The Dow Chemical Company

Transcription

1 The Dow Chemical Company 3Q 2016 Earnings Conference Call October 27, 2016 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 forwardlooking 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. Operating earnings per share is defined as earnings per share excluding the impact of Certain Items. See Supplemental Information at the end of the earnings release for a description of these items, as well as a reconciliation of operating earnings per share to Earnings per common share diluted. EBITDA is defined as earnings (i.e., Net Income ) before interest, income taxes, depreciation and amortization. Operating EBITDA is defined as EBITDA excluding the impact of Certain Items. Operating EBITDA margin is defined as Operating EBITDA as a percentage of reported net sales. Net debt equals total debt ( Notes payable plus Long-term debt due within one year plus Long-Term Debt ) minus Cash and cash equivalents. Free Cash Flow is defined as Cash from Operating Activities less Capital Expenditures. Sales excluding acquisitions and divestitures excludes prior period sales of recent divestitures and current period sales of recent acquisitions. SQLY is defined as Same Quarter Last Year ; PQ is defined as Prior Quarter ; YoY is defined as Year over Year ; TTM is defined as Trailing Twelve Months. EMEAI is defined as Europe, Middle East, Africa and India LAA is defined as Latin America Area NA is defined as North America EU is defined as Europe 2

3 Dow Delivers 3Q16 Operating EPS of $0.91, up 11% Achieves Four Full Years of YoY Operating Earnings Growth & Margin Expansion Financial 16 th consecutive quarter of YoY operating EPS and EBITDA margin expansion Highest 3Q operating EPS in a decade Record 3Q operating EBITDA of $2.5B >$900MM of cash returned to shareholders in the quarter Operational Strategic 6% volume increase, ex. M&A; growth in all geographic areas 12 th consecutive quarter of YoY volume growth, ex. M&A $76MM in productivity savings in the quarter, reaching $254MM YTD Operating EBITDA margin expanded to 20% Dow Corning integration firmly on track; run-rate cost synergies of >$200MM Sadara multi-feed cracker and third PE train commenced operation LA-3 expansion underway; unit scheduled to start up in 4Q TX-9 cracker >85% mechanically complete; remains on track for mid-2017 startup Further progressed Day 1 readiness for DowDupont; finalized cost synergy plans 3

4 Agenda Financial Highlights Business Highlights Dow s Enhanced Earnings Growth Trajectory 4

5 3Q16 Financial Performance Summary Consumer-led Demand for Dow s Solutions Drives Operating EBITDA Operating EBITDA, ($MM) $203 $54 $141 $36 $(218) $(98) $2,471 $2,353 3Q15 Ag CS IS PMC PP Corp 3Q16 Tailwinds: Broad-based, consumer-driven demand Dow Corning integration uplift Strong Ag performance in Latin America Productivity initiatives continue Headwinds: Lower equity earnings Lost earnings due to divestitures YoY normalization of PE margins (Europe and Latin America) Volume 1 by Geo. Area vs. SQLY 10% 8% 6% 4% 2% 0% 9% EMEAI 6% North America 4% Asia Pacific 6% Global Volume Growth 1% Latin America FY 2016 Productivity Progress 2016 Target >$300MM 2016 YTD Achieved 4Q16 Target $254MM Achieved YTD Cash Returned to Shareholders $512MM Dividend Buy-back $416MM $928MM Returned to Owners 1. Excluding the impact of divestitures and acquisitions 5

6 Dow Corning Integration Well On-Track Significant Progress on Cost Synergies and Delivery of Quick Win Opportunities Cost Synergies Cost synergy run-rate at >$200MM >85% of role reduction target notified Full clarity on objectives, roles and responsibilities Cost Synergy Tracking vs. $400MM Commitment Progress Commitment 100% 85% 70% 51% 30% 2H16 1H17 2H17 1H18 Growth Synergies Finalized innovation playbook to achieve $100MM target Expanded addressable market ($4B) in fast-growing sectors consumer care, infrastructure, transportation, packaging 6

