The Dow Chemical Company

Transcription

1 The Dow Chemical Company 1Q 2014 Earnings Conference Call April 23, 2014 The Dow Chemical Company

2 SEC Disclosure Rules 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 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 earnings per share is defined as earnings per share excluding the impact of Certain Items. Net Debt to EBITDA is defined as Net Debt divided by Adjusted EBITDA. Net debt equals total debt ( Notes Payable plus Long-term debt due within one year plus Long-Term Debt ) minus Cash and cash equivalents. Adjusted sales is defined as Net Sales excluding sales related to prior-period divestitures. 2

3 Near-Term Strategic Priorities Invest in key integrated and feedstock driven value chains and successfully start up these projects in 2015 (USGC and Sadara) Launch new products in Dow Packaging & Specialty Plastics, Dow AgroSciences, Dow Electronic Materials and Dow Coating Materials, and deliver new margins in these businesses in 2014/2015 Drive productivity and reduce costs manage cash and capital tightly Divest or JV chlorine chain and Epoxy business in 2014/2015 Release hidden value businesses and ventures, drive better transparency on ROC and value creation in each segment Drive returns that exceed the cost of capital, increase financial flexibility with cash generated and reward shareholders 3

4 Agenda 1Q 2014 Overview & Financial Update Segment Overview & Market Trends Driving Near-Term Shareholder Value 4

5 Dow Delivers Earnings Growth and Margin Expansion Earnings per share of $0.79 up 14% on an adjusted basis Net Income increased to $964MM up 18% on an adjusted basis Sales of $14.5B Higher volumes in Coatings and Infrastructure Solutions Pricing gains in Performance Plastics Emerging geographies sales increased driven by growth in China EBITDA of $2.4B sixth consecutive quarter of YOY growth Adjusted EBITDA margin expanded to 16.6%; increases in most operating segments EBITDA increase led by Performance Plastics, Agricultural Sciences and Coatings and Infrastructure Solutions Agricultural Sciences achieved new EBITDA record Cash flow from operations improved nearly 30% Self-help actions mitigated >$300MM rise in purchased feedstock and energy costs $1.7B returned to shareholders through share repurchases and declared dividends 5

6 Drivers of 1Q14 Financial Performance Key Drivers in the Quarter $0.79 $0.69 Productivity actions drove ongoing cost improvements Volume growth in EMEA, Asia Pacific & Latin America Strong performance despite cold winter impacts 6

7 Agenda 1Q 2014 Overview & Financial Update Segment Overview & Market Trends Driving Near-Term Shareholder Value 7

8 Electronic & Functional Materials Market Trends and Near-Term Outlook 1Q14 Sales: $1.1B, down 1% 1Q14 EBITDA: $290MM, up 6% Dow Electronic Materials OLED materials delivered substantial sales growth on continued demand for brighter, sharper displays Demand for printed circuit boards in smart devices drove growth for Interconnect Technologies Margin expansion enabled by productivity gains and Dow s close-tocustomer strategy, including asset rationalization in the U.S. Expect full year market growth to exceed 2013 Functional Materials Dow Microbial Control sales continued to outpace the market driven by strong alignment to energy and water market sectors 1Q planned maintenance activities and cold weather impacts on sales in North America offset growth in Asia Pacific Positive growth outlook driven by consumer solutions trends toward unit dose in fabric and dishwashing applications 8

9 Coatings & Infrastructure Solutions Market Trends and Near-Term Outlook 1Q14 Sales: $1.7B, up 5% 1Q14 EBITDA: $224MM, up 20% Dow Coating Materials & Performance Monomers Improving construction activity in North America, Europe, and Asia Pacific fuels 1Q sales growth for architectural coatings Higher earnings in Dow Coating Materials driven by strengthening demand and share gains within the quarter EVOQUE expands vinyl acrylics participation; launched in Europe in 1Q14 Positive outlook as recovery continues Dow Water & Process Solutions Reverse osmosis demand strong in Asia Pacific; softer in developed regions Ion exchange resin demand soft in Japan power and electronics, while North America industrial water strengthening Improving demand expected throughout 2014 Dow Building & Construction Overall strong demand in 1Q despite adverse winter weather in North America; particularly strong in Japan and EMEA where winter was mild Increasing demand for innovative materials in insulation, roofing and tile applications drives profitable year-over-year growth Asset reductions (three in Europe) to lower structural costs Non-residential construction indicators suggest U.S. growth in

