Dow CEO, COO & CFO Analyze 1 st Quarter Earnings. First Quarter 2017 Earnings The Dow Chemical Company April 27, 2017

Transcription

1 Dow CEO, COO & CFO Analyze 1 st Quarter Earnings First Quarter 2017 Earnings The Dow Chemical Company April 27, 2017 Quarterly Earnings Conference Call/Webcast with Investors, Financial Analysts and the Media Remarks By: Andrew N. Liveris, Chairman and CEO Jim Fitterling, President and COO Howard Ungerleider, Executive Vice Chairman and CFO Neal Sheorey, Vice President, Investor Relations N. Sheorey Good morning and welcome to The Dow Chemical Company s first quarter earnings conference call. I am Neal Sheorey, Vice President of Investor Relations. 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 express written consent is strictly prohibited. On the call with me today are Andrew Liveris, Dow's Chairman and Chief Executive Officer, Howard Ungerleider, Vice Chairman and Chief Financial Officer, and Jim Fitterling, President and Chief Operating Officer. We have prepared slides to supplement our comments in this conference call. These slides are posted on our Investor Relations Financial Reporting page. You can also access the slides through the link to our webcast. I would like to direct your attention to the forward-looking statement disclaimer contained in both the press release and in the slides. In summary, it says that statements in the press release, the presentation and on this conference call that state the company's or management's expectations or predictions of the future are forward-looking statements intended to be covered by the Safe Harbor provisions under federal securities laws. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. A detailed discussion of principal risks and uncertainties which may cause actual results and events to differ materially from such forward-looking statements is included in the section titled Risk Factors in our most current annual report on Form 10-K. In addition, some of our comments reference non-gaap financial measures. A reconciliation to the most directly comparable GAAP financial measure and other associated disclosures are contained in our earnings release and on our website.

2 Unless otherwise specified, all comparisons presented today will be on a year-over-year basis. Sales comparisons exclude divestitures and acquisitions. EBITDA, EBITDA margins, return on capital and earnings comparisons exclude certain items. I will now turn the call over to Andrew. A. Liveris Thank you, Neal, if you turn to slide 3, and good morning. Our results once again underscored the strength of Dow s portfolio. The first quarter saw rapidly changing business conditions around the world, and Dow showed once again it has the right levers in place to stay agile, focused and deliver strong earnings growth. The summary of these results are: We delivered an all-time record quarterly EBITDA. We extended our EPS growth streak to four and a half years and our volume growth streak to three and a half years. Volume and price both grew in every geographic area. We achieved the full Dow Corning cost synergy run-rate of $400 million in just 10 months, versus the two years we stated when we closed the transaction. Construction of our Texas cracker was completed, and the unit remains on-track for startup mid-year, ahead of all of our competition. Sadara now has 16 units in the startup phase. And just today, this powerful joint venture achieved commercialization of its entire plastics franchise, with the startup of the fourth polyethylene unit. And we progressed our pending merger with DuPont receiving key regulatory approvals and announcing that the intended Materials Science Company will be the first spin-off if it would not adversely impact the value of the intended spin-off transactions. Simply put, Dow s business model showed once again its ability to deliver under all conditions. I will spend some time later on the call discussing our growth strategy over the next several years as we move through the DowDuPont merge-and-spin period and emerge as the new Dow, a preeminent, global Materials Science Company. But first, I will turn the call over to Howard and Jim to discuss our quarterly performance and an update on the silicones integration. Howard? H. Ungerleider Thanks, Andrew. Turning to Slide 5 and a summary of our results. Sales grew to $13.2 billion, driven by price and volume gains and the addition of Dow Corning s silicones business. Pricing rose 7 percent, reflecting broad-based actions that led to increases in all geographic areas and in most operating segments.

