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Fourth Quarter 2009 Earnings
The Dow Chemical Company
February 2, 2010
Quarterly Earnings Conference Call/Webcast
With Investors, Financial Analysts and the Media
Remarks By:
Andrew N. Liveris, Chairman and CEO
William H. Weideman, Vice President and Interim CFO
Howard Ungerleider, Vice President, Investor Relations
Note: The following statements contained in this document involve risks and uncertainties that may affect the Company's operations, markets, products, services, prices and other factors as discussed in filings with the Securities and Exchange Commission. These risks and uncertainties include, but are not limited to, economic, competitive, legal, governmental and technological factors. Accordingly, there is no assurance that the Company's expectations will be realized. The Company assumes no obligation to provide revisions to any forward-looking statements should circumstances change, except as otherwise required by securities and other applicable laws.
The following is a summary of prepared remarks made during Dow's conference call/Webcast concerning its quarterly earnings on February 2, 2010. The news release and financial statements are also available on www.dow.com.
H. Ungerleider:
Good morning everyone and welcome. As usual, we are making this call available to investors and the media via webcast. This call is the property of The Dow Chemical Company. Any redistribution, retransmission or rebroadcast of this call in any form without Dow's expressed written consent is strictly prohibited.
On the call with me today are Andrew Liveris, Dow's Chairman and Chief Executive Officer; Bill Weideman, Vice President and Interim Chief Financial Officer; and David Johnson, Director in Investor Relations.
Around 6:30 this morning, February 2, our earnings release went out on PRNewswire and was posted on the Internet on Dow's website, Dow.com. We have prepared some slides to supplement our comments in 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 would 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. And, I would like to point out that in our prepared remarks today -- in order to provide the best information regarding our results -- our sales comparisons are on a pro forma basis excluding completed divestitures and our EBITDA comparisons exclude certain items. 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 release, as well as recent SEC filings, are also available on the Internet at Dow.com.
The agenda for today's call is on slide 3. Now I will hand the call over to Andrew.
A. Liveris:
Thank you, Howard. Good morning to everyone and thank you for joining us to discuss our results.
What a difference a year makes! As you recall this time last year, we were facing unprecedented demand destruction and of course steep declines in manufacturing activity across virtually all sectors.
We responded by taking decisive actions throughout the year, and the results of those actions are clearly demonstrated in the fourth quarter result.
- Here Dow grew earnings year-over-year in the quarter, and we delivered the fourth consecutive quarter of positive operating earnings in highly challenging economic conditions.
- But the big story of the quarter is top-line growth driven by year-over-year volume gains. We achieved 4 percent top line growth and 10 percent higher volumes versus the same quarter last year. This is on a pro forma basis excluding divestitures, which is really the best way to view the underlying performance of our operations. This was driven by strengthening demand across many of our key segments. Sales increased sequentially each quarter of the year and even accelerated during the fourth quarter.
- The power of our strong geographic footprint manifested itself once again – specifically in the emerging geographies of Asia Pacific, Latin America, Eastern Europe, India and the Middle East which all had double-digit volume growth over the fourth quarter of last year. Overall, emerging geographies posted volume growth of 33 percent.
- EBITDA increased by $809 million in the quarter, and in all operating segments except Health and Agricultural Sciences, which declined primarily due to increased investment in R&D as we continue to fund growth in this exciting segment of our Company. EBITDA in the combined performance segments was up 88 percent versus the fourth quarter of last year. Overall, EBITDA was at a $6 billion annualized run-rate for the third consecutive quarter.
- Equity earnings were very strong at $284 million, and back to normalized levels not seen since prior to the economic downturn, led by strong performance in Dow Corning and EQUATE. These joint ventures will continue to be important elements of our growth strategy going forward.
- We continued our focus on cash flow, generating $1.4 billion of cash from operations in the quarter, and $2.1 billion for the full year.
- We are also well ahead of our goals on cost reductions. We ended the year with a run rate of $1.7 billion in savings from structural cost reductions and cost synergies related to Rohm and Haas. We are now 70 percent of the way towards our two year goal of $2.5 billion in savings.
