The Dow Chemical Company

Transcription

1 The Dow Chemical Company 2Q 2014 Earnings Conference Call July 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. Adjusted sales is defined as Net Sales excluding sales related to prior-period divestitures. Total Debt equals Notes payable plus Long-term debt due within one year plus Long-Term Debt. 2

3 Dow Delivers Earnings Growth and Margin Expansion Adjusted Earnings per share of $0.74 up 16% Sales of $14.9B up 3% on an adjusted basis with gains in all operating segments Adjusted EBITDA increases to $2.2B led by Performance Materials, Performance Plastics and Electronic & Functional Materials Adjusted EBITDA margin expands to 15.0% up 40 bps $3B returned to shareholders YTD through share repurchases and declared dividends Adjusted EPS Rise for 7th Consecutive Quarter Due to Sales Gains and Focused Productivity Actions 3

4 Agenda 2Q 2014 Financial Update Segment Review Our Six Near-Term Strategic Priorities 4

5 2Q14 Financial Performance Dollars in millions, except per share amounts 2Q14 2Q13 Net Sales $14,917 $14,577 Adjusted Net Sales $14,917 $14,497 Volume change in percent +1% -- Price change in percent +2% -- EBITDA $2,224 $4,166 Adjusted EBITDA $2,242 $2,127 Net Income Available for Common Stockholders $882 $2,340 Net Income Available for Common Stockholders, excluding Certain Items $893 $770 Earnings per Common Share diluted $0.73 $1.87 Adjusted Earnings per Share diluted $0.74 $0.64 5

6 Drivers of 2Q14 Financial Performance Key Drivers in the Quarter $0.64 $0.74 Delivered strong margin expansion, led by Performance Plastics Sales growth in all segments Productivity actions drove ongoing cost and asset utilization improvements Notable headwinds from Plaquemine, LA outage Margin defined as margin over raw materials 6

7 Agenda 2Q 2014 Financial Update Segment Review Our Six Near-Term Strategic Priorities 7

8 Near-Term Strategic Priorities (2014/2015) 1. Invest in key integrated and feedstock driven value chains and successfully start up these projects in 2015 (USGC and Sadara) 2. 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/ Drive productivity and reduce costs manage cash and capital tightly 4. Divest or JV chlorine chain and Epoxy business in 2014/ Release hidden value businesses and ventures, drive better transparency on ROC and value creation in each segment 6. Drive returns that exceed the cost of capital, increase financial flexibility with cash generated and reward shareholders 8

9 Targeted Growth & Productivity Gains Accelerate Earnings Driving Adjusted EBITDA Margin Expansion Across All Segments Electronic & Functional Materials Coatings & Infrastructure Solutions Agricultural Sciences Performance Materials Performance Plastics Q14 TTM vs. FY 2013 (bps) Business-Specific Actions E&FM customizing solutions for attractive food, energy and display technology sectors Performance Plastics delivering operational excellence and mix upgrades via ELITE technology in food packaging C&IS implementing cost actions and delivering faster-than-market growth DAS delivering new Crop Protection products and Seeds scale efficiencies PU and Epoxy growing profitability through organizational focus on operational cost reductions and pricing discipline Business-Specific Actions Delivering EBITDA Margin Expansion TTM defined as trailing twelve months 9

10 Electronic & Functional Materials Market Trends and Near-Term Outlook 2Q14 Sales: $1.2B, up 5% 2Q14 EBITDA: $303MM, up 19% Dow Electronic Materials Strong customer relationships and technology platforms enable quick innovation cycles and drive growth solid sales gains in Asia Pacific Demand for printed circuit boards in smartphones and automobiles drove 2Q growth for Interconnect Technologies Expect strong second half with mid-to-high single-digit semiconductor and foundry revenue growth Functional Materials Customized solutions aligned with attractive markets delivered 2Q sales gains in all businesses Dow Microbial Control delivered double-digit sales growth in North America aligned to the energy sector Positive growth outlook continues on consumer-driven trends in the food, pharmaceutical and personal care market sectors 10