3 Volume ex M&A grew 4 percent reflecting consumer-led demand, particularly in our core end-markets of packaging, transportation, infrastructure and consumer care. EBITDA increased 20 percent to $2.7 billion. The key tailwinds in the quarter included: broad-based consumer-driven demand; the addition of our new silicones business; higher equity earnings; and productivity and synergies that totaled $200 million, evenly split between Dow Corning cost synergy savings and productivity actions. We have now achieved more than $750 million of cost-out since These gains more than offset higher feedstock costs, which led to short-term margin compression, particularly in a few of our downstream businesses where pricing initiatives typically lag the raw material increases. As we shared with you on our fourth quarter call, we also had more than $100 million of higher spending for planned maintenance activities as well as commissioning costs in the U.S. Gulf Coast all of which was in-line with our modeling guidance. The commissioning costs will continue in the second quarter, and I encourage you to review our updated modeling guidance in the appendix for more details. Moving to our business highlights. On slide 7, Dow Ag reported EBITDA of $351 million. The highlight of the quarter was the continued increased contribution from the Seeds business, driven by gains in Latin America and the successful launch of ENLIST cotton in the U.S. due to strong early grower adoption. Crop Protection reported volume growth in all geographic areas except Asia Pacific on strong demand for new product innovations and 9 percent growth globally in insecticides with particular strength in spinetoram and spinosad in Europe and across multiple molecules in North America. We saw lower herbicide demand in North America aligned with the projected acreage shift from corn to soybeans. The decline in Asia Pacific was primarily related to soft rice herbicide demand due to an inventory overhang created by flooding during last year s season and increasing resistance to our existing penoxsulam technology. Going forward, we will address the resistance issue with the launch of Rinskor Active herbicide, which features an alternative mode of action. Rinskor will be launched in time for the next growing season. Innovation is still very much valued by growers. We saw this in the quarter, with gains for our new Arylex broadleaf herbicide for use in multiple crops, including cereals, and strong demand for Enlist cotton. Looking ahead, our crop protection business which represents about 70 percent of Dow Ag has an industry-leading pipeline, with products including Isoclast insecticide to control sap-feeding pests and Rinskor herbicide to control grass, broadleaf and sedge weeds. Dow AgroSciences remains wellpositioned to bring at least one new-to-the-world molecule to commercialization every year. We have included a review of the business s innovation pipeline in the appendix, which highlights the breadth and depth of products that are still to come.

4 We still expect to deliver flat EBITDA in the first half of 2017 versus last year s first half. I ll now turn it over to Jim to cover the rest of the businesses, and I ll come back to provide an update on the silicones integration. Jim? J. Fitterling Thanks, Howard. Moving to Consumer Solutions on slide 8. The segment delivered record first quarter EBITDA of $500 million and its seventh consecutive quarter of growth, led by Dow Automotive, Electronic Materials and the contribution from silicones. Dow Automotive achieved an all-time quarterly EBITDA record, driven by its 16th consecutive quarter of volume gains as the business s growth continues to outpace the automotive end-market. Consumer Solutions Silicones delivered strong results led by volume gains in Asia Pacific particularly in automotive end-markets. Electronic Materials delivered its seventh consecutive quarter of EBITDA growth on continued abovemarket volume gains, driven by new business wins and share gains. Infrastructure Solutions, on slide 9, achieved record quarterly EBITDA of $511 million, driven by volume growth, the contribution from silicones, and the benefit from on-purpose propylene production. Building and Construction delivered volume growth on strong demand, particularly for commercial applications. The silicones business reported volume growth on robust demand for pressure sensitive adhesives, label stock release liners and building and construction applications. Silicones also benefited from the significant cost synergy savings. And our Performance Monomers business benefited from tighter industry fundamentals and reduced turnaround spending. Performance Materials and Chemicals on slide 10, delivered a year-over-year EBITDA increase of $100 million. Equity earnings and volume gains in all geographic areas and all business more than offset margin compression in some products. Polyurethanes achieved double-digit growth on continued robust demand for systems applications, particularly in building insulation and household appliances, as well as tight market conditions in isocyanates. Industrial Solutions grew volume in high-value applications for textiles, lubricants and electronics, with double-digit volume growth in Asia Pacific. The business also reported higher equity earnings.

