Next Steps in Dow's Transformation
The Dow Chemical Company
March 9, 2009
Conference Call/Webcast
With Investors, Financial Analysts and the Media
Remarks by:
Andrew N. Liveris, Chairman and Chief Executive Officer
Geoffery E. Merszei, Executive Vice President and Chief Financial Officer
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 announcement Dow Reaches Agreement to Close Rohm and Haas Acquisition.
Howard Ungerleider, Vice President, Investor Relations:
Good afternoon everyone and welcome to our announcement of our next steps in Dow’s transformation.
As usual, we’re making this call available to investors and the media via Webcast. This call is the property of The Dow Chemical Company. Any redistribution, retransmission, or rebroadcast of this call in any form without Dow’s express written consent is strictly prohibited.
On the call with me today are Andrew Liveris, Dow’s Chairman and CEO; Geoffery Merszei, Dow’s Executive Vice President and Chief Financial Officer; and Jeff Tate, Director in Investor Relations.
This afternoon, we issued a press release concerning today’s announcement and it is posted on Dow’s website, dow.com. We have prepared some slides to supplement our comments on this conference call. The slides are posted on our website, available 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. If you’d like more information on the risks involved in forward-looking statements, please see our SEC filings. In addition, some of our comments may reference non-GAAP financial measures. A reconciliation to the most directly comparable GAAP financial measure and other associated disclosures are on our website. This announcement as well as recent 10-Qs, 10-Ks, 8Ks and annual reports are available on the Internet at dow.com in the Financial Reports page of the Investor Relations section.
I would like to run through the agenda for today’s call. Andrew will give detail around today’s announcement. He’ll discuss the strategic rationale for the agreement, the new organizational structure, a clear and actionable path forward, and the synergies from our combination.
He will then provide a detailed financial summary.
Andrew will conclude the prepared remarks today with an update of our outlook and priorities for 2009.
Andrew Liveris, Chairman and Chief Executive Officer:
Thank you, Howard, and good day everyone. We are glad you could join us today to talk about a vital step in completing Dow’s transformation.
As you know, we announced a definitive agreement with Rohm & Haas to close our pending acquisition on April 1, 2009 on substantially improved financial terms to Dow and we filled the void left by the failure of the Kuwaitis to go through with K-Dow. We significantly reduced the cash purchase price and the debt required to complete the transaction. This agreement also resolves our pending litigation in the Delaware Chancery Court.
This is a pragmatic outcome for all parties involved given current economic and credit market conditions. The judge has clearly stated this situation called for a business resolution – and we found one. We always said Rohm & Haas was a strategic fit for Dow and that we needed more time to find a solution for the combined entities to be viable and today’s treacherous market environment, and we have used that time effectively. We have not been idle!!
We have clearly accomplished our objective between January 26th when Rohm and Haas filed suit and today. We now have that actionable path forward that improves our position and the potential of the business to generate both top-line and bottom-line growth.
40 days can make a significant difference. I am going to spend a bit more time on this slide because it cuts to the heart of why we were able to get this deal done.
We pressed for some currency changes that were not in the original agreement, but were ultimately reflected in the settlement, including $2.5 billion in perpetual preferred equity from the Haas Family Trust and Paulson & Company. In addition, Dow has the ability to exercise a $500 million common equity option. These changes significantly improve Dow’s debt to capital ratio versus what it would have been if we had been forced to close under the conditions we faced on January 27th.
Critically, we have changed the terms of the Rohm and Haas agreement to alter the capital structure of the combined entity. This along with a revised financing plan are the most important factors in our ability to fill our commitment to close this transaction and at the same time, improved our financial flexibility.
We successfully restructured the transaction to essentially pay the equivalent of $63 in cash and $15 in face value of preferred equity securities.
This new agreement significantly reduces the need for debt financing. Under the new terms, we plan a net draw of between $9.5 and $10.0 billion.
Another very significant accomplishment is the work that we did to amend our original twelve month bridge loan agreement. The changes we successfully negotiated include an $8 billion extension for the second year, dual credit rating triggers, and the increased debt to EBITDA coverage ratio. This tremendously improves our financial flexibility
And we have also developed a disciplined plan to retire the bridge by the end of the first year through asset sales, equity and debt issuance, and cash saved by reducing our dividend.
Beyond the significant changes to the capital structure of the combined entity, we are clearly and emphatically implementing a number of actions to ensure the combination remains strategic and value enhancing in the long run. We have spent the last two months studying the potential synergies of Rohm and Haas and grounding these more fully. Today we are announcing a more robust synergy plan … more on this later. Additionally, we engaged with the rating agencies in an effort to preserve our long-term investment grade status and have commenced an asset divestment program. We are making good progress on all of these fronts.