7 vs. PQ vs. SQLY Corporate 4Q16 Modeling Guidance TDCC Revenue $12-13B D&A $ MM Corp. Segment EBITDA $(85) - (125)MM Net Interest Expense $ MM Operational Tax Rate 23-27% Sharecount ~1,125MM Segments Agricultural Sciences Consumer Solutions Infrastructure Solutions Perf. Materials & Chemicals Performance Plastics Key Drivers Continued productivity and self-help actions offset by challenging industry macros. Sold several non-strategic molecules in 4Q15 which lifted Op. EBITDA in the year-ago period by $50-75MM Dow Corning contribution with ramping synergies muted by seasonality in Electronics and NA Auto production slowing ahead of YE; No Dow Corning equity earnings; HSC $75-85MM pre-tax (50%) Dow Corning contribution, ramping synergies and PDH tailwind (1/3); Higher Monomers T/A costs ($30-40MM); No Dow Corning equity earnings; HSC $75-85MM pre-tax (50%) Seasonal uptick on deicer sales and tailwind from PDH (2/3) offset by global raw material pressures and lower equity earnings (~$50MM) on EQUATE ownership change and Sadara EO/PO costs NA PE pricing increase in Sept and potential upside from EU industry outages more than offset by global raw material pressures and higher turnaround costs (~$50MM) 7

8 Agenda Financial Highlights Business Highlights Dow s Enhanced Earnings Growth Trajectory 8

9 Ag. Sciences: Highest 3Q Operating EBITDA in Nearly a Decade Quarterly Segment Performance Record 3Q Seeds Sales and Crop Protection Operating EBITDA ($MM) 3Q15 3Q16 Op. EBITDA increased $141MM YoY on strong growth in LAA, productivity gains and demand for innovative products $1,167 $1,235 $102 8% Strong demand in LAA drove double-digit sales gains in Seeds on higher price and volume Corn and soybean seeds sales each nearly tripled primarily as the business increased share and met demand in LAA Crop Protection sales declined modestly Sales -$39 Op. EBITDA -3% Op. EBITDA Margin DAS Innovations Recognized Through Industry Awards & Collaborations Instinct nitrogen stabilizer named winner of the U.S. EPA Presidential Green Challenge Award 4 Agrow Awards, including best formulation for Resicore herbicide DAS / Monsanto announced global licensing agreement on DAS Exzact Precision Technology genome-editing platform DAS and Radiant Genomics expanded R&D collaboration focused on natural products for crop protection 3Q16 Sales Split by Business Seeds Crop Protection 9

10 Consumer Solutions: Record Quarterly Operating EBITDA Dow Automotive Systems: Record 3Q Operating EBITDA Quarterly Segment Performance Double-digit volume gains in Asia Pacific on new business wins and market share gain 7 consecutive quarters of YoY Op. EBITDA growth on demand for solutions for light-weighting and enhanced in-cabin experience Consumer Care: Market Share Gains and Innovation in Targeted Sectors ($MM) $1,575 $1,108 3Q15 $289 3Q16 $492 26% 31% Grew market share on gains in home care market sectors and innovative new products for personal hygiene solutions Early signs of bottoming in inventory de-stocking in pharma end-markets Consumer Solutions Silicones: Strength in Auto and Consumer Care Sales Op. EBITDA Op. EBITDA Margin Strong demand in Asia Pacific, particularly in automotive Achieved first growth synergies cross-selling opportunities with Dow Automotive Systems, Consumer Care and Polyurethanes Dow Electronic Materials: Record Quarterly Operating EBITDA Double-digit operating EBITDA growth, fueled by strong demand, particularly in Asia Pacific, and continued self-help measures Above-market volume growth, led by share gains and new business wins in technologies for smartphones Consumer Solutions - Silicones 3Q16 Sales Split by Business Dow Electronic Materials Dow Automotive Systems Consumer Care 10