- We completed the divestment of Morton Salt in the quarter. This was the fourth non-core divestment of 2009 – all with strategic buyers and all at favorable multiples.
- We paid-off the balance of our bridge loan well ahead of plan, and we also repaid our revolver.
- In total, we reduced our debt by $2.5 billion since April 1st, reducing our net debt to cap to 48 percent, ahead of our goal, through a number of actions I’m going to highlight later.
This is an impressive list when taken on its own. But when you consider we did all of this while continuing the integration of Rohm and Haas, cutting costs, reducing our Basics footprint, divesting non-core assets while continuing our many investments for growth - all of which was done during the worst recession in decades, these accomplishments are even more extraordinary. I am also proud that the Dow team continued its focus on serving customers well and driving top line growth.
Looking at slide 5 and turning to the outlook for industry demand, here again is the tracking tool we showed you last quarter. We saw improvements across many of our end-use industries throughout the year. This underscores the unique view we have into the economic recovery based on our participation in the value chains of a vast array of industries and end markets.
On slide 6 you can see our broad geographic reach also gives us insights on overall global demand trends. Emerging geographies once again led our growth in the fourth quarter, with volumes up 33 percent over the fourth quarter of last year.
Volumes in China, for example, were up nearly 60 percent, and India and Russia were up around 30 percent. Brazil was up 20 percent.
Globally, North America was the only region that we did not see volume growth. But even here, there were some bright spots. Automotive demand was improved and the demand for packaging remained resilient. Broader growth, however, continued to lag as high unemployment and reduced consumer spending dragged on the progression of the U.S. recovery.
Conditions were similar in Europe for many of the same reasons, and the higher value of the Euro further impacted exports out of that region.
These trends, along with our fourth quarter results, represent clear and positive steps forward in the global economy, and in our operating segments. We begin 2010 well positioned to take advantage of strengthening economic conditions in key areas of the world.
Our new portfolio … our R&D engine … our strong geographic presence … our ability to remain financially disciplined will all be key drivers to earnings growth well into the future. I’m going to speak more about these points in a moment, but first, I would like to turn the call over to Bill for a review of the fourth quarter.
W. Weideman:
Thank you, Andrew. I’ll begin with a review of our fourth quarter results on slide 7.
Reported sales were $12.5 billion, an increase of 15 percent over the same period last year and 3 percent over the third quarter of 2009.
On a pro forma basis and excluding divestitures, year-over-year sales were up 4 percent, driven by volume growth of 10 percent.
EBITDA excluding certain items was up on a year-over-year basis in the fourth quarter by $809 million and was basically flat sequentially in what is traditionally a seasonally weak quarter.
Earnings excluding certain items were 18 cents per share, ending the year with four quarters of positive results.
The current quarter included 10 cents per share unfavorable impact for certain items – details for these items are included in the appendix.
Our tax rate was lower this quarter due to higher earnings in emerging geographies and strong joint ventures results. We expect a lower tax rate to continue in 2010 and would estimate a rate of between 15 to 20 percent for modeling purposes.
As Andrew mentioned, we saw strong volume growth in the quarter. As you can see on slide 8, we saw year-over-year improvement in virtually every operating segment and across all geographies except North America. Strong growth in Electronic Materials of 14% was, however, off-set by lower demand in Specialty Materials, driven by lower capital spending in industrial water applications. We see this as just a temporary pause, and remain confident in the long term fundamentals in the demand for clean water.
Emerging regions also clearly performed very well versus last year, while growth in the more developed economies is lagging.
On a sequential basis, as you can see on the next slide, volumes rose 3 percent. This was in spite of normal seasonality in segments such as Electronic Materials and Coatings and Infrastructure. Once again, emerging geographies led the volume gains.
On slide 10, you can see that price rose sequentially in every operating segment except Health and Agricultural Sciences and in every geography. These gains largely offset the more than $525 million increase in purchased feedstock and energy costs. As you know, energy prices rose significantly in the last half of December and we have responded quickly to pass on these increased costs.
Now let’s take a look at how the company performed at an operating segment level on slide 11.
