Dow AgroSciences products was up 7 percent. In addition, we received preliminary approval on the registration of our ENLIST™ Soybeans and Corn in Brazil, with final approval for commercialization pending. We also have secured approval for ENLIST™ E3 in Argentina.

Additionally, the EPA has approved ENLIST™ Duo in nine additional, key corn-and-soybean-producing U.S. states and regulatory approvals are pending for ENLIST™ Cotton. We are in the process of a stewarded introduction into U.S. corn this year, and expect a full commercial launch following approvals in China.

We remain focused on delivering this key technology platform to serve the global farmer customer base, and are working to bring it to market as soon as possible.

In the near term, Greater China demand continues to drive growth; North America is currently operating with high levels of channel inventories; Latin America is facing some potential economic headwinds; and Western Europe growth appears modestly positive with year-over-year weather comparisons normalizing in the second quarter.

We remain confident in our technology and expect our margins to improve; however, acreage and commodity price continue to be a challenge.

Turning to Consumer Solutions on slide 9.

This segment delivered record EBITDA based on the strength of differentiated products and Dow innovation.

Double-digit sales gains were reported in North America, with broad-based volume growth across all three businesses. Dow Electronic Materials led the way with a double-digit volume increase, followed by Consumer Care and Dow Automotive. Sales gains were also reported in Latin America.

Let me briefly cover the businesses.

Automotive Systems delivered record EBITDA performance. The business is benefiting from auto industry trends toward light-weighting as well as a preference for larger, premium vehicles, driven in part by lower oil prices. These vehicles tend to feature both more and higher margin Dow materials. As a result, we achieved margin expansion as key customers continued to increase adoption of our differentiated technologies such as BETAMATE™ structural adhesives.

In Dow Electronic Materials, EBITDA was also a new first quarter record, with margin expansion driven by product mix upgrades. The strength of our technologies in the electronics sector was recognized by a number of key customer wins across the business. We also reported strong top-line performance in semiconductor in both our CMP and litho markets. Notably MSI, a key figure that we track for semiconductor growth, is forecasted to be up nearly double GDP in 2015.

In Consumer Care, food and pharma sales remain flat overall, but excluding currency, the business grew – particularly in Dow Pharma and Food Solutions, which saw expansion through sales of unique and differentiated products.

Operating rates are running high in this segment, and we expect to continue to increase sales in the home and personal care sectors due to rising consumer demand and new customer applications.

Looking ahead to the second quarter, we expect margins in this operating segment will improve on increased consumer demand.

Moving to Infrastructure Solutions on slide 10, where similar innovation-driven performance is delivering solid EBITDA expansion. Sales were $1.8 billion and EBITDA grew 10 percent to $295 million.

In Energy & Water Solutions, we expect continued growth at two to three times the rate of GDP with strength in our water business offsetting weakness in North American energy markets. This can be seen in the double-digit demand growth in our Reverse Osmosis business in the quarter.

Lower oil values, coupled with the decline in the energy exploration and fracking from 2014 levels, have impacted Dow Microbial Control. However, our expert consultancy model, combined with our regulatory position in the oil and gas sectors, is enabling us to grow share.

In Dow Building & Construction, our differentiated products have contributed to global margin expansion as well as growth outside the U.S. in new applications. North America continues to be the demand driver for this business.

Dow Coating Materials reported volume growth, driven by EMEAI and Asia Pacific versus the prior year. These volume gains, along with value-based pricing actions and improved raw material margins, drove EBITDA growth in the quarter. Looking ahead, we expect that North America will lead global coatings growth due to an improving housing market.

Performance Monomers continues to experience trough-like conditions in the acrylates market, though we expect improvement in this business toward the second half of the year, with more globally competitive U.S. propylene market pricing.

From an equity earnings perspective, results from Dow Corning were slightly up, overcoming currency headwinds.

For the Infrastructure Solutions segment, we expect margins to remain flat sequentially as the building season ramps up and our new applications and technologies offset continued headwinds from acrylates.

Turning to slide 11.

Performance Materials & Chemicals reported sales of $3.2 billion and delivered EBITDA of $535 million excluding divestitures, which is up 4 percent versus last year and represents a fourth consecutive quarter of year-over-year EBITDA and margin expansion.