11 Infrastructure Solutions: B&C Strength, Softness in Energy & Water Dow Building & Construction: Record 3Q Operating EBITDA Quarterly Segment Performance Volume growth on demand for acrylics-based construction chemicals and continued adoption of BLUEDGE polymeric flame retardant ($MM) 3Q15 3Q16 8 consecutive quarters of YoY operating EBITDA growth $1,900 $2,534 $325 $379 17% 15% Energy & Water Solutions: Challenging Macros, Soft Demand Lower volume on decreased demand from the oil and gas exploration sector in NA and industrial RO applications EBITDA declined as self-help was more than offset by challenging macros Infrastructure Solutions Silicones: Strength in B&C, Volume Growth Sales Op. EBITDA Op. EBITDA Margin Strong demand in the building and construction end-markets Earnings improvement on higher volume and savings driven by quick wins on cost synergies Performance Monomers: Op. EBITDA Improvement from Strategy Shift Dow Coating Materials: Volume Growth in All Market Sectors Monomers op. EBITDA improves on double-digit demand growth and reduced merchant exposure Coatings volume growth continues, with gains in industrial and architectural sectors 3Q16 Sales Split by Business Infrastructure Solutions - Silicones Performance Monomers Dow Building & Construction Energy & Water Solutions Dow Coating Materials 11

12 Perf. Materials & Chemicals: PU Systems Strength, Volume¹ Growth Polyurethanes: Growth Driven by Energy Efficiency Applications Quarterly Segment Performance Record volume on continued tilt to downstream systems; double-digit gains in specialty polyols and systems ($MM) $3,142 3Q15 $540 3Q16 Op. EBITDA lower on pricing pressures for less differentiated products and ramp up in Sadara start-up costs $2,367 $322 17% 14% Industrial Solutions: Volume Growth in All Businesses Volume gains driven primarily by demand for heat transfer fluids, as well as targeted share gain in Oxygenated Solvents Op. EBITDA decline driven by pricing pressures, lower EQUATE equity earnings and higher Sadara start-up costs Sales Op. EBITDA Op. EBITDA Margin 3Q16 Sales Split by Business Chlor-Alkali and Vinyl: Improved EDC/VCM Fundamentals in the Quarter Volume¹ flat as planned turnarounds offset increased demand for EDC/VCM Divestiture of Dow Chlorine Products resulted in reduced earnings and narrower geographic focus Polyurethanes Industrial Solutions Chlor-Alkali And Vinyl 1. Excluding divestitures and acquisitions 12

13 Performance Plastics: Double-Digit Volume Growth Dow Packaging and Specialty Plastics: Record 3Q Sales Volume Quarterly Segment Performance Double-digit growth in developed geographies and adoption of INNATE and AFFINITY grades into food and specialty packaging applications ($MM) $4,665 $4,702 3Q15 3Q16 $1,349 $1,251 29% 27% Sadara integrated PE chain now operational with cracker and three trains; >80MM lbs. sold in the quarter Dow Elastomers: Record 3Q Sales Volume on Auto and Consumer Demand Volume rose on demand for larger vehicles that incorporate more Dow content and double-digit growth in footwear Sales Op. EBITDA Op. EBITDA Margin Operating EBITDA lower primarily on EPDM pricing pressure due to capacity additions Dow Electrical and Telecommunications: Strong Demand for Telecomm Double-digit volume gains in the Americas on power cable installations and continued demand for fiber optics 3Q16 Sales Split by Business Energy Hydrocarbons Dow Packaging and Specialty Plastics Continued trend towards global wireless adoption provides demand tailwind Dow Electrical and Telecommunications Dow Elastomers 13