In Electronic & Specialty Materials, as I just mentioned, volume was up 14 percent in our Electronic business versus last year. Foundry utilization rates remained strong and we did not see the typical seasonal pause. The semiconductor industry also continued to see solid downstream demand.
In Specialty Materials, volume was somewhat muted during the quarter in industrial water end-markets and demand for cellulosics used in construction applications was weak in North America and Europe.
We continue to see growth in our Coatings and Infrastructure segment as emerging regions continue to drive increased demand. Significant growth in China was driven by its stimulus programs, which strengthened construction and residential end-markets. In North America and Japan, we are beginning to see improvement. However, commercial construction continues to be slow in these geographies, and in Europe.
Now turning to Health and Agricultural Sciences on slide 12, the fourth quarter produced double-digit sales growth in Ag-Chem as farmers in Brazil resumed plantings after a temporary pause last quarter. Seeds, Traits and Oils volume grew 24 percent as the business continues to reap the rewards of its technology-rich pipeline and recent seed acquisitions. These drove sequential and year-over-year volume growth.
We remained focused on investing in this segment given its robust long-term fundamentals. Both R&D and SG&A investments increased in the quarter to support product launches and recent seed acquisitions.
One example of this, just last week, Dow Agrosciences announced regulatory approval from Mexico for the importation of corn grain produced from SmartStax™. This is an important approval because Mexico is among the world’s largest importers of U.S. corn, and this ensures they will have access to this world-class technology.
Now let’s turn to Performance Systems. Performance Systems continued to show strong operating performance in the quarter. Demand for wind energy applications in China drove growth in our Formulated Systems business, while demand in food packaging and automotive applications strongly benefited our Elastomers business. While there was double-digit increase in light vehicle production within the automotive industry versus last year due to government stimulus, visibility remains unclear in this sector as the programs come to an end.
Moving to Performance Products, our polyurethane building block business delivered a solid quarter due to tight supply, increasing demand and further penetration of our unique technologies in the appliance industry. We also saw increased demand for oxygenated solvents. These products go into a number of growing healthcare applications such as hand and surface sanitizers. And lastly, we saw increased demand in Europe for heat transfer fluids used in new concentrated solar power installations.
As you can see on slide 13, our Basic Plastics franchise delivered another outstanding quarter. Continued demand for polyethylene drove double-digit volume growth versus the fourth quarter of 2008. This is the fourth consecutive quarter of polyethylene volume growth, due in part to an open export window from North America due to relatively low gas prices and to the weak U.S. dollar.
As an aside, I would like to point out that the Basic Plastics segment, which is comprised primarily of polyethylene, generated $1.7 billion of EBITDA in 2009. In one of the worst economic climates in decades, this is truly an impressive performance.
Finally, I am pleased to report that after facing headwinds throughout most of 2009, our Basic Chemicals business showed signs of strengthening. Caustic soda prices improved after bottoming in the third quarter and vinyl chloride monomer prices rose for the third consecutive quarter on increasing demand. Aggressive economic stimulus efforts in China drove improved performance in EO/EG,as polyester fiber mills saw an uptick in production.
On slide 14, equity earnings, excluding certain items, were $284 million, which is up 27 percent sequentially. Once again this is back to levels we last saw before the economic downturn. Notable contributors to the improvement were Dow Corning and EQUATE.
Turning to our actions on cost control, on slide 15, and in keeping with our long-term heritage of financial and operating discipline;
We delivered on our structural cost reductions, achieving more than $215 million in the fourth quarter;
On a pro forma basis, SG&A was down 4 percent in the quarter versus the fourth quarter of 2008 even with a 15 percent increase in Ag to support new product launches and commercial activities;
On a pro forma basis, R&D spending was up 6 percent, continuing our investment in growth despite the challenging economic conditions, led by increased investment in Dow AgroSciences;
And lastly, we made significant progress in our commitments related to cost synergies and our restructuring efforts.
On slide 16, you can see we are well ahead on our plan to capture the cost synergies related to the acquisition of Rohm and Haas and our restructuring programs. And we expect to deliver an additional $650 million in savings in 2010 versus 2009.
Let me now hand it back over to Andrew.