Through our efforts, we have addressed the funding gap due to the failure of the K-Dow transaction to close as scheduled. We also have been hard at work on developing viable alternatives to K-Dow. This includes outreach to our Kuwaiti partners, arbitration, and preserving our litigation option … we’re seeking the resolution of this matter in an expeditious manner. We are also in active dialog with a number of other potential partners as we remain committed to our asset light / joint venture strategy. We've had significant interest from many companies and are currently in face to face negotiations with potential buyers. This should come as no surprise since the businesses that were going to make up K-Dow are great assets. They include assets that establish Dow as the number one global producer of polyethylene, which is the largest volume thermoplastic in the world. Let me add emphatically we have no intention to fire sale these assets. So as you will see shortly in our financing plan, we’re not assuming the sales of these assets in the near-term. And we’re confident if we don't find the right partner during this down cycle, we will in the next up cycle. We like the polyethylene business and as the world’s leading producer, we know how to run it.
We’re also taking steps to improve our financial position, accelerating our December 2008 restructuring to improve cash flow, which is critical in this uncertain environment, and as most of you know, along these lines, we made the very difficult decision to significantly reduce our dividend. You know how important the legacy of the dividend is to The Dow Chemical Company, but this is a decision that the Board of Directors and I agreed was the right thing to do given the current reality.
While conditions remain difficult, we do have more tracking and visibility on business conditions now than we did in January. More on that later …
As we look at our strategy, nothing has changed. We will grow specialties so that we can deliver more consistent earnings growth.
As a result, acquiring Rohm & Haas is very much on strategy. It is a strong operational and strategic fit, and as I will detail in a minute there are substantial cost synergies to realize. The significant value creation opportunities we will gain by leveraging our broader product portfolio, deeper geographic reach, more channels to market and complementary technologies are also clear.
Our innovation engine will be reinvigorated and we will have enhanced leadership positions in a number of key segments.
As we announced in July and confirmed in November, we can now proceed to put in place our exciting new business structure. We have streamlined to better position our technology and channels to market, while allowing us to leverage Dow’s history of operational excellence and the power of integration.
Key to this new business structure is the combination of the Rohm & Haas and Dow specialty materials businesses as they are combined under the Advanced Materials portfolio. Rohm & Haas brings significant strengths in coatings and electronic materials. As you can see, there are also great synergies across this diverse set of product portfolios.
The combination of these business portfolios transforms both our revenues and EBITDA as you can see on slide 12. 2008 revenues go from 52 percent Performance for Dow to 60 percent for the combined entity. EBITDA is similarly transformed from 62 percent for Performance for Dow to 70 percent on a combined basis. We will have more comments on the footnotes of this slide later in the discussion.
Let’s turn to the synergies created by this transaction. As you can see, our expectations have increased from an initial estimate of $910 million to a new target of $1.3 billion. The largest increases come in the area of Purchasing Synergies, including raw materials, and in the Shared Service and Governance areas.
We feel this 43% increase in synergy savings is readily obtainable by the new combined entity and can be achieved while maintaining Rohm and Haas’s legacy of deep customer relationships and innovation … the heart of its business model. We have spent the last two months solidifying the numbers and feel confident that they can be achieved … and this is very indicative of the type of operational excellence that Dow is known for.
Here is how these synergies will be obtained. Firstly, there will be an additional headcount reduction of 3,500 positions primarily from Rohm & Haas. This number is exclusive of planned divestitures and is in addition to the previous job reductions announced individually by Dow of 5,000 positions and by Rohm & Haas of 1,500 positions.
We will also work to centralize business services and combine existing overlapping office locations. Currently, we estimate 10-15 plant closures globally with an additional consolidation of 6 R&D facilities. Finally, we also look to achieve over $400 million in purchasing synergies. Specifically, 30% of purchasing synergies are comprised of raw materials purchases that can be procured between the two companies … for materials such as propylene, acetone, and additives. This number is significantly higher than we first estimated.
Over the years, we have a strong track record of achieving cost synergies from our acquisitions. As you can see, we’ve achieved cost synergies from 14-18% from our other major acquisitions … and this one will be no different. Our 14% target is well within reach.
We’re confident in achieving this goal because of our Dow operational excellence skill set. Hackett, for example, recently rated a number of our functions very highly when compared to many other world class companies. We’re the best of the best.
We’ve also intervened to improve our financial position … this slide details a number of these actions. We are reducing capital expenditures, cutting back on discretionary spending, reducing working capital, and freezing salaries … all of which will save about $2.2 billion in 2009. We accelerated our restructuring to reflect the demand destruction in the industry … another $500 million. Finally, we also made the painful, but prudent decision to cut the dividend, which will conserve another $1 billion in cash on an annualized basis
As we’ve said all along, this deal is strategic and positions Dow for the future and transforms our business portfolio. There is $3 billion of value creation potential in growth synergies for the combined enterprise. We have one of the largest research and development investment programs in the industry … $1.6 billion combined. And geographically, the portfolios are very complimentary across a number of emerging regions as you can see.