Polyurethanes delivered record first quarter EBITDA, driven by a combination of volume gains and margin expansion as the business continues to make progress focusing on their defined markets, as well as developing customer-tailored solutions through our systems house capabilities in the consumer comfort and energy efficiency sectors. Ongoing self-help productivity actions will also continue contributing to margin expansion in the coming quarters.

Epoxy also continues to improve with double-digit volume growth, particularly in differentiated product lines, as well as a continued productivity focus.

Industrial Solutions reported margin expansion, with improving demand toward the end of the quarter. EBITDA is up versus the same quarter last year in the core businesses, though it was offset by lower equity earnings and the divestiture of both ANGUS and the Sodium Borohydride businesses.

Overall, we expect prices to stabilize in this operating segment and margins to reflect strengthening demand.

Turning now to slide 12.

Performance Plastics reported sales of $4.3 billion, down 11 percent versus the prior year, excluding Hydrocarbons and Energy. EBITDA was $985 million, up 2 percent and marking the eleventh consecutive quarter of operating EBITDA growth and EBITDA margin expansion.

Packaging and Specialty Plastics posted record first quarter EBITDA performance, driven by strong year-over-year volume growth across all geographies as well as in the hygiene and medical and food packaging sectors. Operating rates are running high in every geography.

Elastomers delivered the highest EBITDA since 2012, a nearly 60 percent year-over-year increase. Results were particularly strong in the transportation sector. Volume also improved due to our sell-up actions in new consumer durable products, for example, INFUSE™ Olefin Block Copolymers set a volume record in part due to traction in the high-end footwear market sector.

Electrical & Telecommunications had a major turnaround in the quarter which impacted volume comparisons. Demand continues to be healthy, particularly in North America. Weakness was seen in EMEAI and Asia Pacific due to very aggressive competitive pricing actions.

At a segment level, we expect prices to move up on strong demand for our high-value products.

Looking at slide 13, let me briefly cover our modeling guidance; Let’s begin with the second quarter. We expect year-over-year demand growth in most businesses, with pricing momentum building through the year. We expect raw material costs to remain favorable year-over-year, with stable natural gas, though oil-based costs may rise. Equity earnings will continue to be down year-over-year due primarily to Sadara costs as we ramp to first product later in the year. Costs will be $75 to $100 million headwind year over year in the second quarter. After buying back $500 million in Dow stock in Q1, our buyback program is restricted until the close of the Olin transaction – which is anticipated by year-end – so we expect second quarter share count to remain flat with the first quarter. Turnaround costs are expected to be higher by $75 to $100 million sequentially and relatively flat year-over-year.

And for the full-year 2015, we will continue to move forward on our productivity program with a goal of $300 million in savings expected, ramping through the year. Pension expense is still expected to increase slightly more than $100 million for the year. We expect a $400 to $600 million impact on EBITDA due to currency. Capex will be approximately $3.9 billion for the year; and we still expect a tax rate in the 25 to 28 percent range.

Next, I’d like to review progress against our key commitments on slide 15.

We have been transparent in sharing the actions we have been proactively taking to further drive our enterprise into the premiere chemical, materials and agriculture company that it is today.

For example, late last year we increased our divestiture target to $7 to 8.5 billion and said we expected to achieve that target by mid-2016, with the actions announced this quarter, we have now outperformed this target – and expect considerations from divestiture actions to now exceed $11 billion. This quarter, we have completed both the ANGUS and the Sodium Borohydride transactions, and of course, just a few weeks ago we announced the most significant action in this series – a transaction with Olin to divest a substantial portion of our chlorine value chain.

This transaction – particularly with its tax-efficient, win-win structure – will enable shareholders of both companies to benefit from the significant upside opportunity of the new Olin.

From a Dow perspective, the transaction will enable us to continue our drive to grow in our higher value markets as we continue to go narrower and deeper with our portfolio and will enable the new Olin to become a first tier competitor across the chlorine envelope.

To follow up on previous announcements, we expect to receive final regulatory clearance to close on the Univation transaction in early May. We anticipate the deal will close officially immediately following this final approval.