A. Liveris:
Thank you, Bill. Now let’s look at Slide 17 and turn to a review of the full year. Exactly a year ago I ended my discussion by asking you to judge us by our actions.
Despite 2009’s unprecedented demand destruction, and the traumatic failure of PIC of Kuwait to close the legally binding joint venture transaction, we acted decisively to re-position ourselves to our new realities.
We quickly reduced costs and right-sized our asset footprint to reduce exposure to commodity products in low-growth locations. And, we increased our presence in high growth products in fast-growing geographies.
We also closed the Rohm and Haas transaction and moved quickly on the cost synergies.
As a result, we improved volumes and profits from these actions sequentially through-out the year. And we are benefiting from the pivotal step we took in acquiring Rohm and Haas. By year’s end, our pace of improvement was increasing, as shown by the results in the quarter. We are ahead of all of our operating and financial milestones that we had promised you in early 09. Let me review each of these milestones in turn.
Our strategic accomplishments this year were many.
As I stated, we acquired and integrated Rohm and Haas, which I believe will be remembered as the singular strategic acquisition that transformed Dow into a higher-growth and higher-margin business portfolio with significantly improved earnings power.
We shed $3 billion of non-core assets at very attractive multiples. This was done ahead of our divestment plan and gave us the proceeds to strengthen our capital structure.
We reviewed and re-committed ourselves to our strategy, and after an enterprise-wide review, we remain committed to ongoing and active portfolio management to improve profitability and focus resources on higher-growth, higher-margin opportunities.
We have a deliberate and well thought out plan, with $12 billion of divestment options, as well as targeted areas for growth.
And to me, the best proof of our renewed commitment to grow and deliver shareholder value is our record year of R&D investment, reinforcing our focus on market-driven science-based innovation.
On Slide 19 our financial milestones we also over-achieved in a very difficult year.
As I mentioned earlier, we delivered four consecutive quarters of positive operating earnings. And we achieved improved sequential sales throughout the year reflecting quarterly demand improvement as volume increased, particularly in emerging markets.
And since the close of Rohm and Haas on April 1st, we’ve taken a number of actions to strengthen our balance sheet.
We eliminated the high-cost Series B and C preferred shares – at par. We successfully raised equity in an oversubscribed offering and termed out near-term maturities with oversubscribed debt offerings. And we completely paid off the bridge loan ahead of schedule, and paid off the remaining balance on the revolver.
In addition, we reduced long-term debt maturities through 2011 by 80 percent and lowered total indebtedness by more than $2.5 billion. All of these actions brought our net debt to total cap down to 48 percent – which is ahead of our plan – and we lowered our financing costs by $500 million per year.
And lastly, as I mentioned at the outset of my talk, we generated $2.1 billion in cash from operations in 2009.
We also exceeded our operational goals in every respect, reflecting our commitment to operational discipline and our very strong focus throughout the year.
Our actions to reduce structural costs delivered more than $1.2 billion in savings in 2009, and we ended the year with a $1.7 billion run-rate, ahead of our plan and 70 percent of the way towards our two year goal of $2.5 billion in savings. And we are also well ahead on the cost synergies related to Rohm and Haas. We accelerated our actions and have now achieved 140 percent of the 12-month cost synergy run-rate target.
Finally, we took quick steps to right-size our Basics manufacturing footprint, reducing ethylene consumption on the U.S. Gulf Coast by 30% and re-positioning our Basic Chemicals portfolio to more efficiently feed our higher-value, higher-margin downstream performance businesses.
On slide 21 you can see that overall, this was an amazingly active year with a tremendous number of accomplishments – all of which were made possible because of the hard work of Dow’s people around the world.
As we look ahead, Dow has all of the elements in place to move forward aggressively on three distinct fronts, delivering consistent earnings and cash flow, a higher rate of growth and an improved return on capital while doing so.
First, we are positioned to be able to drive growth across the board. We have businesses tied to markets that are growing at a multiple of GDP as well as being present in developing geographies that are providing us tremendous growth opportunities, and driving our earnings trajectory.
In fact, we currently project our revenues will grow by greater than 10% with our new portfolio driven by science and technology.
