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An Update On Dow

CEO Andrew N. Liveris believes the major pieces are in place to continue the company’s transformation

by Alexander H. Tullo
October 17, 2011 | A version of this story appeared in Volume 89, Issue 42

Dow’s Economic Outlook
China continues to perform well.NOTE: Forecast for 2011, revised in October. SOURCE: Dow Chemical
Graph: Dow's Economic Outlook, China continues to perform well.
China continues to perform well.NOTE: Forecast for 2011, revised in October. SOURCE: Dow Chemical

The main message of Dow Chemical’s investor day, held on Oct. 4 in New York City, was that the company is prepared for anything the world can throw at it.

“Dow is not the same company you knew just two short years ago,” Chief Executive Officer Andrew N. Liveris told analysts and investors. The transformation of Dow from a company focused on commodity chemicals into one that derives its revenues mostly from specialty products is well under way, he said. The components of the new Dow—a combination of businesses acquired in Dow’s $19 billion purchase of Rohm and Haas in 2009 with what Liveris regards as the best of the old Dow—are working in harmony. The resulting company, as Liveris likes to say, is one that can take “two bites from the apple.”

Dow’s new technology orientation represents one of these bites. In 2006, the firm’s sales were divided about evenly between commodity chemicals and specialties. Now, commodities represent only 20% of sales, Liveris said.

The other bite comes from a traditional Dow strength: back-integration into basic petrochemicals. But Dow now looks to use basics to make specialty products instead of more commodities. In the U.S., the integration has been enhanced by cheap raw materials derived from shale gas. Offshore, the centerpiece of the strategy is a joint venture with Saudi Aramco, formed in July, to build a $20 billion integrated chemical complex in Saudi Arabia.

The event in New York was more of a progress report on Dow’s transformation than an unveiling, but Liveris argued that the major pieces are in place to engender further development.

For example, the company’s acquisition strategy will be moderate. In early 2009, Dow was in crisis. The Kuwaiti government walked away from a big petrochemical joint venture, leaving Dow without the $7 billion down payment it needed to close the impending Rohm and Haas transaction. And the credit crunch made alternative financing difficult to find.

Liveris had to perform a trapeze act. “I am really 25, I just look like this because of late ’08,” the 57-year-old told C&EN in an interview. Since 2009, the company sold off $8 billion in noncore businesses, many of which Dow originally intended to pool into the Kuwaiti venture.

Dow has been paying down debt since then and might be healthy enough financially to contemplate acquisitions again. But Liveris said Dow will pursue only deals of less than $500 million, and even those likely won’t come for another five years.

Instead, the company is turning to organic growth. At the event, Dow announced the commercial launch of its Powerhouse Solar Shingles, which are thin-film photovoltaics that can be installed much like normal asphalt roofing shingles. Conventional polysilicon photovoltaic panels are bracket mounted.

Jane Palmieri, vice president of Dow Solar, said she isn’t worried about one of the woes that famously brought down the photovoltaics company Solyndra: tumbling prices for competing polysilicon-based panels. She sees solar shingles as an alternative to asphalt shingles as much as they are to polysilicon panels. “What really matters about our product is that we are reinventing the entire roof,” she said. Dow is targeting $1 billion in revenues from the business by 2015.

During the investor day, the company highlighted one of the early fruits of the Rohm and Haas transaction: the Evoque line of emulsion polymers, touted as reducing the need for white titanium dioxide pigment in latex paints by about 20%. The resins adhere to the TiO2 and self-assemble to distribute pigment evenly in the paint film, improving opacity.

The company also showed off its new performance plastics division. Howard Ungerleider, who leads the unit, said he gets ribbed that the company merely changed the name of Dow’s plastics operations from “basic plastics” to “performance plastics” without changing anything else. “Nothing can be farther from the truth,” he said.

The difference, Ungerleider said, is an organization aligned by markets, such as packaging, and not by products. In packaging, the unit combines Dow businesses such as linear low-density polyethylene and elastomers with Rohm and Haas products like adhesives for laminated packaging. The company has over $8 billion in annual revenues from packaging, making it the largest materials supplier to the sector, he noted.

Liveris told C&EN that the packaging synergy between Dow and Rohm and Haas came as a pleasant surprise. “It wasn’t the reason we bought Rohm and Haas,” he said. “We bought Rohm and Haas for a couple of their positions in big areas—coatings and electronics in particular.”

Part of Dow’s plastics strategy has been to divest commodity businesses. Last month, the company completed the sale of its polypropylene unit to Brazil’s Braskem.

About a year ago, Liveris floated a trial balloon about the sale of its high-density polyethylene business. Now Dow isn’t pursuing a sale of the business as such. Instead, at “integrated” facilities such as its site in Alberta, Canadaa, Liveris intends to convert gas-phase polymer plants, many of which make high-density polyethylene, into versatile solution-process plants. The firm will largely shut down or divest plants at locations where conversion isn’t feasible.

At the investor event, Liveris reaffirmed the company’s near-term target of $10 billion in annual earnings before taxes. During the recessionary year of 2009, Dow generated $5.5 billion in before-tax profits. Over the past 12 months, the figure was $8.6 billion. What’s more, Liveris now says the company could generate $8 billion in earnings before taxes even if confronted with the same economic circumstances it faced in 2008 and 2009.

That claim could be put to the test. Economists are warning of an economic slowdown that may turn into another recession in some regions, particularly Europe.

Liveris acknowledged that Europe’s banking sector is under stress, but he doubted that the region’s sovereign debt problems would become a widespread liquidity crisis of the sort seen in 2008. The U.S. continues to be dogged by high unemployment and low consumer confidence, he said. The emerging economies, particularly China, remain strong. “We believe the pace of the global economic recovery will remain jagged,” he noted.

The improvements Dow has made to its portfolio have gone relatively unrewarded on Wall Street. In May, Dow shares traded at a recent peak of about $42. They declined to around $21 by the morning of investor day, as investors have fretted over the economy.

At the event, Liveris was clearly frustrated. “We are not the same company that was priced at $42 a few short months ago,” he told the audience. “We are a better company. And there is no way the current valuation reflects how much better than that we can be.”

Away from the podium, Liveris complained that Dow is still being pigeonholed by the market as a commodity chemical maker. “If you look at Lyondell, Westlake, Georgia Gulf, and Huntsman, we have been categorized with them,” he said. “If I take umbrage with anything, it’s that.”

Some analysts agree that the company’s stock has been punished more than it deserves. Most have 12-month price targets of more than $30. “Following Dow’s investor day,” Credit Suisse analyst John P. McNulty noted, “we came away with greater belief that while the world, particularly North America and Europe, is somewhat moderating, Dow’s business is certainly not ‘falling off a cliff,’ and a positive long-term outlook remains intact.”

Still, Liveris maintained that he won’t let the stock price distract Dow executives from fine-tuning their strategy. “The company is not the stock; the stock is not the company,” he said.


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