14 Agenda Financial Highlights Business Highlights Dow s Enhanced Earnings Growth Trajectory 14

15 Earnings Growth Showcases Power of Dow s Business Model Innovation and Integration Deliver Higher, More Consistent Earnings Track Record of Growth, Integration & Portfolio Enhancements Innovation & Integration Shift Earnings Trajectory Narrower focus on packaging, transportation and consumer care market sectors Shifted earnings mix to more consumer-driven exposure Upgraded packaging value chain participation; revamped auto franchise; grew coatings and construction franchises Divested low ROC, non-strategic assets since 2009 $15B revenue divested $1.6B EBITDA divested $17B pre-tax equivalent realized Short- and long-term earnings growth drivers firmly in place Revitalized R&D engine to drive organic growth, customer intimacy and further upgrade mix Integrated capabilities from Dow Corning Enhanced cost competitiveness and integration strength with growth investments in USGC, Saudi Arabia and Asia Instituted consistent focus on productivity and cost savings Dow Operating EBITDA ($ billion) 1 $10 $9 $8 $7 $6 $5 $4 $3 $2 7-Year Avg Operating EBITDA CAGR: 1% Below-GDP Growth Above-GDP Growth Source: Dow 10-K filings; 2016 data represents 3Q16 trailing 12 months. 15

16 Total Shareholder Return Strategic Shifts Have Yielded Enhanced Shareholder Returns Average Operating EBITDA ($B) Average Operating Cash Flow ($B) $8.6 $9.6 $7.2 $6.7 $5.6 $5.1 $3.9 $ Q16 TTM Consistent EBITDA Growth Q16 TTM Enhanced Cash Flow Profile 1 Established track record of earnings and cash flow growth over past 4 years 18% operating EPS CAGR bps operating ROC expansion 2 $14.6B of cash 3 returned to shareholders through share buybacks and paid dividends TSR outperformance vs. S&P 500 Further shareholder benefits from industrydefining DowDuPont merger and intended spins Established Track Record of Results 25% 20% 15% 10% 5% 0% Dow S&P Year 10-Year 5-Year 3-Year 1-Year As of 10/19/2016; Source: Bloomberg Equity Outperformance 1. 3Q16 TTM calculated as Cash from Operating Activities, excluding the impact of K-Dow arbitration award and Urethanes settlements 2. Trailing 12 month basis. 3. Includes $1.5B in non-cash share repurchases related to the Dow Chlorine Products transaction. 16

17 Dow Will Continue to Deliver Focused Portfolio Flexible Integration Industry-Leading Innovation Broad Geographic Reach Through a Relentless Focus on our Execution and on Maximizing Value Creation 17

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19 Appendix

20 Financial Performance Metrics (on a trailing twelve month basis) Operating EPS Operating EBITDA ($MM) Operating Cash Flow 1 ($MM) $3.75 $3.25 $2.75 $2.25 $1.75 $10,000 $9,000 $8,000 $7,000 $9,000 $7,500 $6,000 $4,500 $3,000 Op. FCF CAPEX $1.25 $6,000 $1,500 $5,000 $0 Target: 10% average annual EPS Dividend Payout Ratio 2 Cumulative Share Buyback 3 ($MM) Operating ROC $1.90 $1.75 $1.60 $1.45 $1.30 $1.15 $1.00 Annualized Dividend Payout Ratio 75% 60% 45% 30% 15% 0% $8,000 $6,000 $4,000 $2,000 13% 12% 11% 10% 9% 8% 7% $0 Target: 45% of Net Income Target: Return 3% above Cost of Capital 1. Excluding the impact of K-Dow arbitration award and Urethanes settlements; Cash from Operating Activities Capital Expenditures = Op. Free Cash Flow 2. Calculated on dividends declared; Yearly declared dividend per share/operating EPS = Dividend Payout Ratio 3. Includes $1.5 in repurchases related to the Dow Chlorine Products transaction 20

21 Capacity and Demand (B lbs.) Global Operating Rate Days of NA PE Inventory Capacity and Demand (B lbs.) Global Operating Rate Operating Rates Remain High in Forecast Period Polyethylene Demand Capacity Operating Rate (%) % % % % 50 75% 0 70% Source: Dow Ethylene and PE Capacity Adds Match Demand Growth Ethylene Demand Capacity Operating Rate (%) % % % % 75 75% 0 70% Source: Dow Dow s View on Market Drivers Operating rates likely stable over next few years Demand growth in consumer-driven markets Industry forecasts overstate capacity adds Significant new capacity destined for highly commoditized applications Current conditions Margins firm, inventories below average Dow s competitive advantages Global reach, customer intimacy, application development, innovation-driven value-add PE Inventories Near Bottom of Range Month Min/Max Range 2016 Source: ACC 21