10 Agricultural Sciences Market Trends and Near-Term Outlook 1Q14 Sales: $2.1B, up 1% 1Q14 EBITDA: $529MM, up 9% Crop Protection Record quarterly sales for Crop Protection business Favorable weather in Europe led to an early start to the season Positive 2Q demand outlook, tempered by channel inventories in North America Accelerating resistance issues drive demand for new crop protection chemistries New crop protection products on-track to exceed $1B in 2015, up 28% in 1Q14 led by pyroxsulam herbicide Positive outlook for top- and bottom-line growth in FY14 Seeds Favorable soybean economics lead to lower corn acres in the Americas Farm economics remain favorable; positive outlook for FY14 Farmer demand for increased yield accelerates adoption of stacked traits Dow expects to continue to outpace the market on the strength of differentiated technologies including SmartStax, Refuge Advanced and PowerCore Enlist corn and soybeans will accelerate top-line growth, share gains, and scale efficiencies; expect U.S. launch in 2015, registration pending 10

11 Performance Materials Market Trends and Near-Term Outlook 1Q14 Sales: $3.3B, down 1% 1Q14 EBITDA: $440MM, Flat Polyurethanes and Dow Formulated Systems 1Q demand strengthened in industrial and energy efficiency markets in all regions Improvements in Europe, on higher furniture & bedding demand and steady industrial markets buoyed by increasing economic confidence in the region Productivity efforts, including six asset shutdowns, combined with increased emphasis on higher-value market sectors position Dow for increased profitability Specialty Chemicals Severe cold temperatures impacted 1Q14 demand in North America Fundamentals remain robust within Dow Oil, Gas & Mining as major project fills, increased geographical scale and positive market outlook drive growth 1Q14 sales in Asia Pacific negatively impacted by the conclusion of marketing responsibilities related to a former joint venture Favorable trends in home care products will drive growth for Dow technologies Dow Automotive Systems Healthy transportation fundamentals continued in Asia Pacific and North America within the quarter; pent-up demand is driving improvements in Europe Above industry growth in adhesives due to new applications and products New Dow technologies enable strategic advancements in light-weighting that retain crash durability, structural integrity and acoustic performance Specialty Chemicals includes Amines, Dow Oil, Gas and Mining, Oxygenated Solvents, and Polyglycols, Surfactants and Fluids 11

12 Performance Plastics Market Trends and Near-Term Outlook 1Q14 Adjusted Sales: $3.6B, up 6% 1Q14 EBITDA: $1.0B, up 5% Dow Packaging & Specialty Plastics Growth driven by high-value targeted end markets that value differentiated technology: flexible food & specialty packaging, hygiene & medical and pipe Asia Pacific and North America delivered double-digit sales growth in 1Q14 Despite feedstock fluctuations, margin management and operational excellence drive earnings gains Healthy demand to continue in North America and emerging geographies Dow Elastomers Increased 1Q demand in Asia Pacific transportation and EMEA infrastructure; momentum expected to continue North America sales down due to cold weather impacts on operations Positive outlook on strong demand globally for transportation and hot melt adhesives for packaging and hygiene Dow Electrical & Telecommunications 1Q14 sales growth driven by Asia Pacific in power and telecommunications markets on strong power markets in China and 4G network investments Increased asset efficiency and exit from non-strategic JV drove margin expansion Expect healthy demand to continue in power and telecommunications 12