We expect EBITDA margins to increase from 12% in 2008 to 20% over time with our new portfolio, powered by our ability to provide customers with science-based, technology rich solutions.
And we will accelerate these earnings with our new reduced cost structure which will provide us $2.5 billion in savings by 2011.
Also fueling this growth is our innovation engine.
In 2009, the $1.6 billion we invested in R&D as a combined entity, which as an aside is more than the combined R&D budgets of all the university chemistry programs in the United States, is paying off.
During the last three years, we have nearly tripled our pipeline valuation – to $28 billion – by making targeted investments in higher-value, higher-margin products and businesses.
At the same time, as already stated we have implemented a rigorous, cross-company system of portfolio management to ensure every research dollar is well spent.
All of this leads to tremendous earnings power which will generate significant cash flow that we are committed to both reinvesting in our businesses for growth while at the same time rewarding our owners.
On slide 23 you have heard me speak throughout this past year of a new Dow. The decisions we made in 2009 – along with the speed and decisiveness of the actions we took – we believe we have firmly delivered the Dow of Tomorrow.
Today, we have the right portfolio ... the right geographic position ... and the right pipeline, as indicated by all the points on this slide.
The right portfolio is in place to define how we will grow. This portfolio is supported by three integrated business models; Basics, Performance, and Market-Driven.
We now have a robust portfolio of businesses exposed to high-growth industries, such as electronics, coatings, infrastructure, personal care, water, energy and food and agriculture, all with higher EBITDA margins and higher growth. You can see this across our Advanced Materials, AgroSciences and Performance businesses. These represent two-thirds of our overall business portfolio and almost all of them have leading industry positions.
We also have the right geographic position. Dow’s volume from emerging geographies grew 33% year-over-year and actions we took this year further strengthen our geographic presence and position the Company for even greater success. Sales in emerging geographies now represent 32 percent of our total sales, up from 28 percent last year. We will continue to expand in these fast growing geographies.
On slide 27 you can see that we have the right pipeline. At our Investor Day in November, we highlighted the power of our innovation engine. This is an engine that today has a potential value of $28 billion, five times higher than in 1997. The more than 500 projects in our innovation playbook are strategically aligned with four global megatrends: health and nutrition, energy, consumerism, and transportation and infrastructure. The $1.6 billion that we plan to invest annually in R&D will continue to be aimed squarely at the intersection of society’s greatest needs and business opportunity.
A further proof point on innovation is the growth synergies we’re gaining from the integration of Rohm and Haas. These growth synergies will produce $2 billion in revenue by the end of 2012 on a run-rate basis and cut across our portfolio, geographies, and pipeline.
They are focused on new commercial activities such as: cross-selling to increase our share of products with existing customers; leveraging the new product portfolio; and creating new and innovative solutions for customers.
In our Coatings business, for example, we’ve realized a number of successful cross-selling opportunities between our architectural and industrial coatings portfolios. In our ion exchange business, we delivered additional growth opportunities for industrial water purification. And in adhesives, our expanded product line was able to capture new business with a global packaging converter.
These are just two of the many examples that, by the end of the fourth quarter of this year, delivered more than $340 million in new annual revenue.
So with the right portfolio, the right footprint and the right pipeline, the Dow of Tomorrow is here … today.
Let me address our outlook for 2010. From a geographic perspective, the sustained demand growth we’re witnessing in emerging geographies bodes well for global growth.
The recovery in regions such as China is creating positive volume opportunities which have helped us through much of 2009. However, we continue to closely monitor China’s overheating manufacturing engine and the potential for the creation of asset bubbles. The Brazilian economy fared better than most during the global economic recession and we’ve seen stronger demand rebound there as well.
We feel better about the North American and European economies today than we did one year ago, or even one quarter ago. Certainly the U.S. GDP numbers released last week point to an economy that is recovering. The impressive 5.7 percent annualized number in the fourth quarter shows that the U.S. economy grew at the fastest pace in more than 6 years, although over half of this was inventory re-stocking. These much stronger than expected numbers provide yet another data point that a recovery is taking hold.
