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Dow posts higher profit, notes investor criticism

By: Frank Esposito

January 29, 2014

Officials at Dow Chemical Co. addressed recent investor criticism while announcing that the firm showed major profit gains during 2013.

For full-year 2013, Dow’s sales were up less than 1 percent to just under $57.1 billion, but profit at the Midland, Mich.-based firm increased more than four times to $4.8 billion. Some of this improvement came from Dow winning a major cash settlement of almost $2.5 billion from Petrochemical Industries Co. of Kuwait over a failed 2008 business deal.

In a Jan. 29 conference call, Dow Chairman and CEO Andrew Liveris said that Dow “has re-positioned itself to address uncertainties and the new reality of our world.”

“Our company is strong,” he added, pointing out that Dow exceeded its $500 million cost reduction target for 2013.

On Jan. 21, Dow investor Third Point LLC of New York criticized the firm for what it called “a poor operational track record” and “a history of under-delivering relative to management’s guidance and expectations.” Third Point also suggested that Dow’s petrochemical business – including its major polyethylene assets – be spun off into a separate public company.

Liveris addressed this criticism – without mentioning Third Point by name – during a question-and-answer session at the end of the conference call.

“We look at value chains from ethane to ethylene to polyethylene to high-end packaging – the complete value chain,” he said. “It’s almost impossible to think of Dow as a petrochemicals company anymore. We’ve divested $10 billion worth of those businesses.”

“No one else can imitate the Dow business. There’s only one competitor in similar businesses, and they value their business as much as we do.”

Liveris added that he “agreed with the investor that there is an upside.”

Included in that petrochemicals sell-off was the October sale of Dow’s polypropylene licensing and catalyst business to W.R. Grace & Co. for $500 million.

Among separate business units, Dow’s Performance Plastics unit – including PE - saw sales grow 1 percent to more than $14.6 billion in 2013. The unit’s pretax profit, however, surged almost 51 percent to more than $4.5 billion.

Dow’s Performance Materials unit – including PVC feedstocks and epoxy resins – saw its 2013 sales fall more than 1 percent to $13.4 billion, even as pretax profit grew almost 4 percent to more than $1.4 billion.

In early December, Dow announced plans to spin off or sell most of its chlorine value chain businesses – which are part of Performance Materials – including PVC feedstocks and epoxy. Those businesses have annual sales of about $5 billion.

Liveris said that interest in the chlorine-related business “has been terrific.”

“We’re marching down the path and would like to complete (the spinoff or sale) early in the 12-24 month period,” he added.

Liveris – a 38-year Dow veteran who has served as the firm’s CEO since 2004 - also commented on the transformation that Dow has made in the last decade.

“We’ve transitioned to being a producer of agricultural and high-end plastic products, in order to re-shape and position our company for long-term earnings growth,” he said. “We’ve reduced our commodities footprint, not because these are bad businesses, but because their returns are challenged by global competition, primarily from state-owned entities.”

Liveris explained that Dow has re-shaped its portfolio by exiting such businesses as styrenics, PP and polycarbonate and by “lining up with technology-added solutions.” In packaging, Dow has “collaborated throughout the value chain to make more functional and sustainable packaging,” he said.

This transformation “led us to exit a (chlorine) value chain that’s been part of Dow’s portfolio since the company was founded more than 100 years ago,” Liveris added. The fact that Dow is carving out chlorine “shows that anything is on the table,” he said.

At the same time, Dow is embarking on a massive expansion project on the U.S. Gulf Coast in order to take advantage of newfound supplies of natural gas throughout North America. The firm plans to spend about $4 billion to add more than 3 billion pounds of PE and related plastics – as well as ethylene and propylene feedstocks – with most of that work focused at Dow’s already-massive complex in Freeport, Texas. The first new capacity from this expansion is set to come online in 2017.

On Wall Street, Dow’s per-share stock price was near $34 in early 2013 but stood at $45.40 in early trading Jan. 30 for an increase of more than 30 percent.

Moody’s Investor Service – a well-known credit rating firm – weighed in on the Dow/Third Point situation in a Jan. 27 news release, saying that splitting Dow “would be a credit negative.”

“We do not believe that Dow will implement this proposal, and instead will accelerate its planned cost reductions and divestitures,” Moody’s officials said. They added that the two Dow companies created by the Third Point proposal “individually would likely exhibit greater volatility in earnings and cash flow than the current Dow.”

The two proposed firms “would likely be unable to support Dow’s current credit profile and remain at the Baa2 rating,” Moody’s officials explained. “We believe that Dow’s vertical integration is a credit positive and leads to greater overall stability in earnings and cash flow.”