13 Actions Fuel Earnings Momentum 30% 25% 20% 15% 10% 5% 0% Adjusted EBITDA Growth by Operating Segment Six months ended 1Q14 vs. six months ended 1Q13 Electronic & Functional Materials Coatings & Infrastructure Solutions Agricultural Sciences Performance Materials Performance Plastics Collective Actions Drive Earnings Growth + Continued execution of strategic value drivers + Cost reduction actions continue to gain traction + Intense focus on margins to manage rising feedstock costs + Ongoing focus on operational excellence and reliability + Increased working capital efficiency Cumulative focus drives EBITDA gains in each key segment 13

14 Driving Near-Term Margin Expansion and Growth 2013 EBITDA Margin Innovation Investments Productivity Market Growth E&FM 23% Near-Term Margin Expansion bps Examples: Grow display technologies; Enter adjacent markets and technologies; Brand-owner relationships C&I 13% 300 bps Examples: Coatings and water innovations; PDH integration; Operating rate leverage; Construction market recovery DAS 14% bps Examples: Commercialize R&D pipeline (seeds, crop protection); Achieve scale efficiencies in Seeds Perf. Mtrls. 11% 400 bps Examples: Innovations in oil and gas, auto, others; PDH integration to reduce raw material cost; Operating rate leverage Perf. Plastics 28% bps Examples: Customer relationships drive innovation; USGC investments, market improvement in Europe 14

15 Agenda 1Q 2014 Overview & Financial Update Segment Overview & Market Trends Driving Near-Term Shareholder Value 15

16 Near-Term Strategic Priorities Invest in key integrated and feedstock driven value chains and successfully start up these projects in 2015 (USGC and Sadara) Launch new products in Dow Packaging & Specialty Plastics, Dow AgroSciences, Dow Electronic Materials and Dow Coating Materials, and deliver new margins in these businesses in 2014/2015 Drive productivity and reduce costs manage cash and capital tightly Divest or JV chlorine chain and Epoxy business in 2014/2015 Release hidden value businesses and ventures, drive better transparency on ROC and value creation in each segment Drive returns that exceed the cost of capital, increase financial flexibility with cash generated and reward shareholders 16

17 Dow s Unique Business Model and Core Value Chains Physical Integration Technology Integration Value Chain Ethylene Polyethylene Specialty Plastics Packaging Value Chain Propylene Intermediates Performance Materials Coatings Value Chain Chlorine Ag Chemicals Ag Biology Food & Nutrition Technology Platform Ethylene, Propylene, Chlorine, Materials and Polymers Packaging and Perf. Materials Electronic and Functional Matls. Water, Pharma and Personal Care Low Cost and Technology Differentiated 17

18 Propylene Propylene Value Chain Participation Dow Integration Market Selection Performance Materials Polyurethanes and Systems Automotive Energy Efficiency Consumer Comfort Specialty Chemicals Coatings and Infrastructure Coatings Coatings Adhesives Industrial Investments Productivity Innovation Specialty Chemicals includes Amines, Dow Oil, Gas and Mining, Oxygenated Solvents, and Polyglycols, Surfactants and Fluids 18

19 Polyurethanes & Systems Margin Expansion Actions Productivity Gains (~14% Cost Reduction) Pricing Discipline Organizational Manufacturing Market Focus Innovation Reduction in SG&A and R&D expenses Streamlined R&D to targeted markets Completed asset closures from 2012 restructuring Improved product mix through customer collaboration Higher supply capability Target higher-value market segments (e.g. industrial and energy efficiency) Tailored solutions maximizing mix between components and systems Quicker R&D pipeline commercialization Launch of PASCAL foaming technology; TERAFORCE more efficient oil and gas production; BETAMATE structural adhesive Actions aligned to strategic value drivers deliver >200bps improvement Basis point improvement reflects six months ended 1Q14 vs. six months ended 1Q13 19