11 Coatings & Infrastructure Solutions Market Trends and Near-Term Outlook 2Q14 Sales: $2B, up 3% 2Q14 EBITDA: $257MM, up 3% Dow Coating Materials Growth outpacing the market in architectural and industrial sectors with 2Q sales increases in nearly all regions 2H margin increases on improving productivity tempered by costs related to short-term supply constraints in monomers Dow Water and Process Solutions Demand for reverse osmosis technologies continues, led by double-digit sales gains in the residential sector in China Ion exchange delivering growth from demand in residential and industrial processing in North America and EMEA Mix upgrades from higher value sales driving forward margin expansion EMEA defined as Europe, Middle East and Africa Dow Building and Construction Market recovery underway though varied by region B&C exceeding market growth as innovations enable access to new applications in insulation, roofing and tile Productivity gains, particularly in Europe, drive margin expansion and position the business to further improve profitability 11

12 Agricultural Sciences Market Trends and Near-Term Outlook 2Q14 Sales: $1.9B, up 3% 2Q14 EBITDA: $281MM, down 3% Crop Protection Record sales in the quarter driven by insecticides growth in North America and Latin America Positive 3Q demand outlook, despite missed applications in North America Accelerating resistance issues drive demand for new crop protection chemistries New product sales up 18% through 1H14 and on-track to exceed $1B in 2015, as sales of Isoclast ramp up Seeds Record 2Q sales driven by increased corn and soybean sales in the Americas Soybean sales in North America grew double digits as farmers shifted acres from corn to soybeans Positive 2H outlook for Latin America, despite regional headwinds Enlist corn and soybeans, pending registration, will accelerate top-line growth, share gains, and scale efficiencies; expect U.S. launch in

13 Performance Materials Market Trends and Near-Term Outlook 2Q14 Sales: $3.4B, up 1% 2Q14 EBITDA: $386MM, up 36% Polyurethanes Value Chain Productivity actions and improving demand enabled 2Q EBITDA margin expansion Strong demand in energy efficiency, consumer comfort and industrial sectors expected to continue in 2H PO supply demand dynamics improving due to industry outages Specialty Chemicals Dow Oil, Gas & Mining sales grew double digits with strong outlook: increased project fills in EMEA and exploration & production demand in North America Consumer, industrial, and construction markets remain strong in Amines; improving industry supply/demand balances Dow Automotive Systems Demand in NAA, China and Western Europe drive growth; strong transportation fundamentals expected to continue Dow continues to outpace market growth; customer adoption of new adhesives technologies enable multi-material light-weighting Polyurethanes Value Chain includes Polyurethanes, Formulated Systems and PO/PG Specialty Chemicals includes Amines, Dow Oil, Gas & Mining, Oxygenated Solvents, and Polyglycols, Surfactants & Fluids 13

14 Performance Plastics Market Trends and Near-Term Outlook 2Q14 Sales: $3.7B, up 4% on an adjusted basis; 2Q14 EBITDA: $1,067MM, up 6% Dow Packaging and Specialty Plastics Continuing strong YoY demand momentum in targeted markets: flexible food & specialty packaging and hygiene & medical Global prices increased YoY; up in all regions Positive fundamentals expected to continue, with below-average industry inventories across most regions Dow Elastomers Strong demand, coupled with tight supply, drove pricing levels higher in 2Q Tarragona asset conversion allowed Dow to meet hot melt adhesives demand Expected 3Q growth in Asia Pacific; transportation demand growth is expected in North America, China and Western Europe as automobile builds climb Dow Electrical and Telecommunications Healthy demand in power and telecommunications offset by 2Q supply disruptions Differentiated offerings leading to price gains vs. prior quarter and same quarter last year Fundamentals remain strong, as power markets in China and India gain momentum and demand rises for power cable transmission in EMEA 14

