- Polyethylene reported growth in specialty packaging applications, while underlying demand for Polypropylene was down due to slowdowns in the housing and automotive sectors in North America.
- Polystyrene saw margin expansion in the quarter due to a moderation in benzene costs.
- Disciplined price and volume management across the segment helped to overcome substantial increases in feedstock and energy costs.
- Equity earnings were down $11 million year over year due to lower earnings at Equipolymers and Siam Polyethylene, which offset very strong results at EQUATE.
- EBIT was $394 million, including restructuring charges of $88 million. In the same period last year, EBIT was $461 million.
- In Basic Chemicals strong performance was driven principally the gains in EO/EG, with very tight supply/demand balances due to a series of industry outages, including some at Dow facilities, ethylene glycol prices rose to record levels during the quarter.
- In chlorovinyls, strength in caustic soda was offset by some weakness in PVC applications.
Strategic Review:
- The firm indicated that it would actively manage its portfolio by divesting or shutting down non-competitive, unproductive, or non-strategic assets.
- Since 2003, the firm has announced 92 plant shutdowns, 42 site exits, and divested 38 businesses.
- With respect to pursuance of acquisitions, the firm completed the Wolff Walsrode acquisition, completed four acquisitions for Dow AgroSciences, completed three acquisitions in Epoxy Systems, and three more in Polyurethane.
- The acquisition of Rohm & Haas'' agricultural business was equally dramatic, giving the firm both cost and growth synergies, and it is now an important part of profitable growth in the Dow AgroSciences business.
New projects with Saudi Aramco in Saudi Arabia, with Shenhua Energy in China, and Gazprom and SIBUR in Russia, allowed it to take advantage of this joint venture model while retaining the competitive advantage of site and product integration.
- The joint venture with PIC is an important part of the strategy because it gives new life and preserves global leadership to those businesses that were the most susceptible to the ethylene cycle.
- By joint venturing these assets, it give them access to advantaged feedstocks and new opportunities to grow in emerging and mature geographies, a win-win for Dow and partner.
- Over the last five years, the firm spent $7 billion to reduce on and off-balance sheet debt and to make voluntary contributions to its pension funds.
Macroeconomic Outlook:
- If the US economy deteriorates, the firm has two-thirds of its sales outside the United States.
- Combined that with the strong portfolio and joint ventures, layer on top of the demonstrated financial discipline and plan or deploy cash, and it is in very good shape to weather a US economic downturn.
- The joint ventures such as the one with KPC/PIC, which give the firm basis of joint businesses advantaged feedstocks, while also allowing it to redefine its portfolio and help alleviate those high hydrocarbon energy costs.
- In 2008, the firm will close on its venture with PIC and move forward toward implementing the other joint ventures.
Key questions and answers from the fourth quarter earnings call conducted by The Dow Chemical Co. on January 29, 2008.
Donald Carson (Merrill Lynch): Are your products really differentiated enough to give you that kind of topline growth that will enable you meet your 10% earnings growth goal?
Andrew N. Liveris: Our assessment is that especially in businesses like Polyurethane, Epoxy, Specialty Plastics, of course, Dow AgroSciences, and the market facing businesses that we have been launching like Dow Water and others, not counting any of the new ones, that we actually are creating a part of the Performance business mix that is now more in the Specialties side than on the hydrocarbon sensitive side.
As we added built-on acquisitions to some of them, like in design polymers and Cellulosics Wolff for example, we have been adding those in as we have been doing them to show that we have a very conservative topline assumption on the Performance businesses for the industry trough.
Donald Carson (Merrill Lynch): What percentage of your performance businesses have you considered truly Specialty?
Andrew N. Liveris: We have the $25 billion that is core performance in both the segments. It split itself about a a third true specialties, a third neither true specialty nor true differentiated commodity, and the other third more being intermediates.
Donald Carson (Merrill Lynch): Did Dow AgroSciences lose competitive position in Latin America?
Andrew N. Liveris: No, quite the contrary, Latin America was very strong for us. It is the forward buying in North America that mitigated the impact in the fourth. The real opportunity at Dow AgroScience is the organic growth, which is we are putting new R&D resources and new selling resources to gain extra share, especially as SmartSpecs comes around the corner and other innovative things that they are doing.
Unidentified Analyst (Credit Suisse): How does this expansion of the Brownfield buildout fits in with your asset-light strategy?
Andrew N. Liveris: The new chlorine project we announced today has been in the works for sometime to support our Performance businesses. In essence, the net is we are down 430,000 tons of capacity.
Unidentified Analyst (Credit Suisse): On the Polyethylene side, what do you see happening in 2008 with capacity coming on in the latter half of 2009, given your 2010, 2011 trough model?
Andrew N. Liveris: We have not changed our view given all these current market circumstances. When we look at the granularity of the end-use markets in North America such as packaging for food, etcetera, agricultural uses, in fact we see actually strong growth.
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