20 Timeline cents per pound USGC Investments: PDH Update Economics and Construction Remain on Track Propane-to-Propylene Dynamics Expected to Continue ~25 cpp 2012-YTD ~36 cpp 40 EPC Contract Awarded Construction Initiated Detailed Engineering Work Completed 2H COMPLETED 90% of Equipment On Site Mechanical Completion 1Q 2Q Full Production '08 '09 '10 '11 '12 '13 '14 Market fundamentals support persistent propane-to-propylene spread; $450MM annual EBITDA contribution at full run rate Source: IHS, Propane-to-propylene spread is calculated as (PGP Contract Benchmark Price (cents per pound) 1.2*(Propane Price (cents per gallon)/4.2)). This calculation assumes that it takes approximately 1.2 pounds of propane to make 1.0 pound of propylene and one gallon of propane weighs approximately 4.2 pounds 20

21 On the Path to $10B+ EBITDA Near Term Near-Term Controllable Growth Catalysts $50-$100MM over 2013 >$350MM in >$450MM/yr run-rate >$250MM/yr run-rate NPV>$1B ~$500MM annually >$1.5B/yr run-rate St. Charles Ethylene Restart Cost Savings Ramp-up Freeport PDH Louisiana Ethane Flexibility U.S. Enlist Launch Sadara TX Ethylene and USGC Derivatives $4.5B - $6.0B in transactions Potential Sources of Additional EBITDA Upside Lower Pension Expense 100 bps increase in the discount rate translates to >$250MM lower pension expense Operating Leverage 100 bps increase in annual operating rate translates to >$200MM Tightening Global Ethylene $0.01/lb margin improvement translates to >$200MM Productivity Additional actions to drive earnings growth 21

22 Strategic Choices to Narrow Our Portfolio Increased divestiture target to $4.5B-$6B of cumulative proceeds by year-end 2015 Prioritize resources toward strategic end-use markets Dedicated deal team focused on chlorine carve-out execution of transaction(s) Physical Carve-Out Diligence Finalizing Definitive Agreements Chlorine Carve-Out Timeline Binding bids and negotiation of definitive agreements start Finalize & Close Dec. 2, 2013 Mid 2014 Late 2014 Mid 2015 Late

23 Cash Flow from Operations ($B) Billion ($) Increasing Shareholder Remuneration Increasing Financial Flexibility Dividends and Share Repurchases $ $3.5 $7.0 $6.0 $5.0 $4.0 $3.0 $2.0 $1.0 $ Q10 1Q11 1Q12 1Q13 1Q14 Cash Flow from Operations Net Debt to EBITDA Net Debt to EBITDA $3.0 $2.5 $2.0 $1.5 $1.0 $0.5 $0.0 1Q10 1Q11 1Q12 1Q13 1Q14 Common Stock Dividends Declared Share Repurchases Trailing Four Quarters Trailing Four Quarters On pace to complete >$4B in share repurchases in Q14 trailing four quarters cash flow from operations includes after-tax impact of K-Dow award Net Debt to EBITDA is defined as net debt divided by Adjusted EBITDA. Net debt equals total debt ( Notes Payable plus Long-term debt due within one year plus Long-Term Debt ) minus Cash and cash equivalents. 23

24 Near-Term Strategic Priorities Invest in key integrated and feedstock driven value chains and successfully start up these projects in 2015 (USGC and Sadara) Launch new products in Dow Packaging & Specialty Plastics, Dow AgroSciences, Dow Electronic Materials and Dow Coating Materials, and deliver new margins in these businesses in 2014/2015 Drive productivity and reduce costs manage cash and capital tightly Divest or JV chlorine chain and Epoxy business in 2014/2015 Release hidden value businesses and ventures, drive better transparency on ROC and value creation in each segment Drive returns that exceed the cost of capital, increase financial flexibility with cash generated and reward shareholders 24

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26 Electronic and Functional Materials Dollars in millions 1Q14 1Q13 Sales $1,133 $1,141 Price (1)% Volume 0% EBITDA $290 $273 Equity earnings (included in EBITDA) $31 $17 1Q14 Sales Dow Electronic Materials 1Q14 Trends vs. 1Q13 Sales Price Volume Dow Electronic Materials Functional Materials - Functional Materials 26