This number also shows that U.S. inventory destocking has ended, and the good news is that we see supply chain inventory levels remaining low. So, the potential for growth and a re-bound is there but high unemployment and questions about the sustainability of government stimulus spending continue to mute the possibility of a strong rebound, like we saw in 03-04.
Therefore in our view the US, this recovery looks more like a “U“ than a “V”, and the opposite is true in the emerging world. Which gives us the view that recovery this year will be mostly shaped like a “lazy V“.
Our portfolio is perfectly positioned for such an outcome.
On the Performance side, we have the right the exposure to fast growing sectors such as electronics, water, coatings, energy, consumer goods and agriculture.
And our powerful Basic Plastics franchise now has a relatively low cost position with the increased supply dynamic in U.S natural gas. Our investments in feedstock flexibility in this region, coupled with our low cost positions in Canada, Kuwait and Argentina, mean we will continue to generate strong profits in this business as economic recovery takes hold and the cycle turns.
Finally, as I just mentioned, our growing presence in emerging geographies will fuel earnings growth, as witnessed by our 33% year-over-year growth from these regions in the fourth quarter alone.
On slide 29 you can see our tracking tool and this time it shows the first quarter outlook where we see continued improvement across many of our end-use industries as you can see from the predominance of green boxes.
However, despite the sequential revenue and volume growth throughout 2009 and even the acceleration of our results in the second half of last year, we believe the economic environment continues to warrant caution because of the potential for uneven growth.
That’s why our plan does not count on a material improvement in economic activity from end of year 2009 levels.
Accordingly, we will keep a tight rein on costs and capital, while maximizing cash flow – just as we did last year. This disciplined focus, when coupled with our higher-margin, higher-growth portfolio, strong geographic presence and invigorated pipeline, really positions us well to benefit from an economic recovery.
On slide 30 you know and you’ve seen our clear path to earnings growth. And this slide, which you will recall from our Investor Day, sets the framework to achieve this goal.
We now have all of the elements in place – our new portfolio … our R&D engine … our strong geographic presence … our ability to remain financially disciplined as well as our ongoing portfolio management.
Plus, the full retention of our powerful Basic Plastics business all add up to this new earnings profile, one with significant upside potential, and one that we will realize over these next few years with flawless and rigorous execution, something that Dow is known for.
So, that brings me to my priorities for 2010
From a strategic perspective:
We will maintain our commitment to innovation-based science and plan to invest a further $1.6 billion in our world-class R&D capabilities to accelerate our future growth on multiple fronts;
We will also continue to invest in emerging geographies to further expand our market and asset presence in these high growth regions.
We will continue our focus on portfolio management by divesting non-core assets. Our target in 2010 is $2 billion. Styron represents the largest portion of that.
I am pleased to report the Styron divestment process has continued to move forward on a very timely basis. As with any strategic process, we will update you when we have an announcement. The business is now running in a separate structure and is doing very well.
And we will seek to deliver on the right asset-light strategy, and we will only do so if it creates a long-term growth enterprise that creates value for our shareholders. We remain in an active process of exploring our strategic asset-light JV.
Financially, we’ll continue to take the appropriate steps to maintain optionality and financial flexibility.
We will remain focused on cash generation with a goal of generating free cash flow of $1.5 billion.
As I mentioned before, we will further pay down debt in 2010 with a goal of reaching a net debt to total cap of 45%.
We will protect and enhance our investment grade rating. To that end our intention is to use our excess cash to repay debt.
And lastly, on operational priorities, we will maintain our commitment to fixed cost reductions and cost synergies at a run rate of $2.5 billion by year-end.
We will capitalize on the growth synergies related to the integration of Rohm and Haas, delivering greater than half a billion dollars on a run rate basis by the end of the year;
We will continue to deliver on our working capital discipline to the tune of half a billion dollars.
These priorities are a balance between appropriate caution, and therefore maintaining cost and operating discipline and focus, especially with the uncertainty around the U.S. consumer; and balance with growth, given our exciting new portfolio, our broad opportunity mix, and our transformation into a consistent earnings growth enterprise.
And, just to repeat one more time, this enterprise is here today.
I will now turn the call back to Howard.
H. 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.