Once the Dow Chlorine Products transaction, along with our ongoing JV consolidation and de-consolidation activities – including our Kuwait joint ventures – as well as a few other, smaller portfolio moves are in place, we will have completed our select-out actions.

Turning to slide 16. As a result of these actions – coupled with our targeted strategic growth investments – today Dow has the portfolio to better withstand volatility under most macro conditions.

Over the last ten years, we have been executing a significant portfolio shift with clear focus on delivering innovation-driven growth, building in-region leadership in targeted markets, and driving more consistent performance, resulting in lower volatility and more predictable earnings.

To further advance these efforts, we invested in a new ERP platform to more quickly and effectively respond to customers, as well as providing end to end capability on a single instance across the globe.  We completed the last phase of this implementation late last year. This powerful platform is also enabling us to remove costs that are made obsolete by our upgraded end-to-end platform.

Recall at our Investor Day last fall, we committed to a new, three-year $1 billion productivity drive.  Our productivity efforts continue to center on cost-out actions and doing more with the resources we have in place, all to enable higher earnings.  We are making steady progress to deliver on this objective as we removed $57 million of costs in the quarter and will ramp to $300 million through the year. Our productivity focus also enabled us to produce the same volume year-over-year in the quarter, despite more than a billion pounds of incremental capacity off line due to planned maintenance turnarounds versus Q1 of last year. 

We will make further announcements around the actions we are taking in the coming quarters to deliver the $1 billion drive, so stay tuned.

Looking ahead on slide 17, our earnings performance, coupled with our strengthened balance sheet, and the growth catalysts that we have discussed, provide us with confidence in our future cash flow.

In the near term, we expect our demand on cash to decrease as a result of three main factors. CapEx reverting to depreciation levels over the next three years; reduction in pension expense associated with rising interest rates; as well as the conversion of our preferred shares.

We also anticipate cash flow increases resulting from multiple drivers. The ramp up of our key catalysts – Sadara and the U.S. Gulf Coast investments, which will have a collective $3 billion EBITDA run rate, once fully operational. Our investments in innovation – delivering 5,000 new products a year and driving higher margins; productivity; and of course, our operating leverage – where every percent improvement in our operating rate adds approximately $200 million in annual EBITDA; and while we are not counting on it, we do see an ethylene cyclical upside in front of us in the next few years.

And finally turning to slide 18, with our earnings performance, our strengthened balance sheet, and the growth catalysts we have discussed, as well as our confidence in our future cash flow, I want to briefly recap our financial priorities. Drive further, ongoing ROC improvement with a goal to return 3 percent above our cost of capital; Continue to enhance our capital structure and maintain our solid investment grade rating; Reward shareholders with a goal to remain in the range of our historical payout ratio of about 45 percent of our net income; And continuing to invest for growth in our key markets through both the organic actions we have in motion, as well as our ongoing JV consolidation and de-consolidation actions.

In closing, let me emphasize, the results we have been consistently delivering – on the bottom line – reflect the deliberate actions we have taken and will continue to take. 

Our focus remains on execution, to drive a continued focus on productivity measures and to continue to position Dow for growth, as well as increased shareholder remuneration.

With that, Jack, let’s turn to Q&A. 

J. Broodo

Thank you, Howard. Now we will move on to your questions.

First, however, I would like to remind you that my comments regarding forward-looking statements and non-GAAP financial measures apply to both our prepared remarks and the following Q&A.

Rachelle, would you please explain the Q&A procedure?

Thank you everyone for your questions.

Andrew, would you like to make any final comments?

Thank you, Andrew.

As always, we appreciate your interest in The Dow Chemical Company.

For your reference, a copy of our prepared comments will be posted on Dow's website later today.

This concludes our call for today. We look forward to speaking with you again soon.

Use of non-GAAP measures: Dow’s management believes that measures of income excluding certain items (“non-GAAP” measures) provide relevant and meaningful information to investors about the ongoing operating results of the Company. Such measurements are not recognized in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and should not be viewed as an alternative to GAAP measures of performance. Reconciliations of non-GAAP measures to GAAP measures are provided in the Supplemental Information tables.