27 Coatings and Infrastructure Solutions Dollars in millions 1Q14 1Q13 Sales $1,749 $1,667 Price Volume (1)% 6% EBITDA $224 $186 Equity earnings (included in EBITDA) $71 $26 Performance Monomers 1Q14 Sales Dow Building and Construction 1Q14 Trends vs. 1Q13 Sales Price Volume Dow Building and Construction Dow Water and Process Solutions Dow Coating Materials Dow Coating Materials Dow Water and Process Solutions - Performance Monomers 27

28 Agricultural Sciences Dollars in millions 1Q14 1Q13 Sales $2,119 $2,103 Price Volume (1%) 2% EBITDA $529 $484 Equity earnings (included in EBITDA) - $2 1Q14 Trends vs. 1Q13 Sales Price Volume Crop Protection Seeds 28

29 Performance Materials Dollars in millions 1Q14 1Q13 Sales $3,291 $3,328 Price Volume - 1% EBITDA $440 $440 Equity losses (included in EBITDA) $(24) $(23) 1Q14 Sales 1Q14 Trends vs. 1Q13 Sales Price Volume Amines Amines Dow Automotive Systems Dow Oil & Gas Epoxy Polyglycols, Surfactants & Fluids PO/PG Chlorinated Organics Dow Formulated Systems Dow Plastics Additives Oxygenated Solvents Polyurethanes Chlorinated Organics Dow Automotive Systems Dow Formulated Systems Dow Oil, Gas & Mining - Dow Plastics Additives Epoxy - Oxygenated Solvents Polyglycols, Surfactants & Fluids Polyurethanes Propylene Glycol / Propylene Oxide 29

30 Performance Plastics Dollars in millions 1Q14 1Q13 Sales $3,613 $3,498 Adjusted Sales $3,613 $3,401 Price Volume EBITDA $1,000 $952 Equity earnings (included in EBITDA) $61 $57 5% 1% 1Q14 Sales Dow Elastomers Dow Electrical & Telecommunications 1Q14 Trends vs. 1Q13 Sales Price Volume Dow Elastomers - Dow Electrical and Telecommunications Dow Packaging and Specialty Plastics Dow Packaging and Specialty Plastics 30

31 Feedstocks and Energy Dollars in millions 1Q14 1Q13 Sales $2,458 $2,556 Price Volume (4)% 0% EBITDA $173 $240 Equity earnings (included in EBITDA) $121 $159 1Q14 Sales Chlor- Alkali/Chlor- Vinyl 1Q14 Trends vs. 1Q13 Sales Price Volume Chlor-Alkali/Chlor-Vinyl - EO/EG Energy Energy Ethylene Oxide/Ethylene Glycol (EO/EG) Hydrocarbons Hydrocarbons 31

32 Reconciliation of Non-GAAP Financial Measures Three Months Ended In millions 03/31/14 03/31/13 EBITDA ex certain Items $2,396 $2,292 Certain Items - $(72) EBITDA $2,396 $2,220 - Depreciation and amortization $672 $668 + Interest income $13 $8 - Interest expense and amortization of debt discount $246 $296 Income Before Income Taxes $1,491 $1,264 - Provision for income taxes $425 $604 - Net income attributable to noncontrolling interests $17 $25 - Preferred stock dividends $85 $85 Net Income Available for The Dow Chemical Company Common Stockholders $964 $550 32

33 Supplemental Information- 1Q14 Certain Items Impacting Results In millions, except per share amounts (unaudited) Pretax Impact (1) Net Income (2) EPS - Diluted (3) Three Months Ended Three Months Ended Three Months Ended 03/31/ /31/ /31/ /31/ /31/ /31/2013 Adjusted to exclude certain items (non-gaap measures) $964 $819 $0.79 $0.69 Restructuring plan implementation costs - $(12) - $(8) - $(0.01) Loss on early extinguishment of debt - $(60) - $(38) - $(0.03) Uncertain tax position adjustments $(223) - $(0.19) Total certain items - $(72) - $(269) - $(0.23) Reported (GAAP amounts) $964 $550 $0.79 $0.46 (1) Impact on Income Before Income Taxes (2) Net Income (Loss) Available for The Dow Chemical Company Common Stockholders (3) Earnings (Loss) per common share diluted 33