15 Driving Near-Term Margin Expansion and Growth 2013 Adjusted EBITDA Margin Innovation Investments Productivity Market Growth E&FM 23% Near-Term EBITDA 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 15

16 Agenda 2Q 2014 Financial Update Segment Review Our Six Near-Term Strategic Priorities 16

17 Near-Term Strategic Priorities (2014/2015) 1. Invest in key integrated and feedstock driven value chains and successfully start up these projects in 2015 (USGC and Sadara) 2. 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/ Drive productivity and reduce costs manage cash and capital tightly 4. Divest or JV chlorine chain and Epoxy business in 2014/ Release hidden value businesses and ventures, drive better transparency on ROC and value creation in each segment 6. Drive returns that exceed the cost of capital, increase financial flexibility with cash generated and reward shareholders 17

18 Timeline Priority 1: Successful start-up of Sadara and USGC investments Focused on Mitigating Cost Inflation First-mover advantage: Secure industryleading EPC firms; enable equipment orders ahead of the cost curve Global reach and scale: Attract and retain talent; leverage prior designs and global construction capabilities St. Charles Ethylene Restart Sadara Financial Close TX Ethylene Cracker Ground-breaking Freeport PDH Start-up LA Ethane Flexibility Sadara Olefins/PE Start-up Sadara Phase 2 & 3 Start-up TX Ethylene Cracker & Derivatives Start-up / Run-Rate EBITDA: $250MM $450MM $250MM $500MM $1.5B COMPLETED Planned Projects on Track within Budget 18

19 Priority 2: Launch new products and deliver new margins R&D Magazine Award Winning Technologies Dow Automotive Systems BETAMATE 1630 structural adhesive Dow Oil, Gas & Mining NEPTUNE subsea insulation system Polyurethanes Dow TERAFORCE utilized in preferred RCS Garnet 2.0 resin coated sand Dow AgroSciences Transform WG Insecticide and Closer SC Insecticide with Isoclast Active Dow Water and Process Solutions TEQUATIC PLUS fine particle filter Targeted at corn, soybean and cotton markets for the Americas Resistant and hard-to-control weeds have more than doubled from 2009, and affect an estimated 70 million acres Significant regulatory milestones have been achieved with both USDA and EPA Pending regulatory approvals, Dow AgroSciences expects to launch Enlist corn and soybeans in

20 Priority 4: Divest or JV chlorine chain and Epoxy business in 2014/2015 Divesting non-strategic assets, representing $4 billion of revenue Assessing all market options Fine tuning scope to maximize integration benefits and minimize stranded costs Ensuring long-term value creation Transaction Close Remains on Schedule for Year-End

21 Priority 5: Release hidden value businesses and ventures, drive better transparency on ROC and value creation in each segment Total: $4.5B $6B 100% Corporate Assets Nearly $1B in proceeds expected ~$3B $4B Chlorine Carve- Out and Other Non-Strategic Businesses 75% 50% 12 corporate teams reviewing all JVs and all structural costs Reviewing large JVs to release new value and increase transparency ~$0.6B - $1B Corporate Assets ~$0.9B Completed in % 0% Rail Cars Real Estate Terminals & Other Release value in rail car fleet over next six months Remain Committed to $4.5B - $6B Target 21

22 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 Segment-Specific Margin Expansion Actions Potential Sources of Additional EBITDA Upside Lower Pension Expense Operating Leverage Tightening Global Ethylene Productivity 100 bps increase in the discount rate translates to >$250MM lower pension expense 100 bps increase in annual operating rate translates to >$200MM $0.01/lb margin improvement translates to >$200MM Additional actions to drive earnings growth 22