We have opportunities for growth across a number of segments … here are examples of high growth global businesses where we are well positioned. On the right are the combined revenues for each business. These have leadership positions in resilient markets or participate in key areas of global stimulus investment … like infrastructure for example. The combination of Dow and Rohm and Haas assets represents broader market participation and significantly improved scale. We are today in the top quartile cost position for each of these businesses and our combined expertise will support even greater market share and growth opportunities.
I’m going to focus on two: coatings and water.
Our combined coatings portfolio is about a $3.5 billion business with leadership in architectural and industrial coatings markets.
Integration of acrylics, latexes, epoxies, polyurethanes and water soluble polymer technologies provides unparalleled capabilities to lead transition to high performance, environmentally friendly coating.
Our water portfolio is one of our most exciting growth opportunities … it’s about a $1 billion business. It is a leading component provider that services the fast growing demand for pure water for industrial and consumer markets. Ion exchange and membranes are critical components at the heart of purification systems.
All of these businesses are in growth markets, are high margin, and are intellectual property intensive. They will add considerable power to our innovation engine.
Now I’d like to spend a couple of minutes focused on how we are going to draw on and pay down the bridge loan and talk specifically about what our financial plan is designed to deliver.
We have a timeline of how we’re planning on paying down the bridge … and it is a disciplined and realistic schedule, but one that we think is reasonable given our plans on asset sales and additional sources of funds.
Let’s start with asset sales. At this point, we’re planning on selling our share in Dutch petroleum refining partnership TRN, our equity stake in an olefins and derivatives business in South East Asia, and Morton Salt, a division of Rohm and Haas, post close. We expect to generate in the neighborhood of $4 billion from these and other sales.
We also plan on raising additional capital to retire the bridge, including a debt issuance of $4.3 billion and an equity issuance to the Rohm and Haas ESOP of approximately $600 million.
This plan will deliver what you see here. We will maintain a debt to capital ratio of less than 50%. Our gross debt to EBITDA will remain within our covenants. We will retire the bridge by the end of the year. And we will have positive operating cash flow for the year.
I’d like to conclude with a review of our outlook for 2009 and our priorities for the remainder of the year.
Let me emphasize … back in October we said that we expected 2009 to be a year of global recession and things have not changed since then. But we’re beginning to see some bright spots.
The multi government stimulus packages could positively impact infrastructure, housing and energy efficiency for example ... all sweet spots for us.
The long-term fundamentals of Agricultural Sciences have not changed and remain strong. Farmers are coming out of 2008 in a relatively strong position and we expect growth in seeds and traits and a continued ramp-up in new product sales.
We’re seeing insulation sales offsetting the declines in construction activity because of demand for higher energy efficiency.
As I said earlier, water industry fundamentals remain strong as well. The fourth quarter of last year was the best quarter ever for Dow Water Solutions, capping off a very solid 2008.
Our exposure to the sectors that are highly sensitive to the economic downturn is relatively low … 20% of our total business. Almost all of our exposure is in the construction and transportation sectors. Most of the other sectors have low or medium exposure.
One of these sectors is polyethylene, the world’s largest and most widely used thermoplastic … and packaging is its largest application. This is a product that we all use every day and, therefore, it is resilient in recessionary environments like the current one. In fact, as you can see, our exposure to highly sensitive macroeconomic sectors is very low across polyethylene.
On our last earnings call, I mentioned that we felt like Polyethylene was primed for recovery. Here we’re depicting the extreme destocking it experienced in the fourth quarter … nearly 1 billion pounds were taken out of inventory in December alone and far surpassed historical industry de-stocking events. Clearly the significant drop in feedstock and energy costs caused a demand interruption in the value chain. Let me remind you … polyethylene industry growth has never been negative in back-to-back years. And we have seen demand improve in January and again February.
Dow’s global polyethylene operating rate estimate for the first quarter is improving, which clearly reinforces that restocking is occurring. Despite this particular trend, we’re not planning on anything more than the global recession continuing through the end of the year.
Our path forward for 2009 is very clear. We are focused on cash flow and earnings. We will realize the operating synergies from this combination quickly and we will divest the assets necessary to support our financial plan. Additionally, we continue to pursue all of our options to successfully resolve PIC’s failure to close K-Dow.
We have a very clear path forward and we are going to execute on our commitments … just as we did to change the terms of the Rohm and Haas agreement. We are back in control of our own destiny and have removed uncertainty. We are a company known for our implementation skills. As we announce the completion of the Rohm and Haas acquisition as a part of Dow, know that the hardworking people of the combined enterprise will deliver on the promise and the commitments of this exciting new company.