Note: The forward looking statements contained in this document involve risks and uncertainties that may affect Dow’s operations, markets, products, services, prices and other factors as discussed in filings with the Securities and Exchange Commission (“SEC”). These risks and uncertainties include, but are not limited to, economic, competitive, legal, governmental and technological factors. Accordingly, there is no assurance that Dow’s expectations will be realized. The Company assumes no obligation to provide revisions to any forwardlooking statements should circumstances change, except as otherwise required by securities and other applicable laws.This document also contains statements about Dow’s agreement to separate a substantial portion of its chlor-alkali and downstream derivatives business, distribute the business to Dow shareholders and then merge it with a subsidiary of Olin Corporation (the “Transaction”). Many factors could cause actual results to differ materially from these forward-looking statements with respect to the Transaction, including risks relating to the completion of the transaction on anticipated terms and timing, including obtaining shareholder and regulatory approvals, anticipated tax treatment, unforeseen liabilities, future capital expenditures, revenues, expenses, earnings, synergies, economic performance, indebtedness, financial condition, losses, future prospects, business and management strategies for the management, expansion and growth of the new combined company’s operations, Olin’s ability to integrate the business successfully and to achieve anticipated synergies, and the risk that disruptions from the Transaction will harm Dow’s or Olin’s business. While the list of factors presented here is considered representative, no such list should be considered to be a complete statement of all potential risks and uncertainties. Unlisted factors may present significant additional obstacles to the realization of forward looking statements. Consequences of material differences in results as compared with those anticipated in the forward-looking statements could include, among other things, business disruption, operational problems, financial loss, legal liability to third parties and similar risks, any of which could have a material adverse effect on Dow’s or Olin’s consolidated financial condition, results of operations or liquidity. Dow does not assume any obligation to provide revisions to any forward looking statements should circumstances change, except as otherwise required by securities and other applicable laws.

Important Notices and Additional Information

In connection with the proposed transaction, Blue Cube Spinco Inc. (“Spinco”) will file a registration statement on Form S-4/S-1 containing a prospectus and Olin will file a proxy statement on Schedule 14A and a registration statement on Form S-4 containing a prospectus with the SEC. INVESTORS AND SECURITY HOLDERS ARE ADVISED TO READ THE REGISTRATION STATEMENTS/PROSPECTUSES AND PROXY STATEMENT WHEN THEY BECOME AVAILABLE, BECAUSE THEY WILL CONTAIN IMPORTANT INFORMATION ABOUT THE PARTIES AND THE PROPOSED TRANSACTION. Investors and security holders may obtain a free copy of the prospectuses and proxy statement (when available) and other documents filed by Dow, Spinco and Olin with the SEC at the SEC's web site at http://www.sec.gov. Free copies of these documents, once available, and each of the companies’ other filings with the SEC may also be obtained from the respective companies by directing a written request to Olin at 190 Carondelet Plaza, Clayton, MO 63105. Attention: Investor Relations or Dow or Spinco at The Dow Chemical Company, 2030 Dow Center, Midland, Michigan 48674, Attention: Investor Relations.

This communication is not a solicitation of a proxy from any investor or security holder. However, Olin, Dow, and certain of their respective directors, executive officers and other members of management and employees, may be deemed to be participants in the solicitation of proxies from shareholders of Olin in respect of the proposed transaction under the rules of the SEC.  Information regarding Olin’s directors and executive officers is available in Olin’s 2014 Annual Report on Form 10-K filed with the SEC on February 25, 2015, and in its definitive proxy statement for its annual meeting of shareholders filed March 4, 2015. Information regarding Dow’s directors and executive officers is available in Dow’s Annual Report on Form 10-K filed with the SEC on February 13, 2015, and in its definitive proxy statement for its annual meeting of shareholders, filed March 27, 2015, and a supplement to the proxy statement filed March 31, 2015. These documents can be obtained free of charge from the sources indicated above. Other information regarding the participants in the proxy solicitation and a description of their direct and indirect interests, by security holdings or otherwise, will be contained in the registration statements, prospectuses and proxy statement and other relevant materials to be filed with the SEC when they become available.

This communication shall not constitute an offer to sell or the solicitation of an offer to sell or the solicitation of an offer to buy any securities, nor shall there be any sale of securities in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such jurisdiction. No offer of securities shall be made except by means of a prospectus meeting the requirements of Section 10 of the Securities Act of 1933, as amended.