23 Near-Term Strategic Priorities (2014/2015) 1. Invest in key integrated and feedstock driven value chains and successfully start up these projects in 2015 (USGC and Sadara) 2. 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/ Drive productivity and reduce costs manage cash and capital tightly 4. Divest or JV chlorine chain and Epoxy business in 2014/ Release hidden value businesses and ventures, drive better transparency on ROC and value creation in each segment 6. Drive returns that exceed the cost of capital, increase financial flexibility with cash generated and reward shareholders 23

24 Priority 6: Drive returns that exceed the cost of capital, increase financial flexibility with cash generated and reward shareholders Key Uses of Cash ( ) Operational Focus Delivers Higher Levels of Cash Key Uses of Cash Last four quarters Strong cash from operations growth Financial flexibility afforded by previous debt actions enables focus on shareholders and organic growth in 2014 CapEx increase: ~$1B CapEx Dividends and Repurchases Debt Reduction Share buybacks: ~$4B * Common Dividends Declared: ~$1.8B *Part of the announced $4.5B share repurchase program CapEx Dividends and Repurchases Debt Reduction An Unrelenting Focus on Cash Flow and Shareholder Remuneration Dividends and Repurchases include dividends paid to common stockholders and share repurchases Debt equals Total Debt 24

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26 Electronic and Functional Materials Dollars in millions 2Q14 2Q13 Sales $1,205 $1,152 Price 0% Volume 5% EBITDA $303 $254 Equity earnings (included in EBITDA) $22 $28 2Q14 Sales Dow Electronic Materials 2Q14 Trends vs. 2Q13 Sales Price Volume Dow Electronic Materials Functional Materials - Functional Materials 26

27 Coatings and Infrastructure Solutions Dollars in millions 2Q14 2Q13 Sales $1,951 $1,888 Price Volume EBITDA $257 $250 Equity earnings (included in EBITDA) $43 $25 1% 2% Performance Monomers 2Q14 Sales Dow Building and Construction 2Q14 Trends vs. 2Q13 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 2Q14 2Q13 Sales $1,907 $1,850 Price Volume EBITDA $281 $290 Equity earnings (included in EBITDA) $1 $1 0% 3% 2Q14 Sales Seeds 2Q14 Trends vs. 2Q13 Sales Price Volume Crop Protection - Seeds - Crop Protection 28

29 Performance Materials Dollars in millions 2Q14 2Q13 Sales $3,440 $3,389 Price Volume 1% 0% EBITDA $386 $284 Equity losses (included in EBITDA) $(30) $(12) 2Q14 Sales 2Q14 Trends vs. 2Q13 Sales Price Volume Amines Amines Dow Automotive Systems Dow Oil, Gas & Mining 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 Oxide / Propylene Glycol - 29

30 Performance Plastics Dollars in millions 2Q14 2Q13 Sales $3,746 $3,676 Adjusted Sales $3,746 $3,596 Price Adj. Volume 7% (3%) EBITDA $1,067 $1,010 Equity earnings (included in EBITDA) $71 $88 2Q14 Sales Dow Elastomers Dow Electrical and Telecommunications 2Q14 Trends vs. 2Q13 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 2Q14 2Q13 Sales $2,595 $2,543 Price Volume (1%) 3% EBITDA $190 $193 Equity earnings (included in EBITDA) $125 $105 2Q14 Sales 2Q14 Trends vs. 2Q13 Chlor- Alkali/Chlor-Vinyl EO/EG Energy Sales Price Volume Chlor-Alkali/Chlor-Vinyl Energy Ethylene Oxide/Ethylene Glycol (EO/EG) Hydrocarbons Hydrocarbons 31

32 Reconciliation of Non-GAAP Financial Measures Three Months Ended In millions 06/30/14 06/30/13 EBITDA ex certain Items $2,242 $2,127 Certain Items $(18) $2,039 EBITDA $2,224 $4,166 - Depreciation and amortization $677 $659 + Interest income $9 $10 - Interest expense and amortization of debt discount $242 $279 Income Before Income Taxes $1,314 $3,238 - Provision for income taxes $344 $795 - Net income attributable to noncontrolling interests $3 $18 - Preferred stock dividends $85 $85 Net Income Available for The Dow Chemical Company Common Stockholders $882 $2,340 32