22 Relative Portion of Dow Revenue Developed Asia Eastern Europe, ME, Africa, India Developing Asia Latin America Western Europe US & Canada Market Pulse 3Q16 Heat Map 3Q16 Up 3X GDP or greater Flat Demand Growth 3Q16 Down Double digit or greater Lower Participation Market >$1B Participation in 2015 ex. Divestitures, includes Silicones Infrastructure Packaging Agriculture Consumer & Food Electronics Durables & Industrials Transportation Relative Portion of Dow Revenue 22

23 3Q16 vs. 3Q15 Sales Trends by Business Agricultural Sciences 1 Consumer Solutions 1 Infrastructure Solutions 1 Sales Price Volume Crop Protection $ $ $ Seeds # # # Dow Automotive Systems Sales Price Volume - $ # Consumer Care $ $ # Dow Electronic Materials # $ # Dow Building & Construction Energy & Water Solutions Dow Coating Materials Performance Monomers Sales Price Volume $ $ # $ $ $ $ $ # $ $ $ Performance Materials & Chemicals 1 Sales Price Volume Polyurethanes $ $ # Industrial Solutions $ $ # Chlor-Alkali and Vinyl $ $ - Dow Packaging and Specialty Plastics Sales Price Volume $ $ # Dow Elastomers $ $ # Dow Electrical and Telecommunications Performance Plastics 1 $ $ # Hydrocarbons # $ # Energy # $ # 1. Excluding the impact of divestitures and acquisitions 23

24 Global Operating Rates as a Percent of Capacity Year QTR YTD 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% 2Q 82% 83% 3Q 88% 85% 4Q 86% 85% Q 84% 84% 2Q 84% 84% 3Q 86% 85% 4Q 86% 85% Q 88% 88% 2Q 82% 85% 3Q 86% 85% 24

25 Preliminary Results for Principal Joint Ventures Principal Joint Ventures 1 Total Dow Proportionate Share Dollars in millions (unaudited) 3Q16 3Q15 Dollars in millions (unaudited) 3Q16 3Q15 Sales $2,146 $2,664 Sales $828 $1,042 Adjusted Sales 2 $1,492 $1,821 Adjusted Sales 2 $572 $710 EBITDA 3 $343 $400 EBITDA 3 $144 $170 Depreciation & Amortization $214 $110 Depreciation & Amortization $83 $44 EBITDA in Excess of Equity Earnings $116 $69 Equity Earnings $28 $101 Net Debt 4 $6,395 $5, Dow Corning Corporation (thru 5/31/16), EQUATE Petrochemical Company K.S.C., The Kuwait Olefins Company K.S.C., The Kuwait Styrene Company K.S.C., Sadara Chemical Company, The SCG-Dow Group, Map Ta Phut Olefins Company Limited 2. Adjusted Sales defined as Sales for these joint ventures less sales to Dow and/or to other Dow joint ventures 3. EBITDA defined as earnings (i.e., "Net Income") before interest, income taxes, depreciation and amortization 4. Net Debt excludes debt owed to Dow and/or to other Dow joint ventures 25

26 Reconciliation of Non-GAAP Financial Measures Three Months Ended Nine Months Ended In millions 9/30/16 9/30/15 9/30/16 9/30/15 Operating EBITDA $2,471 $2,353 $7,188 $7,206 + Certain Items (408) ,157 EBITDA $2,063 $2,932 $7,243 $8,363 - Depreciation and amortization ,067 1,921 + Interest Income Interest expense and amortization of debt discount Income Before Income Taxes $1,089 $2,063 $4,611 $5,782 - Provision for income taxes ,630 - Net income attributable to noncontrolling interests Preferred stock dividends Net Income Available for The Dow Chemical Company Common Stockholders $719 $1,290 $4,011 $3,818 26