5 On slide 11, Performance Plastics EBITDA was flat year-over-year as volume growth and price gains offset increased feedstock costs and we absorbed more than $100 million of headwinds in the quarter. These headwinds were evenly split between planned maintenance and turnaround spending and U.S. Gulf Coast commissioning costs. Packaging and Specialty Plastics achieved record first quarter sales volume, and its 11th consecutive quarter of sales volume growth. The business expanded variable margin as polyethylene supply/demand fundamentals remained tight, and chain inventories continued at low levels. Elastomers also reported record first quarter sales volume, and its 9th consecutive quarter of sales volume growth, led by strong demand in transportation, packaging and high performance athletic footwear applications. I ll now turn it back to Howard for an update on the silicones integration. H. Ungerleider Thanks, Jim. Turning to slide 13. I want to thank the Dow Corning and the Dow teams for their efforts to drive a seamless integration. It continues to exceed our expectations, and as you clearly see based on the results, we have accelerated the cost synergy realization. In fact, we hit our $400 million run-rate target in the quarter, and saw approximately $100 million of realized savings drop to the bottom-line. And we delivered this more than a year earlier than planned, which reflects Dow s strong project management skills and bodes well for the implementation phase of the DowDuPont merger. With the cost synergies achieved, our mindset increasingly focuses on growth. Here, too, we re ahead of plan and are seeing early commercial wins and robust volume growth. And this is just the beginning... Turning to slide 14, you will recall that our stated goal is at least $100 million in growth synergies by the end of Year 3 from the close of the silicones transaction. In 2016, we rapidly defined our growth synergy playbook. As part of that process, we identified and are now tracking more than 400 distinct growth opportunities. We have a clear line-of-sight to attaining our target and our execution plans are well underway. We see the growth synergy initiatives delivering at least $400 million of additional revenue, with more than 70 percent of that aligned to our core end-markets. And in fact, we have already secured some early wins in automotive, building and construction, as well as home and personal care. One example is LIQUIDARMOR LT. The Dow Building & Construction team recently launched this flashing and sealant for the commercial building market. This new-to-the-world product takes advantage of silicones low temperature flexibility and can be applied in weather as cold as negative-20-degrees Fahrenheit, meaning year-round.

6 We have also achieved synergy wins in automotive brake fluid applications, seating solutions, as well as into multiple home and personal care applications with brand owners around the world. You can expect our teams to continue to show the same disciplined mindset on growth that rapidly delivered the cost synergies well ahead of schedule. With that, I will turn the call back to Andrew. A. Liveris Thanks, Howard. Dow Corning is one of the most comprehensive examples of our integration and innovation growth strategy in action. And if you turn to slide 16 The long-term Dow strategy has been well articulated. The DowDuPont merger is a key part of realizing this strategy and it accelerates our execution as well as builds upon the trajectory we have consistently driven for the past many years. This strategy reaffirmed by our Board and executive management in 2013 is underpinned by our unparalleled combination of world-class innovation and industry-leading integration. We deploy that expertise and strength to the consumer-led end-markets that value these unique materials science capabilities packaging, transportation, consumer care and infrastructure. Going narrower and deeper, making strict value-based portfolio decisions, delivering superior returns, all based on our integration and innovation drivers. This strategy has fundamentally shifted our growth and earnings trajectory delivering impressive volume growth, significant EPS growth and ultimately, higher cash flows that have enabled us to invest in our next chapter of growth while also increasingly rewarding shareholders. We are actively working on the next phase of this growth strategy, and that work starts with a view towards market trends and our capabilities. And turning to slide 17, the post-merger Materials Science Company will have nearly 90 percent of its revenues aligned to these four core end-markets. These markets are attractive, growing spaces that are fueled by strong demand drivers, including sustainable urbanization and a growing middle class around the world. They are markets that have shown great resilience and consistent growth over time and they are sectors where Dow has leading positions today. We are attracted to these markets because they are increasingly demanding a broader and more complex suite of technology offerings and capabilities, market access and customer intimacy and the unique combination of local presence and global scale. The winner in these markets brings the complete toolkit to the table, that s how Dow has earned a seat at our customers design tables, working hand-inhand with brand owners, OEMs and other value chain members to customize and spec-in breakthrough innovations. If you turn to slide 18.