33 Supplemental Information- 2Q14 Certain Items Impacting Results In millions, except per share amounts (unaudited) Pretax Impact (1) Net Income (2) EPS - Diluted (3) (4) Three Months Ended Three Months Ended Three Months Ended 06/30/ /30/ /30/ /30/ /30/ /30/2013 Adjusted to exclude certain items (non-gaap measures) $893 $770 $0.74 $0.64 Restructuring plan implementation costs $ - $(12) - (8) - - Chlorine value chain separation costs (18) - (11) - (0.01) - Loss on early extinguishment of debt - (110) - (69) - (0.06) Gain from K-Dow arbitration - 2,161-1, Total certain items $(18) $2,039 $(11) $1,570 (0.01) 1.31 Dilutive effect of assumed preferred stock conversion into shares of common stock - (0.08) Reported (GAAP amounts) (5) (6) $882 $2,340 $0.73 $1.87 (1) Impact on "Income Before Income Taxes" (2) "Net Income Available for The Dow Chemical Company Common Stockholders" (3) "Earnings per common share - diluted" (4) For the three- and six-month periods ended June 30, 2013, conversion of the Company's Cumulative Convertible Perpetual Preferred Stock, Series A ("Preferred Shares") into shares of the Company's common stock was excluded from the calculation of "Diluted earnings per hare adjusted to exclude certain items" as well as the earnings per share impact of certain items because the effect of including them would have been antidilutive. (5) For the three- and six-month periods ended June 30, 2013, an assumed conversion of the Company's Preferred Shares into shares of the Company's common stock was included in the calculation of diluted earnings per share (reported GAAP amount). (6) The Company used "Net Income Attributable to The Dow Chemical Company" when calculating diluted earnings per share (reported GAAP amounts) for the three- and six-month periods ended June 30, 2013, as it excludes preferred dividends of $85 million for the three months ended June 30, 2013 ($170 million for the six months ended June 30, 2013). 33

34 Supplemental Information Results in the second quarter of 2014 were impacted by the following item: Pretax charges of $18 million for nonrecurring transaction costs associated with the planned separation of a significant portion of the Company s chlorine value chain, consisting primarily of financial and professional advisory fees and legal fees. The charges were included in Sundry income (expense) - net in the consolidated statements of income and reflected in Corporate. Results in the second quarter of 2013 were impacted by the following items: Pretax charges of $12 million for implementation costs related to the Company's restructuring programs. The charges were included in "Cost of sales" in the consolidated statements of income and reflected in Corporate. Pretax loss of $110 million on the early extinguishment of debt. The loss was included in "Sundry income (expense) - net in the consolidated statements of income and reflected in Corporate. Pretax gain of $2.161 billion related to damages awarded to the Company in the K-Dow arbitration proceeding. The gain was included in "Sundry income (expense) - net" in the consolidated statements of income and reflected in Corporate. 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) 2Q14 2Q13 Dollars in millions (unaudited) 2Q14 2Q13 Sales $4,768 $4,429 Sales $2,083 $1,956 Adjusted Sales (1) $3,502 $3,321 Adjusted Sales (1) $1,567 $1,507 EBITDA (2) $739 $698 EBITDA (2) $361 $338 Depreciation & Amortization $229 $229 Depreciation & Amortization $106 $107 EBITDA in Excess of Equity Earnings $162 $145 Equity Earnings $199 $192 Net Debt (3) $4,243 $2,715 (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 2Q13 2Q13 3Q13 4Q13 1Q14 2Q14 Equity Earnings excluding certain items $169 $148 $175 $206 $230 $228 $322 $254 $251 $227 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 $227 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% 2Q 82% 83% 39

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