34 Supplemental Information 1Q13 Results in the first quarter of 2013 were unfavorably impacted by three items: Pretax charges of $12 million for implementation costs related to the Company's restructuring programs. The charges were included in "Cost of sales" ($11 million) and "Selling, general and administrative expenses" ($1 million) in the consolidated statements of income and reflected in Corporate. Pretax loss of $60 million on the early extinguishment of debt, included in "Sundry income (expense) - net" in the consolidated statements of income and reflected in Corporate. A tax charge of $223 million related to court rulings on two separate matters that resulted in the adjustment of uncertain tax positions. 34

35 Emerging Geographies Dow defines emerging geographies as the following: Eastern Europe, including Russia Asia Pacific, excluding Japan, Australia and New Zealand Latin America India Middle East Africa 35

36 Principal Joint Ventures Although Dow participates in many joint ventures, the most significant joint ventures from a financial perspective are: Dow Corning Corporation EQUATE Petrochemical Company K.S.C. The Kuwait Olefins Company K.S.C. Map Ta Phut Olefins Company Limited MEGlobal Sadara Chemical Company The SCG-Dow Group Univation Technologies, LLC 36

37 Preliminary Results for Principal Joint Ventures Principal Joint Ventures - Total Dow Proportionate Share Dollars in millions (unaudited) 1Q14 1Q13 Dollars in millions (unaudited) 1Q14 1Q13 Sales $4,353 $4,475 Sales $1,970 $1,989 Adjusted Sales (1) $3,258 $3,252 Adjusted Sales (1) $1,508 $1,480 EBITDA (2) $822 $700 EBITDA (2) $408 $342 Depreciation & Amortization $221 $207 Depreciation & Amortization $103 $95 EBITDA in Excess of Equity Earnings $184 $119 Equity Earnings $221 $223 Net Debt (3) $3,975 $2,442 (1) Adjusted Sales defined as Sales for these joint ventures less sales to Dow and/or to other Dow joint ventures. (2) EBITDA defined as earnings (i.e., Net Income ) before interest, income taxes, depreciation and amortization. (3) Net Debt excludes debt owed to Dow and / or to other Dow joint ventures. 37

38 Reconciliation of Equity Earnings Quarterly Average Equity Earnings excluding certain items $10 $81 $231 $241 $240 $281 $197 $181 $ Equity Earnings excluding certain items, for the year , ,112 1,137 Certain items: Dow Corning Restructuring (29) - - Equipolymers impairment (65) - - Gain on collection of impaired note receivable Equity in earnings of nonconsolidated affiliates $40 $322 $923 $964 $959 $1,122 $787 $630 $1,112 $1,223 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 Equity Earnings excluding certain items $169 $148 $175 $206 $230 $228 $322 $254 $251 Certain items: Dow Corning restructuring/asset abandonment Sadara related development and other costs Formulated electrolytes manufacturing joint venture Equity in earnings of nonconsolidated affiliates (89) (73) (10) - $169 $148 $175 $44 $230 $228 $322 $264 $251 38

39 Global Operating Rates as a Percent of Capacity Year QTR YTD Q 83% 83% 2Q 80% 82% 3Q 86% 83% 4Q 81% 83% Q 83% 83% 2Q 84% 83% 3Q 83% 83% 4Q 72% 80% Q 83% 83% 2Q 78% 81% 3Q 83% 81% 4Q 78% 81% Q 82% 82% 2Q 78% 80% 3Q 82% 81% 4Q 82% 81% Q 83% 83% 39

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