7 To do so, we ve reinvigorated our innovation engine. We ve done it through thoughtful investments in capabilities, people and in bringing a business lens to the laboratory. Today, Dow has a truly world-class R&D franchise. Here are some proof points. We have enhanced product commercialization and rapid prototyping, catalyzed by our investments in proprietary high-throughput R&D capabilities. Dow now launches more than 5,000 new products each year and executes more than two million experiments annually. We have boosted our IP portfolio to ensure that our innovations are protected and unique. We received 754 U.S. patent grants in 2016 an all-time record for Dow and our 8th consecutive year of record patent grants. And, we continue to attract the best minds. Since 2010, we have recruited more than 600 PhDs and Post-Docs from the top 20 U.S. technology universities alone. These results reflect a steadfast commitment to our strategy our core, consumer-led markets and our customers. And the success we have had is hitting the bottom line. We have many examples where innovation-led, profitable growth has fundamentally reinvented our businesses driving both longstanding demand growth and significant EBITDA margin expansion. And our results over these last 18 quarters bear testimony to the margin and cash opportunities for these new products over the next five years. Turning to slide 19. The second pillar of our strategy for the next five years is our integration, and here too, we have invested significantly to ensure we maintain our unmatched strength. Our growth investments in the U.S. Gulf Coast and the Middle East create a multiplier effect by broadening our market and geographic access and enhancing our competitive advantage in key regions around the world. These investments create powerful and cost-advantaged manufacturing hubs where we can deploy our unique technology capabilities and capture growth where growth exists. In both cases we are bringing forward the industry s broadest and most differentiated derivatives slate; these are not ordinary investments, but rather, they are carefully crafted to take advantage of the consumer-led demand drivers in our core markets. Both of these mega projects are on the cusp of shifting to earnings tailwinds as they fully come online, activating this critical element of our compelling growth story. And as you have come to expect from Dow as we turn the page on these investments, we are not resting on our laurels. We still see vast potential in these markets and the regions they serve. And these investments provide a springboard to drive the next chapter of Dow s growth trajectory. We will be announcing this next phase of these investments very soon. Slide 20 shows this strategy of innovation, integration and growth investments to drive narrower and deeper into our core markets has delivered at the bottom-line with increasing earnings and cash flow. Looking at our financial scorecard today, you see the significant progress we have made since Dow has improved its ROC by 390 basis points; we have delivered an EPS CAGR of 18 percent; we have taken out nearly $3 billion through productivity, cost control and synergies; we have maintained a strong

8 liquidity and financial position; and the core Dow cash engine is thriving. Free cash flow has doubled from $1.5 billion to now $3 billion on a trailing 12-month basis, while at the same time we have funded our key growth projects. This trajectory will be further enhanced as our capex returns to D&A levels and our aforementioned growth projects become operational. On slide 21. And so today and as we look forward, the strength of our future trajectory is evident. We have an enterprise that has delivered greater than $10 billion of EBITDA on a trailing twelve months basis and has a full arsenal of growth investments to deliver the next level of earnings growth, to $15 billion and beyond. And as we realize these higher earnings, cash flow from operations will be further enhanced by up to $5 billion, providing a higher base to invest in our growth and reward shareholders. We have an enterprise with a consistent strategy rooted in integration and innovation driven by a narrower and deeper presence in our core markets and committed to continuous productivity. And we can deliver this next phase without the significant investment headwinds of the previous five years. So, as we look into and well beyond our intended merge-and-spin transaction with DuPont this is our North Star: a winning strategy, a winning portfolio and suite of growth investments and a winning team with a strong execution mindset, and it continues to guide our path forward. Therefore, our growth strategy going forward remains grounded in these fundamental elements. We will deliver strong cash flow as our current growth investments at Sadara and in the U.S. Gulf Coast come online; we will continue to drive narrower and deeper into our core Materials Science endmarkets; we will further bolster our world-class innovation and industry-leading integration; we will deliver our cost synergies from the DowDuPont merger and maintain a mindset of continuous productivity. And we will soon deliver the world s leading Materials Science Company a growth company rooted in the strategy that we are executing against today and that positions us well to maximize shareholder value creation in the future. A strong earnings growth story. A strong cash flow story. A focused growth company. And with that Neal let s turn to Q&A. N. Sheorey Thank you, Andrew. Now we will move on to your questions. I ask that you please keep to one question so that we can allow as many people as possible the opportunity to ask a question. First, however, I would like to remind you that my comments regarding forward-looking statements and non-gaap financial measures apply to both our prepared remarks and the following Q&A. Rachelle, would you please explain the Q&A procedure? ***

9 Andrew before we close the call, would you like to make any final comments? *** Thank you everyone for your questions. As always, we appreciate your interest in The Dow Chemical Company. For your reference, a copy of our prepared comments will be posted on Dow's website later today. This concludes our call for today. We look forward to speaking with you again soon. ###